Years Bestbusinessthinking: Celebrating OF THE

DON TAPSCOTT C . K . PRAHALAD MARSHALL GOLDSMITH GARY NEILSON A . G .
LAFLEY DAVID ROCK
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Autumn 2010
15 YEARS OF BEST BUSINESS THINKING
CELEBRATING15 YEARS OF THE BESTBUSINESSTHINKING
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15 YEARS OF SIGNIFICANCE
Since its inception, strategy+business has focused on the value of management thinking and practice. Because business knowledge is a moving target, in which there is always something to learn from practice and reflection, the best insights about management often seem counterintuitive at first. But they can make a significant difference in your effectiveness and the performance of your enterprise whether youre a CEO, a student, an entrepreneur, or anyone else in business. This year, we celebrate the magazines 15th anniversary by looking back at the wisdom we have published in our pages. Much of it is still worth reading now. When s+b was founded in 1995 by former Harvard Business Review editor Joel Kurtzman and a group of farsighted partners at Booz & Company (then part of Booz Allen Hamilton), the dot-com era was just beginning, and the shape of the world economy was very different than it is today. Amazon and Google did not yet exist; neither China nor India was seen as a global economic force. The United States, where the magazines focus was centered at the time, was at a peak of prosperity, with rising equity prices, a sound federal budget heading toward surplus, and strong business confidence. How could anything published in those years matter to anyone in 2010? Yet despite all the turbulence since then, there has been a slow but steady increase in knowledge about economic value and organizational effectiveness. The importance of managerial capability has been discounted by economists (and others) for years, but it is now becoming increasingly apparent. Variance in managerial prowess explains why some companies weathered the economic storm and others did not, and why some new CEOs succeed while others crash and burn. Thats why, at s+b through the editorships of Kurtzman (19951999), Randall Rothenberg (20002005), and me (since 2005) our primary editorial mission has been to help readers find the most profound and most pragmatic business insight, and put it to use. Consider, for instance, Why CEOs Succeed (and Why They Fail): Hunters and Gatherers in the Corporate Life (page 8), written in 1996 by an innovative venture capitalist (Edward F. Tuck) and a prominent anthropologist (Timothy Earle). They show how the CEO and the board of a major company play out the same roles in our time that the chiefs and elders of prehistoric tribes established many thousands of years ago. In that context, the passage of 15 years is almost nothing. Similarly, the 1997 article 10X Value: The Engine Powering Longterm Shareholder Returns (page 16) anticipates many of the ideas emerging now about the value of coherence. Leslie Moeller (now a Booz & Company partner) and Booz alumni Charles E. Lucier and Raymond Held studied 30-year growth patterns of 1,300 publicly traded companies in the U.S., and found it is possible to raise a companys value 10-fold in that time, if you know how to muster the right kind of innovation. Don Tapscotts 2001 article, Rethinking Strategy in a Networked World (or Why Michael Porter Is Wrong about the Internet) (page 24) remains current because the controversy it raised still endures: Does the Internet make corporate boundaries obsolete? Should companies emulate Apple, which retains tight control over every aspect of its enterprise, or
editors letter
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IBM, which thrives by providing its customers access to an open source world of software, services, and devices? The debate is far from settled (especially with Apple ascendant right now), but Tapscott lays out a compelling case for open source enthusiasm. Perhaps the most prescient work that s+b has published to date was The Fortune at the Bottom of the Pyramid, by C.K. Prahalad and Stuart L. Hart (page 32). This article, published in 2002, foresaw business models targeteted at the billions of aspiring poor in emerging markets. To reach them, multinational companies would need to create low-margin, low-cost goods in culturally sensitive, environmentally sustainable, and economically profitable ways. Prahalad, who passed away in April 2010 after a sudden illness, lived to see this seemingly outlandish concept become part of the strategy of companies around the world. (See the discussion of his book in Essential Reading: Highlights from 15 Years of s+b Book Reviews, by s+b Senior Editor Theodore Kinni, on page 98.) The concept of organizational DNA began life in our pages as The Four Bases of Organizational DNA (page 46), published in 2003 as an effort to isolate the factors that shape a companys culture. As authors Gary Neilson, Bruce A. Pasternack, and Decio Mendes describe it, company behavior is influenced by the design of structures (reporting relationships and hierarchy), decision rights, motivators (incentives and career options), and information flow (the informal networks by which people share knowledge). Neilsons ongoing work on bolstering organizational capabilities for better execution, and on the pat-
terns of CEO succession and the qualities of effective CEOs continues to appear in s+b. Another author who has become more prominent while writing for s+b is Marshall Goldsmith, the executive coachs executive coach, now known for his bestsellers What Got You Here Wont Get You There: How Successful People Become Even More Successful (with Mark Reiter; Hyperion, 2007) and Mojo: How to Get It, How to Keep It, How to Get It Back if You Lose It (with Mark Reiter; Hyperion, 2009). In 2004s Leadership Is a Contact Sport: The Follow-up Factor in Management Development (page 56), Goldsmith and his coauthor Howard Morgan reveal the most important factor in helping leaders become capable: following up with other people about their own improvement. The Ed Koch Howm I doing? style of leadership may have been right all along. Manufacturing Myopia (page 66), published in 2006, describes a perennial affliction that is demanding more attention now as producers of goods wonder where their industries went. Authors Kaj Grichnik, Conrad Winkler, and Peter von Hochberg posit a culprit different from the usual suspects (China and outsourcing): the conventionally fragmented approach to manufacturing management. Competitiveness, on both a corporate and a national level, depends on taking this kind of guidance seriously. One of the great executives of our time is Procter & Gambles former CEO A.G. Lafley, the author of P&Gs Innovation Culture (page 78), published in 2008. He and noted management writer Ram Charan (who introduces the article) conceived of it as a follow-up to
Art Kleiner Editor-in-Chief

kleiner_art@strategy-business.com
strategy + business special issue, autumn 2010
or missing chapter of their bestselling book, The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation (Crown Business, 2008), which discussed the human changes needed to foster Procter & Gambles remarkable strategic renaissance during the 2000s. This special issue also includes 2009s Managing with the Brain in Mind (page 88) by David Rock, founder of the NeuroLeadership Institute and one of the first writers to explore the relationship between neuroscience and organizational leadership. Change efforts can take hold only when leaders recognize the deep, brain-based needs people have for status, certainty, autonomy, relationships, and fairness. These articles are classics; they will always be relevant. (For a list of other classics weve published, see page 104.) In this special issue, we also celebrate some of the great business books we have reviewed over the years; see the survey by Senior Editor Theodore Kinni, an expert on business books, on page 98. Societys growth curve is driven by the quality of its ideas, particularly those about management. That is the real engine behind increases in wealth and productivity at many companies, and it represents a primary source of strength in dealing with todays immense social and environmental issues. We (and Booz & Company, the firm that publishes s+b ) are proud of our track record in bringing this type of knowledge to you. +
editors letter
features
MANAGEMENT
Why CEOs Succeed (and Why They Fail): Hunters and Gatherers in the Corporate Life
Edward F. Tuck and Timothy Earle
In the corporate world, the laws of the jungle still rule. CEOs and boards fall prey to the habits and practices of prehistoric hunters and gatherers.
STRATEGY & COMPETITION
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10X Value: The Engine Powering Long-term Shareholder Returns

Charles E. Lucier, Leslie Moeller, and Raymond Held
Your company can pursue 10-fold growth over 15 years through strategic innovation: changing the rules of the game for your industry.
STRATEGY & COMPETITION
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Rethinking Strategy in a Networked World

Don Tapscott
The original manifesto for open source, Internetconscious competitive advantage argued that Michael Porter was wrong about partnerships and alliances. Heres why working outside your boundaries is central to business success.
28 Six Reasons There Is a New Economy
GLOBAL PERSPECTIVE
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The Fortune at the Bottom of the Pyramid

C.K. Prahalad and Stuart L. Hart
Low-income markets present a prodigious opportunity for the worlds largest companies to seek their fortunes and bring prosperity to the billions of aspiring poor who are joining the market economy for the first time.
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MANAGEMENT STRATEGY & COMPETITION
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The Four Bases of Organizational DNA

Gary Neilson, Bruce A. Pasternack, and Decio Mendes
How does a company design its organization to execute its strategy and successfully adapt when circumstances change? The first step is to understand how four key traits of an organization influence each individuals behavior: the organizational structure, the decision rights for processes, the motivators, and the flow of information.
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P&Gs Innovation Culture

A.G. Lafley, with an introduction by Ram Charan
Lafley, the CEO of Procter & Gamble, explains how his company built a world-class organic growth engine by investing in people. Going beyond their book, The Game-Changer, the authors explore the role of social systems in turning new ideas into commercial success.
84 Becoming a Great Innovation Team Leader 50 Focus: Testing Quest Diagnostics DNA
Ram Charan
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Leadership Is a Contact Sport: The Follow-up Factor in Management Development

Marshall Goldsmith and Howard Morgan
A review of leadership development programs at eight major corporations reveals that nothing works better than interaction with colleagues. Executives who follow up their training by discussing their improvement plans and progress with co-workers become the best leaders.
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Managing with the Brain in Mind

David Rock
Neuroscience research is revealing the social nature of the workplace and its implications for management. The brains social needs for status, certainty, autonomy, relatedness, and fairness matter more than money.
BEST BUSINESS BOOKS 19952010
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Manufacturing Myopia
Kaj Grichnik, Conrad Winkler, and Peter von Hochberg
Why do manufacturers lose relevance and competitiveness? Because their operations strategies are often the same as they were 10 or 20 years ago. Instead of drifting into decline, producers of goods have a chance to seize the future by cultivating better awareness about manufacturing costs and means: learning to see their operations more clearly and redesign them more flexibly.
Essential Reading: Highlights from 15 Years of s+b Book Reviews

Theodore Kinni
Our all-time favorite business books.
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Articles of Significance
Of s+bs many classic articles over the years, here are a few of the editors favorites. Cover illustration by Opto
72 The Roots of Myopia
Special Issue, Autumn 2010
strategy+business
EDITORIAL Editor-in-Chief Art Kleiner kleiner_art@ strategy-business.com Executive Editor Rob Norton norton_rob@ strategy-business.com Managing Editor Elizabeth Johnson johnson_elizabeth@ strategy-business.com Senior Editor Karen Henrie henrie_karen@ strategy-business.com Deputy Managing Editor Laura W. Geller geller_laura@ strategy-business.com Web Editor Bridget Finn finn_bridget@ strategy-business.com Chief Copy Editor Victoria Beliveau editors@ strategy-business.com Information Graphics Linda Eckstein editors@ strategy-business.com
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BY EDWARD F. TUCK AND TIMOTHY EARLE
HUNTERS GATHERERS CORPORATE LIFE

AND IN THE
What are the factors that determine which CEOs succeed and which fail? Even in the high-tech world, the laws of the jungle still rule.
It is enormously destructive and expensive to
WHY CEOS SUCCEED (AND WHY THEY FAIL)
Illustration by Elwood Smith
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change the chief executive of a growth company who stumbles in office. The human cost is high, as well: competent executives, used to success, fail without understanding why. They are branded with their failure. Some succumb to bitterness and despair; a few are suicides. Why do these otherwise successful, competent, well-trained people fail? Why, in the face of good advice, do they do things that bring about their ruin? Why, after they fail, can people of less training, skill, and intelligence turn their failures into successes? The authors of this article are an early-stage venture seed capitalist and an anthropologist who specializes in leadership. We have examined the most common ways that CEOs fail by applying the findings and techniques
of anthropology to business organizations. We have found that the cause of these systematic failures is not the CEOs lack of skill, nor even his or her psychology; it is the changing institutional context in which the CEO must perform. A chief executive officer will fail most often in these three situations: He or she has moved to a much smaller company, either as an entrepreneur or to take over a startup or early-stage company. The CEOs small company has grown into a midsized company. The CEO has been a successful vice president or chief operating officer and has been promoted to chief executive, or has been recruited as chief executive for another company.
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Edward F. Tuck ed@falconfund.com is the principal of Falcon Fund, a venture capital and private equity fund for seed and earlystage investments, and CEO of Social Fabric Corporation, a relationship-prediction service that uses DNA samples. At the time of publication, he was a general partner of Kinship Partners II, a venture capital fund. He has also been the founder or cofounder of several companies, including Magellan (the GPS pioneer) and Teledesic Corporation.
Timothy Earle tke299@northwestern.edu is professor and chair of the department of anthropology at Northwestern University, positions he held at the time of this articles original publication. Formerly, he was a professor of anthropology at the University of California at Los Angeles and director of its Institute of Anthropology.
Originally published Fourth Quarter 1996.
These three modes of failure seem unrelated; they are not. Something changes when a company reaches a certain size that makes it somehow different to manage; also, running an independent company is different from running a division of a large company. In short, smallcompany CEOs fail in large companies, large-company CEOs fail in small companies, and CEOs who have risen through the ranks cant work with their boards.
Camp, Corporation, and Community
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Every company is a polity: a politically organized community. Even though employees may be hired and fired at will, and may be called resources, heads, directs, or some other impersonal term, each director, officer, manager, and employee of a company is a functioning member of the polity. This is true regardless of the degree of democracy that exists in the company, regardless of an employees position and regardless of whether he or she or the companys management wants it to be true. Everybody in a company is part of a politically organized community, a polity, and each persons role and behavior in that polity is determined by his or her inherited nature, upbringing, and training. In a company, as in any polity, each person behaves according to his or her rules about behavior in groups. Some of these rules come from upbringing and training. According to anthropologists L.J. Eaves, H.J. Eysenck, and N.G. Martin (Genes, Culture and Personality: An Empirical Approach, Academic Press, 1989), half of this behavior is inherited. These rules come from our ancestors, and to a great degree they are shared among the other members of our species. When we are born we are humans, and we know how to behave with other humans. When we try
to succeed in a group, we unconsciously call on those primitive patterns of behavior that have evolved over millions of years of living and working in groups; and the structure of our groups comes from the way we behave together. Anthropologists have found patterns in these primitive, isolated human polities that will help CEOs understand and solve difficulties in their relationships with their boards and their employees. We have found that corporations and their boards have strong parallels in primitive polities, and that boards are therefore organizationally different from the corporations to which they are attached. We learned that the founder who is ruined by his or her companys success, the captain of industry who cannot run a small company, and the seasoned executive who cannot be promoted are all victims of the same simple and ancient effect, and we propose a reason for that effect. First, lets compare organizations.
Inside Primitive Organizations
strategy+business special issue, autumn 2010
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Three primitive organizations have counterparts in modern companies: the working group, camp, and hierarchy. A fourth organization, the state, evolved later and it, too, has counterparts in modern companies. 1. The working group. A working group is found in all cultures. It is a temporary association of two to six people with useful skills, and it has a specific purpose: to hunt, to lay a section of railroad track, to right an overturned car, to catch a criminal. Working groups are variously called hunting parties, task forces, work parties, posses, and patrols: names fitting the purpose of the group and the groups societal context. They exist only for the purpose at hand, and they are organized quickly and informally.
When a hierarchical organization like a corporation or an army sets up a working group, a leader is named by the hierarchy (chairman or squad leader), although the real leader of the group emerges informally. Sometimes the group chooses its own leader by acclamation (team captain) or by lottery (straw boss); usually, the leader arises without any special action as the work progresses, and leadership passes from one person to another smoothly as the nature of the work changes. A working group has a problem to solve and works democratically, accepting suggestions from any member regardless of his or her status outside the working group. When the problem is solved or abandoned, the group disbands. The result of the groups work has a strong effect on the mood of its members. If the work is successful, they are elated and often celebrate. If the work is a failure, its members are depressed and uncommunicative for a time. Working groups are short-lived, have only a few members, and are re-formed as needed. 2. The camp. Hunting and gathering camps usually comprise about 30 people, from up to six families. The business of the camp hunting, gathering, cooking, building is done by temporary working groups as defined above. Though many jobs in a camp are separated by sex, little other specialization exists; todays hunter may be tomorrows gatherer or hut-builder, although special skills such as stone tool making are recognized by all. The huntinggathering camp does not admit to having a leader; in fact, members of the camp will deny there is a leader. They will say, Were all leaders. Nonetheless, a member of a nearby camp will say, Thats Joes camp. The camp thus does have a person who facilitates decisions. He or she does not command, but is respected because of knowledge, judgment, and skill in organizing opinion. As Andrew Schmookler has noted, this person does not give orders, but focuses the decisionmaking process. Decision making in a camp is a political, deliberative, consensual process. The camps elders are expected to choose courses of action that are acceptable to the camp, and to accept suggestions from every-
one. The whole camp behaves in a consensual manner, and there is strong social pressure to conform. (In functioning camps, all members are interested in the facts, are fully informed of them, continuously discuss them, and are aware of the alternatives being considered.) At no time are the people in the camp invited to solve a problem as a group, nor do they wish or expect to do so. Where a consensus is not found and distrust and disagreement linger, the usual solution is for the smaller faction to leave, striking off on its own. This is a fairly normal event, as families frequently move from camp to camp; but it is not without risk. The faction that takes off risks its very survival if a new camp receptive to it cannot be found. When a camp grows to about 50 people, it becomes unstable and splits into two or more camps. This pattern of size-related instability is repeated in organizations of all kinds across human society. 3. The hierarchy. The tribe, which may encompass several camp-sized groups, is a hierarchy. Hierarchical organizations have a clearly defined leader and often many strata of authority. They have clear lines of authority, and no inherent means to achieve consensus. They evolved as a means of providing a mechanism for relations with other tribes (including commerce and war), for conducting religious observances, and to allow occupational specialization. But they had the fortuitous result of solving the problem of instability in large organizations. The tribal hierarchy made it possible for more than 50 people to live and work together, at the cost of personal and group autonomy. Simple tribes are organized into local groups of a few hundred, each with its own leadership. More complex tribes are organized into regional chiefdoms of several thousand, each with a hierarchy of leaders. At the top of every stable hierarchy there is a camplike consensual group. Even in outright dictatorships there must be an egalitarian council, as Machiavelli advised in The Prince 500 years ago: A prudent prince must[choose] for his council wise men. He must ask them about everything and hear their opinion, and afterwards deliberate by himself and in his own way, and in these councils and with each of these men comport himself so that
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everyone may see that the more freely he speaks, the more he will be acceptable. 4. The state. Eventually, in the archaic world, states evolved to organize much larger populations, which were often living together in cities and relying on market exchange. It was at this time that real bureaucracies emerged, both to solve efficiently the problems of large groups and to control those groups for the will of dictatorial rulers. In the 18th and 19th centuries, with industrialization and the introduction of cheap transportation, people began to live together in even larger groups. The bureaucratic state then developed fully and became the preferred method of managing any continuing enterprise employing more than a handful of people. At first, these were outright dictatorships, but improvements in communication, education, and the economy led to a revision of societal values so that now all members of hierarchical societies have some voice. This voice varies from union grievance procedures through election of leaders and managers through public approval of certain actions to formal consensus meetings; however, the structure of any stable organization of more than 50 to 100 people is some form of hierarchy.
Size Determines Structure
after a lengthy process of referring the issue back and forth from the smaller to the larger entities. The largest stable group in which this process has been observed contains about 100 people, and involves three levels of consensus; the usual maximum is about 50 people (7 times 7), and uses two levels of consensus. Two points to hold in mind are: 1) As group size changes, so must its organizational structure. This is as true for the long-term evolution of human society as it is for the short-term evolution of a company; 2) Within a single social system, groups of different scale exist and require different organizational structures. A major dysfunction occurs when an organizational structure appropriate for one scale is used for groups of other sizes.
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Why are human organizations of different sizes structurally different? Why does a small organization become unstable as it grows? Why is the triggering size the same in different cultures? It appears that six or seven is the largest number of relationships that one person can deal with continuously. We need the hierarchy, with its welldefined roles and patterns of behavior, to allow large numbers of people to work together without overload. A study by anthropologist Gregory Johnson at the City University of New York has shown that decisionmaking performance in egalitarian groups falls off rapidly as the group size grows beyond six. This is a result of a well-documented limitation of the human brain, which cannot simultaneously retain and process more than about seven information chunks at once. (One such study by the Bell System set the size of local telephone numbers at seven digits.) To make larger groups work while still retaining their egalitarian nature, six or seven groups form a sequential hierarchy. In this structure, consensus is achieved first within small units for example, nuclear families and then is attempted among the formative groups themselves, with full consensus finally reached
Thus, four types of organization have arisen when people live together and try to do something in common: the working group, the camp, the general hierarchy, and the state bureaucracy. The most primitive of these is the working group, up to six people. It is also the one that elicits the most profound emotional response. The camp, up to 30 to 50 people, is the next most primitive, and is also a very old structure. The most modern organizations, and therefore the ones for which we are by nature least adapted, are the hierarchy and the bureaucracy. Behavior in a tribe, a company, or a nation is not innate: It is learned, in contrast to behavior in camps and working groups. An individuals success in a hierarchy depends on how well he or she has learned its rules, and to what extent his or her innate behavior allows that person to conform to those rules. A modern corporation employing more than 100 people is a hierarchy; a company of more than 1,000 is a bureaucracy. A camplike board of directors is at the top, to offer guidance by diverse experience and to provide intercorporate information. The corporations best work is done by working groups. The advantages and satisfactions of recognizing the egalitarian nature of the working group are now understood; most traditional companies attempt to exploit this. Very little analysis in a similar vein has been done with boards of directors. Yet in corporations, the camplike consensual group, the princes council, is the board. Since todays boards are like the camps of primitive societies, a successful CEO must remember how camps behave. A board is not a working party. It cannot solve
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Since todays boards are like the camps of primitive societies, a successful CEO must remember how camps behave.
problems, it can only approve or disapprove courses of action proposed by its leader. If it is forced to choose between alternatives, a crisis of leadership often arises. The CEOs leadership role is not openly acknowledged by outside board members, who strongly assert their equality. The CEO thus must reach consensus among board members before proposing important issues. This process is called keeping in touch. The CEO is the natural leader of the board. Even when a board has a chairman who is not the CEO, a person close to the company will refer to Joes [the CEOs] board. If the chief executive refuses to lead, then the CEO and board will flounder or another individual member will assume leadership. In either case, the CEO must be replaced. This is because the surrogate leader cannot lead well unless he or she assumes the CEOs role inside the organization and on the board. Board members expect the CEO to be their leader and will treat him or her as such until they decide to fire the person. Anything the CEO says or does will be dealt with by experienced board members in the context of CEO-as-leader. If an act or utterance of the CEO is unreasonable in this leadership context, the other members will believe at a deep, unconscious level that he or she is incompetent or even insane. Since in either of these cases the CEO must be replaced, an extremely unpleasant and difficult task, a member will sometimes opt for denial by assuming that a chief executive who exhibits such behavior is manipulative or evil, either of which is a disquieting but acceptable alternative.
The Ways CEOs Fail
and by recognizing that much of our behavior is genetically determined and will be similar when working within groups of the same size. Our understanding of the short-term development of companies can thus be aided by knowing the long-term evolution of human society. These comparisons confirm anecdotal evidence that successful management techniques are fundamentally different for companies above and below a critical size, and that techniques that succeed in a company above the critical size will fail below it, and vice versa. The comparisons also explain why CEOs who are successful as division or subsidiary managers in large companies are unable to run independent companies. These failures are related to their inability to deal with their camplike boards of directors. Consider the following scenarios:
Problems with the board: the new CEOs surprise.
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We can now examine CEO failure modes by comparing modern companies with polities in primitive cultures,
Those few extraordinary individuals who succeed by climbing to the top of a hierarchy are surprised and sometimes quickly fail when faced with the need to immediately lead the board. The new CEO is in the same position as a camp leader, but without the useful experience of having lived in a camp. The result is that the CEO often arrives at his or her position as head of the board without realizing that the role has fundamentally changed. A CEO in this position assumes that the whole organization is simply like his or her old division or function. If his or her whole experience has been in hierarchies, the CEO may define the role as giving or receiving orders; he or she has always been told what to do or has told others what to do. If the CEO has had no experience with boards of directors, he or she may make the fatal error of regarding the board as a new boss, as a
As the company continues to grow beyond the size of a camp, people say, Weve lost something important. It isnt fun anymore.
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working group to solve the companys problems, or as a part of the organization that he or she must supervise. If the CEO is told to lead the board but not command it, and to work by consensus, he or she may find this guidance incomprehensible. Denying the realities of the new situation, the CEO may either actively avoid assuming leadership of the board or try to manipulate it or dictate to it. He or she can be further confused by fellow board members, who may insist either that the board has no leader or that the leader is the aging chairman. If, in fact, the CEO does not lead the board, the boards other members, who are operating out of their primitive, innate rule book, have little conscious insight into the situation. They are confused and become unruly. The CEO and sometimes the organization itself then fail. Often, neither the board members nor the CEO can explain the failure. They then go on to repeat the pattern until the board gets a CEO who will lead or until the CEO accepts his or her leadership role or returns to a subsidiary role in another company.
Problems with becoming big: the faltering founder.
Unless he or she has access to an enormous amount of money, the founder of a company must first found a camp. In a camp, as we have seen, there is little specialization; in a new company, it is common to hear, I wear a lot of hats. It is also common to operate by consensus: Members marvel at the speed with which decisions are made, and at their feeling of mutual support, clear objectives, and clean, unambiguous communication. Employees at all levels speak as though they know what is going on throughout the company. Most of the companys people work far more hours than a normal workday; they enjoy their work. If the company succeeds, it grows. At first, the com-
Problems with going small: a chief without a tribe.
The opposite occurs when a CEO is recruited from a large company to run a young one. Such people often
panys members are elated with the growth, and point to the companys new people as evidence of its success. Soon, however, typically when the company reaches 25 people, a few dissonant voices are heard: Shes trying to do my job, I dont know whats going on anymore, and, as the company continues to grow beyond the size of a camp, Weve lost something important. I dont know what it is, but its gone. It isnt fun anymore. At this point, one or two key employees decide to leave, or simply begin to work 40-hour weeks. If an insensitive CEO doesnt understand what is happening, he or she will say that the people are ungrateful and will withdraw; a more sensitive CEO will redouble efforts to communicate. Both will fail. The appropriate action is to assemble a hierarchy, using experienced people, when the staff numbers more than 20. Some key people will be dissatisfied and leave, because they left a hierarchy for the camplike feeling of the small company; some will feel betrayed. Others will adjust. The CEO must gradually abandon his or her role as consensus leader and take on the role of chief. This is a difficult transition even for CEOs who understand the problem. Often, founders have chosen their role because of difficulties in the hierarchy of a previous company; they see the transformation of their company to a hierarchy as a personal failure. At best, they must deal with alienation and feelings of betrayal in people with whom they have worked closely, and with whom they shared the bonding and elation of a successful working party. Sometimes, even if their companies succeed, they are unhappy and unfulfilled.
management
have no experience with consensus-based groups. When the CEO arrives at his or her new company and finds that everyone has a title and a place in an organization chart, he or she is pleased, and often begins the process of interviewing people to see if they are well qualified for their positions. The CEO is then usually dismayed. If he or she concludes that the staff is incompetent, however, that conclusion will be wrong. If, on the other hand, he or she believes that the titles and the organization chart describe the real organization, and then attempts to operate the company accordingly, the CEO will fail immediately. There is no hierarchical organization; it is a camp. The CEO cannot delegate; he or she must work by consensus.
Gaining Anthropological Guidance
The literature and techniques of anthropology and cultural evolution can be used to understand business organizations at different scales. We have explained three familiar failure modes of chief executive officers, derived from studies of primitive societies and their leadership. We have shown that these failure modes can be avoided if the CEO and the companys employees understand and conform to the deep structure of their organization. We have also shown that the board of directors of a modern corporation is a more primitive and intrinsically different structure from the organization it serves, and that CEOs must use fundamentally different techniques to work with their boards and with their companies. Many failures of companies and their chief executives can be avoided by supplementing graduate business training, which now deals largely with the structure and management of hierarchies, with training in consensual organizations such as boards, skunkworks, and small companies. The goal is for the new CEO to have the training to understand the differences between the organization he or she is entering and the one he or she is leaving. In the absence of knowledge, people do the things that have worked for them in the past. When these things fail to work, people simply do them more intensively, like a tourist in a foreign country who just shouts louder if he or she is not understood. But new CEOs have staked everything on their new jobs and they desperately want to succeed. When they arrive in an unfamiliar organization, they are receptive to guidance they believe may keep them from failing. A person who is entering a small company for the first
time, and whose work has largely been in hierarchies, would be wise to find an insightful friend who has successfully run a small company, or a person with extensive board experience, to act as an advisor. Venture capitalists, executive recruiters, and board members of young companies who have a stake in the success of the people they fund or recruit can reduce their risks considerably by discussing consensual organizations with their candidates. One of the authors of this article has made a recent habit of exploring the central issues that have been discussed here with company founders (who are frequently pro-consensus and anti-hierarchy) and with experienced candidates for top management jobs (who are dramatically the reverse). In two cases, after such a discussion, a founder suggested that he take the role of a function manager in the new company rather than be its CEO, and that he and the investors go out together to recruit an experienced hierarchical CEO to run the new enterprise when it grew to an appropriate size. In both cases, the company was unusually successful. Perhaps more important, the founder happily remained with the company in a productive and rewarding role. +
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Resources
Timothy Earle, Chiefdoms in Archaeological and Ethnohistorical Perspective, Annual Review of Anthropology (Annual Reviews, 1987): A source of the insights in this article. Eric Flamholtz, How to Make the Transition from Entrepreneurship to a Professionally Managed Firm (Jossey-Bass, 1986): Describes what happens when a camplike company must become a hierarchy. Allen W. Johnson and Timothy Earle, The Evolution of Human Societies (Stanford University Press, 1987): Includes observations on the structure and leadership of primitive polities. Insights from this book have been used throughout this article. Gregory A. Johnson, Organizational Structure and Scalar Stress, in Theory and Explanation in Archaeology, edited by C.A. Renfrew, M.J. Rowlend, and D.A. Segraves (Academic Press, 1982): Why consensus doesnt work in groups larger than six people. Niccol Machiavelli, The Prince, translated by Luigi Ricci (New American Library, 1952): The classic for leaders of a state or a hierarchy. Andrew Bard Schmookler, The Parable of the Tribes (University of California Press, 1984): This work, subtitled The Problem of Power in Social Evolution, contains many strong parallels to modern corporate behavior. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/organizations_and_people.
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BY CHARLES E. LUCIER, LESLIE MOELLER, AND RAYMOND HELD
What does it take to grow shareholder value at world-class rates? More than profit and revenue increases. It takes strategic innovation to make it into the top tier.
10X Value
THE ENGINE POWERING LONG-TERM SHAREHOLDER RETURNS
The question of how to achieve long-term sustain-
Illustration by Dan Page
strategy & competition

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able growth in shareholder value is at the top of the CEO agenda. Many companies have successfully focused their efforts on cost reduction through increased labor and asset productivity, and have achieved shortterm increases in shareholder value as a reward. With their businesses running efficiently, these companies have refocused their energies into developing long-term growth strategies. Aggressive revenue-oriented strategies are the most common approach to creating long-term value for shareholders. These strategies typically include acquisitions, new products that extend the line, and marketing programs to improve customer loyalty and retention. Unfortunately, our research indicates that these strategies can cause more harm than good. Superior
long-term value for shareholders is derived only from a specific type of revenue growth: growth that results when a company delivers an order-of-magnitude increase in value to its customers, which we call 10X value. An order-of-magnitude improvement in the value proposition obtained through a mixture of product, image, service, and price not only stimulates growth by compelling customers to purchase, but also enables a company to earn superior profitability. A 10X value innovation changes the industrys basis of competition and forces competitors to react, often by trying to copy the innovation. We find that attempts to grow revenue rapidly without a 10X improvement in value are seldom successful and often counterproductive. They involve either costly acquisitions that are subsequently divested, renting

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Charles E. Lucier chucklucier@yahoo.com is a writer and contributing editor to strategy+business. He was instrumental in the founding of this magazine. At the time of this articles publication, he was a senior vice president at Booz Allen Hamilton (whose commercial business later became Booz & Company), and the managing partner of its Cleveland office.
Leslie Moeller leslie.moeller@booz.com is a partner with Booz & Company in Cleveland. He leads the firms North American work in the consumer, media, and retail industries. He is the coauthor of The Four Pillars of ProfitDriven Marketing: How to Maximize Creativity, Profitability, and ROI (McGrawHill, 2009).
Raymond Held is the chief financial officer of Kellogg de Mexico. At the time of this articles publication, he was a senior associate in the engineering and manufacturing group at Booz Allen Hamilton.
Originally published Third Quarter 1997.
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new customers with the latest promotion, or the extension of product lines at the expense of the long-term loyalties of current customers. The only reliable way to earn returns for shareholders in the top 10 percent over a period of 10 to 15 years is through a 10X value innovation. Of course, our findings do not invalidate the importance of rapid productivity improvements and revenue growth in all businesses. To sustain even average returns for its shareholders, a company must achieve continual improvements in its productivity and target increases in market share. This article relates our findings on 10X value as a cause of shareholder value growth and discusses the implications for senior managers. These findings result from an ongoing effort to uncover the dynamics of growth. They are based on an assessment of the creation of long-term shareholder value by more than 1,300 large companies publicly traded in the United States between 1967 and 1997, supplemented by case studies of 65 companies in the top 10 percent of shareholder value creation for at least a decade. Although the quantitative research that underlies this article focuses on United States companies, our subsequent research suggests that the conclusions are equally valid in other countries. Indeed, many top-performing U.S. companies (for example, the Coca-Cola Company) achieved much of their growth by replicating their 10X value in other countries. Several findings from this research contradict conventional wisdom. First, the relationship between revenue growth and growth in shareholder value defined as increases in stock price plus dividends, adjusted for stock splits is not close in either the short term or the long term. For example, despite significant growth in
revenue between 1985 and 1994, USAir, Fleming, and Black & Decker had a modest or negative growth in shareholder value. Additionally, industry growth rates are almost completely unrelated to the likelihood that a company will create superior shareholder value over the long term. Contrary to prevailing strategic thinking, companies in slow-growth, mature markets are somewhat more likely to create superior returns for shareholders than companies in fast-growth industries. Finally, the tactics implied by traditional strategic planning which focuses on achieving better market and cost positions than competitors through superior planning and management results, at best, in growth rates a few points faster than average and significantly less than the top-performing companies.
Innovation: The Value Multiplier
What then are the drivers of sustained superior longterm growth in shareholder value? More than 90 percent of the companies we studied that achieved top-decile returns for at least 10 years have been able to sustain rapid increases in operating earnings through the continual creation of 10X value for customers. They then achieved top-line growth by replicating the 10X value to attract new segments of customers (what we call a growth superhighway). To accomplish this, they relied on continual, highly productive innovation: developing and constantly enhancing unique approaches to serve customers more effectively and sharing the value with customers. This often resulted in value propositions that offered both better differentiation and lower pricing. Although the result of innovation is often a breakthrough that changes
The initial target market was purveyors of medical supplies and parts. Then FedEx discovered that most of the material sent was paper.
the rules of the game, all of the companies we studied relied on a series of innovations, not a single big idea. The highest-performing companies were divided into two types of innovators. Strategic innovations dramatic improvements in the entire business system that deliver value to customers powered about half of them. For this group of strategic innovators, willingness to share the benefits with customers was an essential factor to drive top-line growth, and to stimulate additional improvements in the business system and remain ahead of competitors. Innovation in products or services that create 10X value for customers powered the other half of the top-performing companies. Strategic innovators. Although it is not surprising that a successful strategic innovator creates extraordinary value for its shareholders, we were surprised to discover that nearly half of the top decile of companies for each of the three decades we studied fall into this category. Strategic innovation is unusual in any one industry: in the 75 industries in the United States that we investigated, we found an average of 0.6 successful strategic innovations per industry per decade. Nonetheless, 5 percent of all large publicly traded companies are strategic innovators, which is a significant number. Because strategic innovators change the rules of the game in their industries, most of their stories are well known. Nevertheless, three findings common to all of the strategic innovators deserve mention. First, strategic innovations are not brainstorms or concepts that emerge fully formed: The initial concept is different from the typical game-changing innovation. Strategic innovation requires not only a breakthrough idea, but also the commitment and the feedback processes to refine the idea until it is successful. For
example, FedEx Corporation was founded to provide guaranteed overnight delivery, which was a breakthrough idea. However, the initial target market was purveyors of critical supplies, such as medical supplies and parts. It was the later discovery that most of the volume of material sent was paper, and the subsequent positioning of FedEx to provide the reliable delivery of important business material, that really drove growth. Innovations that in retrospect may appear to be a single idea were in fact the result of a series of linked innovations and adaptations. Second, strategic innovation is difficult and timeconsuming to put into practice. Home Depot Inc., for example, was a strategic innovator in its transforming the category of home improvement retailing. An indication of the magnitude of the difficulty is the 15 years required for any of its competitors to create an equally successful format even though they could build upon Home Depots experience. A strategic innovators competitive advantage is not the breakthrough idea, but rather the myriad details of the successful business system and the ability to adapt rapidly and improve. Finally, to create superior value for shareholders, strategic innovators dont need to start in a large market segment. In fact, the companies that created the highest rate of return for their shareholders over a decade were somewhat smaller (in revenue) than the average large publicly traded company at the beginning of the decade and larger than the average large publicly traded company at the end of the decade. Strategic innovators are much more likely to succeed when they initially focus on a peripheral segment. The innovator can learn how to make its breakthrough idea really work to deliver 10X value in the periphery, often without reaction from the

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dominant competitors focused on the core markets. Nucor Corporation illustrates the pattern. Nucor began as a manufacturer of steel joists and a regional manufacturer of reinforcing bars the lowest-quality steel, of least interest to the major integrated mills. Over time, it moved into light structural shapes, medium structural shapes, and finally, flat rolled steel. By the mid-1990s, Nucor had become the second-largest steel producer in North America. Product and service innovators. These companies bring a series of successful new to the world products to market. Their success lies in coupling an effective innovation process with a superior product concept, and repeating this success time after time. Just one new product is no longer enough to power superior shareholder value; top-decile growth in shareholder value requires getting new products right consistently. Although the most successful product innovators are effective throughout the innovation stream of activities, it is excellence in one of four activities that powers success. These are market understanding (defining customer and channel needs and opportunities ahead of competitors); technology management (ensuring that the correct high-impact technologies are available when needed); product planning (integrating market needs with product architecture to enable competitive specification, development, and delivery of products); and product development (translating a product line or process specification into an engineered design that can be competitively delivered to customers). For instance, Nike Inc.s success comes from an understanding of its customers total experience with its product, including intensive managerial experience with the products and a special panel of athletes to provide feedback on designs and trends. Leading-edge products combine with powerful advertising campaigns using role models to enhance the customers athletic shoe experience. Intel Corporation, on the other hand, creates value from a focus on maintaining market leadership by using technology to constantly improve physical product performance. Before a new product is launched, a design team is working on the next-generation technology that will make the new product obsolete bringing a continuous stream of higher-powered chips to the market. In capital-intensive industries, driving value through continual product innovation often requires new to the world innovations that bet the company. For the Boeing Company, the development of each new aircraft is a major decision, one that could permanently
damage the company if it fails. For instance, from the late 1980s to the early 90s Boeing spent US$4.5 billion to develop the 777 aircraft, at a time when the companys equity was $8 billion. The success of this aircraft was instrumental in helping the company turn its sales numbers around during the industry rebound of the late 1990s. Intel has to make similarly risky bets on each next wave of microprocessor technology. Although making these bets can be frightening for all involved, they must enable the stream of continual product innovation required to deliver 10X value. In addition, big bets create a barrier to entry by less-experienced companies, and this helps to maintain the product innovators superior value over its competitors.
The Growth Superhighway
To earn superior returns for shareholders, a company must effectively exploit its 10X value to sustain annual top-line growth of 15 to 25 percent without mistakes that negatively impact earnings. Whatever the source of their 10X value, the companies that created the greatest long-term value for their shareholders all created a growth superhighway that is, the capability to replicate revenue growth along one targeted path. All companies seek growth through some mix of market share gains within current segments, new segments, new geographies, and acquisitions. Most companies try to generate growth through most of these paths. The companies that create the most long-term value for their shareholders are unusual in that they focus on one primary path. For example, Walmart and Home Depot have grown primarily through geographic expansion, the Shaw Group and WMX Technologies (formerly Waste Management Inc.) expanded by acquisition;
Nucor and Rubbermaid pursued adjacent segments; and Intel has primarily focused on rapid rollout within its current segments. Global expansion is an increasingly important growth superhighway. Cokes ability to replicate its 10X value proposition overseas especially in developing and supporting the local bottlers who sell and distribute the product has been the principal driver of its growth. Similarly, Carrefour SA, the leading French hypermarket retailer, has had tremendous success in expanding its format in Latin America. In Carrefours case, international expansion into less-developed markets has been especially effective because the hypermarket value proposition is more than a 10X improvement over the small local supermarkets and general merchandise retailers. The best-performing companies invest in routinizing expansion along the targeted growth path. For example, Walmart has a standard, very efficient process to build a new store, Home Depot excels in quickly penetrating a new metropolitan area with a critical mass of stores, and Shaw and WMX learned to install their 10X value-creating system quickly in the companies they acquired. Once these companies stray from their growth superhighway, their performance can become highly variable. For example, Home Depots entry into Canada by acquisition and its formats targeted at other customer segments (for example, Expo) have not really panned out. It appears that more than one growth superhighway may be viable in an industry. For example, between 1972 and 1985, WMX and Browning-Ferris Industries each created 10X value for customers and top-decile returns for their shareholders, even though WMX grew primarily by acquisition and Browning-Ferris mainly by
geographic expansion. Hence, the imperative appears to be less to select the correct growth path than to focus on one path and invest in building the capability to make it a superhighway.
Implications for Management

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Our findings demonstrate that creation of 10X value for customers along a growth superhighway leads to superior long-term value for shareholders. The four imperatives top management must heed to develop and exploit a 10X value proposition are: challenge; focus; differentiate your management approach; and lead, dont follow. Challenge. Companies that create superior longterm returns for their shareholders have financial performance that is significantly not incrementally better than average. Increasing the rate of growth in earnings and revenue of an average company by two or three points will not result in 80th or 90th percentile returns to shareholders. By setting the strategic long-term challenge of achieving dramatically higher financial goals, a CEO can help stimulate a fundamental rethinking of the business that might yield 10X value for customers. Focus. The best-performing companies that we have studied all prospered by creating 10X value for customers in one business and by exploiting their advantage down one growth superhighway. Focus enables a company to continue to innovate, to gain leverage from scale as it grows, and to sustain its advantage over competitors. Companies that lose their focus on one growth superhighway often falter in creating superior long-term returns to shareholders. The multibusiness corporations like General Electric Company and PepsiCo that have created 10X
It will be very difficult for any corporation to create and exploit 10X value in two distinct business units simultaneously.
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value have done so in only one business unit at a time (specifically, GE Capital and Frito-Lay). In part, this fact may merely reflect the inherent difficulty of creating 10X value. However, we believe that it will be very difficult for any corporation to create and exploit 10X value in two distinct business units simultaneously. 10X value creation is simply too demanding in terms of management talent, investment to finance rapid growth, and the attention of the CEO. One principal reason that large multibusiness companies have been less likely to create 10X value than single-business companies may have been an unwillingness to focus on a single business unit as the driver of superior long-term shareholder value creation. The good news is that even in a corporation as large and diverse as GE, one division that creates 10X value and exploits the advantage along a growth superhighway can yield excellent long-term results to shareholders. For example, GE is an extremely well-managed company with returns to shareholders in the 75th percentile between 1985 and 1994. However, without GE Capitals 23 percent annual earnings growth, the corporations earnings would have grown at only 6 percent instead of 9 percent, and returns to shareholders probably would have been only average. Differentiate your management approach. Creation of 10X value for customers requires a distinctive management model. This involves the rapid incorporation of feedback from customers into the evolving value proposition; investment in rapid growth, often before a compelling case can be made that the investment will pay off; an entrepreneurial culture with rapid decision making; and compensation heavily incentivized toward bottom-line growth or superior returns to shareholders.
Although single-business companies can embrace this model, multidivision corporations face a formidable challenge. The usual multidivision corporate planning and budgeting processes, culture, and compensation systems are inconsistent with the 10X value creation model. For example, traditional strategic planning usually focuses on what is and what has been, whereas 10X value creation involves new to the world innovation. An analytical demonstration that something that has never been done will prove to be a superior investment is very difficult. The solution for a large multidivision company that wants to create 10X value in a business is to differentiate its management systems. That is, it can use different planning, budgeting, and compensation systems in the division targeting 10X value and allow that businesss culture to diverge somewhat. More traditional planning and budgeting systems are better adapted to businesses that are not trying to create 10X value. These systems can stimulate productivity improvements, target opportunities for profitability increases and market share gains, quickly match successful initiatives by competitors, and ensure that business units create and execute near-term plans consistent with a long-term strategic direction. Lead, dont follow. 10X value creation requires senior management leadership. There are two key roles to be played: a senior champion who makes the refinement and success of the 10X value innovation his or her sole objective, and a CEO who decides which bets to make and who creates the environment for success. Creating 10X value starts with the conviction that a market is ready for value innovation, like that shown by Sam Walton in leaving Ben Franklin stores when that
company rejected the idea of a Walmart or by Gary Wendt and Larry Bossidy in building GE Capital acquisition by acquisition during the 1990s. We are not saying these leaders had a vision that popped fully formed into their minds, but they did have the commitment to refine the idea until it succeeded, the willingness to make mid-course corrections, and the ruthless execution to make the financials attractive while evolving along a growth superhighway. Although the CEO usually plays the champions role in small entrepreneurial companies, in large companies the role does not have to be played by the CEO (for example, at GE Capital it was played by the head of the business). The CEO plays three critical roles in the creation of superior value for shareholders. He or she sets the objective of truly superior (top 10th or 20th percentile) longterm returns to shareholders. He or she evaluates the opportunities for 10X value creation across the business units, betting on no more than one or two prospective growth engines and adjusting the bets as new information comes to light. Finally, the CEO ensures that management processes, incentives, and leadership of the targeted bets support 10X value creation. In our discussions with CEOs of large companies, their major concern is risk: How likely is an innovative growth strategy to succeed? What is the downside if it fails? Our response is that if the CEOs objective is top 10th or 20th percentile long-term returns to shareholders, then there is no real alternative to a 10X value creation strategy. Because 10X value creation strategies typically involve pilot programs to refine the concept, significant financial commitments may not be required initially. The downside of the pursuit of an innovative strategy that is ultimately unsuccessful is less the financial loss than the loss of time and management attention that would have been used more productively elsewhere. Partially successful 10X value creation strategies can still produce excellent returns for shareholders, albeit returns sustained for a shorter period of time (because competitors can match the innovation quickly) or fall only in the 70th or 80th percentile. For example, Procter & Gamble Company spends heavily on technology to
improve products significantly (its R&D spending is about 4 percent of sales whereas Unilevers is about 2 percent) and has developed the ability to globalize the products rapidly. Although P&G cannot claim every breakthrough indeed, it missed such product ideas as pull-up diapers and peroxide and baking soda in toothpaste it creates a sufficient stream of global winners, such as two-in-one shampoo and compact detergents, to fuel returns to shareholders, as of 1997, in the 81st percentile. CEOs of companies with successful 10X value creation strategies consider them to be low risk: As long as they can sustain the 10X advantage, there is no need to worry about the actions of competitors or the cyclicality of the underlying market. Superior long-term growth in shareholder value is feasible only with creation of 10X value for customers through strategic or product innovation, sharing part of the value with customers and capturing part of the value in attractive profitability. Ultimately, 10X value creation is strategically liberating: Virtually all companies, even large corporations in mature industries, have the potential of creating superior long-term returns for their shareholders. +
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Resources
Paul Leinwand and Cesare Mainardi, The Coherence Premium, Harvard Business Review, June 2010, Reprint R1006F, www.booz.com/global/home/what_we_think/capabilities_driven_ strategy/hbr_article: Takes the concept of focus further by showing how aligning strategy, capabilities, and products and services leads to a longterm right to win in the market. Charles E. Lucier and Amy Asin, Toward a New Theory of Growth, s+b, Winter 1996, www.strategy-business.com/article/8660: Paved the way for this article by asserting that increasing revenue is not enough; 10X shareholder-value growth requires strategic innovation. Kenichi Ohmae, The Godzilla of the New Economy, s+b, First Quarter 2000, www.strategy-business.com/article/10401: A prescient look at the rapidly growing 10X-value companies of the turn of the century: Amazon, Nokia, eBay, Docomo, Cisco Systems, and more. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/strategy_and_leadership.
BY DON TAPSCOTT
Rethinking
(or Why Michael Porter Is Wrong about the Internet)
Illustration by John Hersey

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in a Netw
The Harvard strategy guru errs when he says partnerships erode competitive advantage. Instead, they are now central to business success.
Strategy

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orked World
For decades, the starting point for strategic think-
ing has been the stand-alone, vertically integrated corporation. These powerful companies do everything from soup to nuts and dominate the competitive landscape. We think of them as intrinsic to the economy, and they provide the context for theories about competitive strategy. Companies prospered with this model of production because it was cheaper and simpler for them to perform the maximum number of functions in-house,
rather than incurring the high cost, hassle, and risk of partnering with outsiders to execute vital business activities. This is no longer true. The CEO of Boeing Company says his company is no longer an aircraft manufacturer; it has become a systems integrator. Mercedes-Benz doesnt build its own E-Class cars; the Magna Corporation does the work, including final assembly. IBM has become a computer company that doesnt really make its computers; its part-
Don Tapscott dtapscott@digital4sight.com is president of the New Paradigm Learning Corporation and cofounder of Digital 4Sight, a company that designs and implements new business models for corporations. He is the coauthor, with David Ticoll and Alex Lowy, of Digital Capital: Harnessing the Power of Business Webs (Harvard Business School Press, 2000).
Originally published Third Quarter 2001.
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ner network does. Indeed, we are seeing spectacular growth in contract manufacturing with companies such as Celestica, Flextronics, and Solectron partnering with computer and telecommunications vendors to provide core electronics manufacturing services. Virtually overnight, the top five contract manufacturing firms have achieved aggregate revenues of more than US$50 billion, averaging return on invested capital of more than 25 percent. All of this is possible because of networking specifically, the Internet. This deep, rich, publicly available communications technology is enabling a new business architecture that challenges the industrial-age corporate structure as the basis for competitive strategy. My colleagues at Digital 4Sight and I have studied hundreds of different examples of this architecture, what we call a business web, or b-web. We define it as any system composed of suppliers, distributors, service providers, infrastructure providers, and customers that uses the Internet for business communications and transactions. B-webs across industries, in which each business focuses on its core competence, are proving to be more supple, innovative, cost-efficient, and profitable than traditional vertically integrated competitors. Established companies, not dot-coms, are the main beneficiaries of b-web thinking. Successful businesses such as Citibank, Herman Miller, Dow Chemical, American Airlines, Nortel Networks, and Schwab are now transforming themselves by partnering in areas that were previously unthinkable. The performance advantages of a b-web also explain why new Internet-based companies such as eBay, Travelocity, E-Trade, and Amazon are growing dramatically and competing well despite volatility in their stock prices. And b-webs ex-
plain why an upstart e-business entity like Napster is wreaking havoc in the music industry, and why open source software such as Linux poses a huge threat to Microsoft. Profound changes to the deep structures of the corporation are under way. Yet most of this underlying restructuring has been either unnoticed or underappreciated by the financial media and business schools. They remain shell-shocked at the rise and collapse of the Nasdaq. And since Nasdaq and New Economy are so frequently (but incorrectly) used interchangeably, the Nasdaq collapse is often cited as proof that the New Economy is a bogus notion. (See Six Reasons There Is a New Economy, page 28.) As for eBay, Amazon, Linux, Napster, and others, they are dismissed as Internet aberrations. Michael Porters obituary for the New Economy, Strategy and the Internet, published in the March 2001 Harvard Business Review, is typical of this thinking. In it, Porter exhorts business leaders to return to fundamentals and abandon thoughts of new business models or e-business strategies that he says encourage managers to view their Internet operations in isolation from the rest of the business. When a politician makes a motherhood statement that receives wide support, pollsters say it resonates with the voters (i.e., its considered credible and is consistent with citizens values). Such is the appeal of Porters article. Profitability still counts. True economic value, measured by sustained profits, is the arbiter of business success not eyeballs, stickiness, hits, or even market share. To compete, companies must operate at a lower cost and/or command a premium price, either through operational effectiveness or by creating unique
value for customers. Being a first mover does not guarantee competitive advantage over the long haul. Unfortunately, he uses these truths to prop up a false thesis. Because corporate objectives remain unchanged by the Net, Porter argues, the best methods of achieving these goals, including operating within a vertically integrated structure, must be unchanged, too. Porter sees the world as two warring camps: the Internet zealots and the defenders of tried-and-true business thinking, such as himself. And its pretty clear whos winning. This gives him the basis on which to assert that the experiences companies have had with the Internet thus far must be largely discounted and many of the lessons learned must be forgotten. If you were an industry leader prior to the Internets bursting on the scene, continue your time-tested business processes. Use the Net as a complement to traditional ways of competing, he says, rather than cannibalizing a healthy company. Regrettably, a much-needed return to fundamentals has become a new fundamentalism that argues managers should turn back the clock for business wisdom. Although there is some merit in Porters view that in our quest to see how the Internet is different, we have failed to see how the Internet is the same, it is utter folly to believe the Internet brings nothing fundamentally new.
What Is the Internet?
Much of Porters reasoning stems from his misunderstanding of the Internet itself. He concedes that the Internet is important its just not that important. But for all its power, the Internet does not represent a break from the past; rather, it is the latest stage in the ongoing evolution of information technology, he writes. Rather than viewing the Net as the emerging infrastructure for economic activity, he puts the Internet architecture on the same level as complementary technological advances such as scanning, object-oriented programming, relational databases, and wireless communications. It is wrong to trivialize the Net in this way. The Net is much more than just another technology development; the Net represents something qualitatively new an unprecedented, powerful, universal communications medium. Far surpassing radio and television, this medium is digital, infinitely richer, and interactive. The Net is becoming ubiquitous; it will soon connect every business and business function and a majority of
humans on the planet. All other communications technologies, such as telephone, radio, television, and wireless, are being sucked into the Nets maw. Porter also makes an all-too-common mistake in assuming that the Internet we see today a network that connects desktop PCs is the same Internet we will see tomorrow. This is nonsense. The Internet of tomorrow will be as dramatic a change from the Internet of today as todays Internet is from the unconnected, proprietary computing networks of yesterday. The Net continues to soar in reach, power, and functionality. It is not only the means to link computers, but the mechanism by which individuals and organizations exchange money, conduct transactions, communicate facts, express insight and opinion, and collaborate to develop new knowledge. Mobile computing devices, broadband access, wireless networks, and computing power embedded in everything from refrigerators to automobiles are converging into a global network that will enable people to use the Net just about anywhere and anytime. No facet of human activity is untouched. The Net is a force of social change penetrating homes, schools, offices, factories, hospitals, and governments. When an institution such as the Massachusetts Institute of Technology says it will post its entire curriculum on the Net including such items as lecture notes and course reading lists it is attempting to shape the nature of pedagogy and learning everywhere. The 20th-century corporation was based on an infrastructure that included the electric power grid, roads, railroad tracks, and primitive analog networks like the telephone. Rather than viewing the Net as comparable to scanning, Porter should see it as the new infrastructure of the 21st century. Many strategists look beyond individual corporations to think about the structure of industries. However, the Internet precipitates one of those rare occasions in economic history when we must think even more broadly in order to understand how the entire infrastructure for wealth creation is changing.
What Is a New Business Model?

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Porter believes there is no such thing as a business model, let alone a new one, and I dont fault him for questioning the validity of the term. Analysts have used it loosely, in reference to everything from selling rocks online to a Vickery auction for financial services. Often the term business model is used more or less
Six Reasons There Is a New Economy
as Internet companies or dot-coms, think about them as companies that use the Internet infrastructure to create effective b-webbased business models. In this sense, the New Economy can include steel compa-
growth comes from small companies; entrepreneurialism is everywhere. 5. New education models and institutions. As lifelong learning becomes the norm, the services of private companies, not public institutions, are proliferating to meet growing demand. The model of pedagogy is also changing with the growth of interactive, self-paced, student-focused learning. Colleges are becoming nodes on communications networks, not just places where people go to study. 6. New governance. Industrial-age bureaucracies rose simultaneously with the vertically integrated corporation and mimicked its structure. New Net-driven governance structures, such as the Knowledge Network of Los Angeles, enable Internet-based cooperation between public and private organizations to deliver services for citizens. Expect to see similar changes in the democratic procedure (e.g., the voting processes) and the relationship between citizens and the state. D.T.
here is nothing fundamentally new about the way capitalism
nies, banks, gas distribution companies, and furniture manufacturers, just as the old economy can include high-technology firms. 3. New sources of value. In todays economy, value is created by brain, not brawn, and most labor is knowledge work. Knowledge infuses itself throughout products and services. Michael Porter is right to say that intellectual capital has no intrinsic value. However, recent experiments in measuring knowledge-based assets suggest wealth contained in such assets can outstrip the wealth contained in physical assets and even bank accounts. 4. New ownership of wealth. The silk-hatted tycoons owned the most wealth in industrial capitalism. Today 60 percent of Americans own stock, and the biggest shareholders are labor pension funds. Most economic
works. In capitalist countries, there is still private, not state, ownership of wealth, and the economy is based on a market. The traditional business cycle (overproduction, inventory gluts, tight employment markets, inflation) is alive and well. Profits are still the ultimate measure of success. Yet, there are characteristics of 21st-century capitalism that make it entirely different from its predecessors. 1. New infrastructure for wealth creation. Networks, specifically the Internet, are becoming the basis of economic activity and progress. This is not unlike how railroads, roads, the power grid, and the telephone supported the vertically integrated corporation. 2. New business models. Instead of thinking of New Economy companies

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synonymously with business strategy. For example, Adrian Slywotzky describes it as the totality of how a company selects its customers, defines and differentiates its offerings (or response), defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers, and captures profits. It is the entire system for delivering utility to customers and earning a profit from that activity. Our view is narrower than this. Quite simply, a business model refers to the core architecture of a firm, specifically how it deploys all relevant resources (not just those within its corporate boundaries) to create differentiated value for customers. Historically, strategists werent particularly concerned with business models, because each industry had a standard model, and strategists assumed the model in that industry. Although the auto manufacturer, the integrated steel company, the
insurance company, the retailer, the oil company, and the bank were different, they shared the characteristic of vertical integration. Traditional business theorists like Michael Porter favor vertical integration and argue against partnering. In his seminal book, Competitive Strategy, he devotes an entire chapter to a vigorous defense of the vertically integrated firm. Today he writes how the myth that partnering is a winwin means to improve industry economics has generated unfounded enthusiasm for the Internet. He cites a litany of reasons he believes its better not to partner. However, it is indisputable that the Net dramatically reduces search, coordination, contracting, and other transaction costs between firms. Because of this, myriad new business models have emerged that are different from the industrial-age template, and there are hundreds
of old and new companies that are winning by focusing on their core capabilities and letting partners do the rest. For example, Siebel Systems Inc., one of the fastestgrowing software companies in America, has established a vast and unique network of customer, supplier, and employee relationships to deliver its products and services. Tom Siebel claims his companys b-web is the most important element in its success: We only have 8,000 people on our payroll, but more than 30,000 people work for us, he says. The relatively small core company creates software products and orchestrates an extensive b-web composed of consultants, technology providers, system implementers, suppliers, and vendors that take its products to the global marketplace. The result: Siebel Systems revenues soared more than 1,400 percent in just three years, from $118 million in 1997 to $1.8 billion in 2000. Yesterdays strategy orthodoxy blinds managers to these unprecedented corporate opportunities. The business strategist needs new tools, including strategic concepts and analytical methods, to comprehend and exploit business architectures, like b-webs, that are suddenly possible because of the Net. I call this business model innovation. When the superiority of the vertically integrated industrial corporation was taken for granted, it was assumed that most resources would be internal to the company. A businesss human-resources strategy dealt with people on the payroll. Accounting handled customer payments. Simple. But in the Internet era, we know firms can profit enormously from resources that dont belong to them. This is much more than what we call outsourcing today. In the future, strategists will no longer look at the integrated corporation as the starting point for creating value, assigning functions, and deciding what to manage inside or outside a firms boundaries. Rather, strategists will start with a customer value proposition and a blank slate for the production and delivery system. There will be nothing to outsource because, from the point of view of strategy, theres nothing inside to begin with. Instead, managers, using new tools of strategic analysis, can identify discrete activities that create value and parcel them out to the appropriate b-web partners. A lead firm in a b-web (e.g., Siebel Systems) choreographs the process, acting as a context provider. Given the Internets power, a reasonable person might ask: Why cant corporate managers simply deploy intranets to get at the resources they need and reap the
rewards? Economics 101 tells us why: Intra-corporate solutions fail to capture the tonic of the marketplace. Most of what companies do is not based on their core competencies. Instead, firms attempt to make do with some combination of in-house design, manufacturing, marketing, and other capabilities that are often not best-of-breed. Now with the Net, business functions and large projects can be reduced to smaller components and farmed out (often simultaneously) to more specialized companies around the world with virtually no transaction costs. This captures the enormous benefits brought on by the competitive environment. Suppliers strive to reduce costs and increase quality and innovation. They know there are other specialized workers and companies around the world keen to replace them. In this environment, the management of partnering, corporate boundaries, distribution channels, industry restructuring, and strategic repositioning is suddenly much more complex. And there are new issues, too. It used to be that sellers simply established prices. No longer. Transparency across the value chain, customer power, and global real-time information make variable pricing mechanisms far more important.
The Net and Competitive Advantage

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Porter avers that as all companies come to embrace Internet technologythe Internet itself will be neutralized as a source of [competitive] advantage. The more robust competitive advantages, he says, will arise instead from traditional strengths such as unique products, strong personal service, relationships, and sustainable operational efficiencies. This astonishing statement has two problems. First, effectively implementing the Internet is not a binary matter like turning a light switch on and off, buying a T1 line, or installing an off-the-shelf application. As we saw during the dot-com craze, there are 1,001 ways to employ the Net, many of which make no sense whatsoever. Moreover, there is a continuum of business transformation that occurs, from setting up a website, to implementing radical new business models, to transforming an entire industry. The Net enables many new applications, technologies, and business innovations. Firms that understand strategy in todays more complex business environment will plumb deeper into the growing pool of possibilities. Second, Porter doesnt see how the Net is precipitating profound changes to the structures and cultures of successful businesses. In fact, these changes enable com-
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panies to compete better precisely through deploying resources that allow them to create better and unique products, stronger personal service, relationships, and sustainable operational efficiencies. These three core areas are ripe for business model innovation: Unique products. IBM has shifted its mentality from vertically integrated fortress to b-web proponent and player. In its earlier incarnation, it reaped huge profits by locking customers on a treadmill of high-margin proprietary hardware and software. Today IBM trumpets Linux. This year it will invest more than $1 billion in the open source software, collaborating with its partners on the Net to develop, enhance, and market Linuxbased applications and services. A typical initiative has IBM joining 18 other companies, such as HewlettPackard, Dell, and Intel, to underwrite a $24 million Open Source Development Lab solely to support projects already under way in the open source community. In 1997, IBM decided its customer relationship management (CRM) software needed to be the best in the world. It mothballed a massive internal development effort and a $40 million revenue stream to partner with Siebel Systems. Today IBMs CRM business is over $2 billion and one of its most profitable. Critics of partnering, such as Michael Porter, condemn IBMs decision to build a PC industry based on the Microsoft standard. Allegedly, this depressed industry profitability and hurt IBM. Not true. PCs became a commodity, leading to a vast explosion in the use of information technology and, ultimately, networking, which is the foundation on which the 21st-century IBM is based. Today [in 2001], the revenue and earnings from IBMs software and services dwarf all hardware sales, not just the sales of PCs.
Compare this to Apple Computer Inc., which clung to the vertically integrated approach of designing and building everything from chips to applications. If it had licensed the Macintosh operating system to partners, Apple Computer would probably be more important today than Microsoft. Remember, in the early 1990s, that IBMs rivals included half a dozen vertically integrated minicomputer companies such as the Digital Equipment Corporation, Prime Computer, and Data General. These companies failed to embrace partnering to deliver the best products to their customers and exploit industry standards. All but one, Hewlett-Packard, which adopted the partner model, failed. The power of business-model innovation is just as evident in service companies. For example, eBay Inc. doesnt just compete well against flea markets, auction houses, and classified ads. It has changed the rules of competition by creating a new type of service company that has become a leader in applying auction-based dynamic pricing. The most important contributors to eBay are its customers, who create the primary value of the business web; eBay is simply the provider of the business context. This b-web also includes companies such as Wells Fargo, Visa, SquareTrade.com, and others providing ancillary services that make buyers and sellers more confident and competent. Operational efficiencies. Around the world, the Internet is allowing companies to wring out waste from their operations, differentiate themselves, and reach new suppliers and customers. Jack Welch calls e-business initiatives a game changer for GE that are expanding far beyond our original vision. His companys first step was to imitate Amazon and sell goods and services online. This initiative was an immediate success; the $8 billion in goods and services GE sold online in 2000 is expected to soar to $20 billion for 2001. In procurement, reverse auctions alone are anticipated to save GE $600 million this year. The company runs global auctions daily $6 billion worth last year, growing to an estimated $12 billion this year. The rewards are so great that rather than cutting back on IT spending because of the weak economy, the company will increase spending this year by 10 to 15 percent. Customer service and relationships. When it comes to customers, many pundits view the Net as simply another channel. Porter writes, On the demand side, most buyers will value a combination of on-line services, personal services, and physical locations over
stand-alone Web distribution. They will want a choice of channels. But the Net is more than a channel. It changes all channels. Effective competitors equip sales agents with Net-based information and tools in the customers living room. Call-center personnel with superior Net-based customer relationship management systems containing complete customer records deliver better customer service. And bricks-and-mortar stores that exploit emerging location-based services will have more customers who find them through the Net.
No to Fundamentalism
Regrettably, many, including Porter, lament the increased knowledge and power that customers are acquiring in this new world. In fact, much of the competition theorists language has disdain for customers. Its best when customers are locked in. When they are ignorant or have no choice, profitability in an industry can be maintained and advantages can be achieved. Because the Net can undermine this, Porter concludes this powerful communications technology is not necessarily a blessing. Indeed, he writes it tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained. Of course the Net creates efficiencies through the economy, intensifying rivalry between competitors and lowering barriers to market entry. It can arm consumers and suppliers with greater power because of their increased access to information, enhanced ability to communicate with each other, and greater freedom of choice. It increases the metabolism of the economy and reduces friction as did, say, the telephone. But would it have been sensible to judge the telephone as not necessarily a blessing? Overall it advanced the economy and benefited society enormously. It was a threat only to the firms that didnt want to change. This becomes even more important when you consider that the telephones impact pales compared to the Nets. It is good that customers will be smarter, more active, and more powerful. Because of this, more real value will come to the fore, and fewer businesses will try to make garbage smell like roses. As businesses increasingly deliver what their customers value, it may turn out the capital businesses earn from customer relationships will dwarf the value of physical assets or money in the bank.
The years from 1997 to 2000 were the dog days of strategy. A get-rich-quick mentality distorted the assertion that the Internet changes everything (which is true) into the hope that all things done on the Internet will prove lucrative (which is rubbish). For a market economy, it was a shameful period. We saw egregious excesses and spectacular market capitalizations based on absurd or nonexistent business models. Momentum investing set in and massive damage was inevitable. Thankfully, those times are past, and sanity is returning. But whats important to understand is that the headlinegrabbing dot-com machinations, be they startups or spin-offs, were largely a distraction and represented only a sliver of the businesses trying to harness the power of the Internet. Today, in the broad space between yesterdays irrational exuberance and todays equally irrational orthodoxy, there is a new frontier of business strategy. There are great new possibilities for creating economic value, customer value, shareholder value, and community value. Business strategy is an idea whose time has come once again. But new rules for competing require some fresh thinking. Business fundamentals, indeed. Fundamentalism, no. +
Reprint No. 01304

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Resources
Lawrence M. Fisher, From Vertical to Virtual: How Nortels Supplier Alliances Extend the Enterprise, s+b, First Quarter 2001, www.strategy-business.com/casestudy/01113/. Keith Oliver, Anne Chung, and Nick Samanich, Beyond Utopia: The Realists Guide to Internet-Enabled Supply Chain Management, s+b, Second Quarter 2001, www.strategy-business.com/special/01209/. Michael E. Porter, Strategy and the Internet, Harvard Business Review, March 2001, www.hbsp.harvard.edu/hbr. Don Tapscott, David Ticoll, and Alex Lowy, Digital Capital: Harnessing the Power of Business Webs (Harvard Business School Press, 2000). David Ticoll, Strategy and the Internet, Letters to the Editor, Harvard Business Review, June 2001. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/strategy_and_leadership.
BY C.K. PRAHALAD AND STUART L. HART
The Fortune
Bottom Pyramid
of the
Low-income markets present a prodigious opportunity for the worlds wealthiest companies to seek their fortunes and bring prosperity to the aspiring poor.
With the end of the Cold War, the former Soviet
at the
Illustration by Marco Ventura
global perspective
32
Union and its allies, as well as China, India, and Latin America, opened their closed markets to foreign investment in a cascading fashion. Although this significant economic and social transformation has offered vast new growth opportunities for multinational corporations (MNCs), its promise has yet to be realized. First, the prospect of millions of middle-class consumers in developing countries, clamoring for products from MNCs, was wildly oversold. To make matters worse, the Asian and Latin American financial crises have greatly diminished the attractiveness of emerging markets. As a consequence, many MNCs worldwide slowed investments and began to rethink riskreward structures for these markets. This retreat could become even more pronounced in the wake of the terrorist
attacks in the United States last September. The lackluster nature of most MNCs emergingmarket strategies over the past decade does not change the magnitude of the opportunity, which is in reality much larger than previously thought. The real source of market promise is not the wealthy few in the developing world, or even the emerging middle-income consumers: It is the billions of aspiring poor who are joining the market economy for the first time. This is a time for MNCs to look at globalization strategies through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind. Countries that still dont have the modern infrastructure or products to
global perspective
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C.K. Prahalad passed away on April 16, 2010. He was the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigans Stephen M. Ross School of Business and coauthor of several significant books, including The New Age of Innovation (McGraw-Hill, 2008) and The Fortune at the Bottom of the Pyramid (Wharton School Publishing, 2005).
Stuart L. Hart slhart@unc.edu is a professor of strategic management, Sarah Graham Kenan Distinguished Scholar, and codirector of the Center for Sustainable Enterprise at the University of North Carolinas KenanFlagler Business School.
Originally published First Quarter 2002.
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Four Consumer Tiers
At the very top of the world economic pyramid are 75 to 100 million affluent Tier 1 consumers from around the world. (See Exhibit 1.) This is a cosmopolitan group composed of middle- and upper-income people in developed countries and the few rich elites from the developing world. In the middle of the pyramid, in Tiers 2 and 3, are poor customers in developed nations and
meet basic human needs are an ideal testing ground for developing environmentally sustainable technologies and products for the entire world. Furthermore, MNC investment at the bottom of the pyramid means lifting billions of people out of poverty and desperation, averting the social decay, political chaos, terrorism, and environmental meltdown that is certain to continue if the gap between rich and poor countries continues to widen. Doing business with the worlds 4 billion poorest people two-thirds of the worlds population will require radical innovations in technology and business models. It will require MNCs to reevaluate price performance relationships for products and services. It will demand a new level of capital efficiency and new ways of measuring financial success. Companies will be forced to transform their understanding of scale, from a bigger is better ideal to an ideal of highly distributed small-scale operations married to world-scale capabilities. In short, the poorest populations raise a prodigious new managerial challenge for the worlds wealthiest companies: selling to the poor and helping them improve their lives by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways.
the rising middle classes in developing countries, the targets of MNCs past emerging-market strategies. Now consider the 4 billion people in Tier 4, at the bottom of the pyramid. Their annual per capita income based on purchasing power parity in U.S. dollars is less than $1,500, the minimum considered necessary to sustain a decent life. For well over a billion people roughly one-sixth of humanity per capita income is less than $1 per day. Even more significant, the income gap between rich and poor is growing. According to the United Nations, the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent. This extreme inequity of wealth distribution reinforces the view that the poor cannot participate in the global market economy, even though they constitute the majority of the population. In fact, given its vast size, Tier 4 represents a multitrillion-dollar market. According to World Bank projections, the population at the bottom of the pyramid could swell to more than 6 billion people over the next 40 years, because the bulk of the worlds population growth occurs there. The perception that the bottom of the pyramid is not a viable market also fails to take into account the growing importance of the informal economy among the poorest of the poor, which by some estimates accounts for 40 to 60 percent of all economic activity in developing countries. Most Tier 4 people live in rural villages, or urban slums and shantytowns, and they usually do not hold legal title or deed to their assets (e.g., dwellings, farms, businesses). They have little or no for-
global perspective
Exhibit 1: The World Economic Pyramid

Annual per Capita Income* More than $20,000 Tiers Population in Millions [2002] 75100
1 2&3 4
$1,500$20,000
1,5001,750
Less than $1,500
4,000
* Based on purchasing power parity in U.S. dollars. Source: U.N. World Development Reports
mal education and are hard to reach via conventional distribution, credit, and communications. The quality and quantity of products and services available in Tier 4 are generally low. Therefore, much like an iceberg with only its tip in plain view, this massive segment of the global population along with its massive market opportunities has remained largely invisible to the corporate sector. Fortunately, the Tier 4 market is wide open for technological innovation. Among the many possibilities for innovation, MNCs can be leaders in leapfrogging to products that dont repeat the environmental mistakes of developed countries over the last 50 years. Todays MNCs evolved in an era of abundant natural resources and thus tended to make products and services that were resource-intensive and excessively polluting. The United States 270 million people only about 4 percent of the worlds population consume more than 25 percent of the planets energy resources. To re-create those types of consumption patterns in developing countries would be disastrous. We have seen how the disenfranchised in Tier 4 can disrupt the way of life and safety of the rich in Tier 1 poverty breeds discontent and extremism. Although complete income equality is an ideological pipe dream, the use of commercial development to bring people out of poverty and give them the chance for a better life is critical to the stability and health of the global economy and the continued success of Western MNCs.
The Invisible Opportunity
Among the top 200 MNCs in the world, the overwhelming majority are based in developed countries. U.S. corporations dominate, with 82; Japanese firms, with 41, are second, according to a list compiled in December 2000 by the Washington, D.C.based
Institute for Policy Studies. So it is not surprising that MNCs views of business are conditioned by their knowledge of and familiarity with Tier 1 consumers. Perception of market opportunity is a function of the way many managers are socialized to think and the analytical tools they use. Most MNCs automatically dismiss the bottom of the pyramid because they judge the market based on income or selections of products and services appropriate for developed countries. To appreciate the market potential of Tier 4, MNCs must come to terms with a set of core assumptions and practices that influence their view of developing countries. We have identified the following as widely shared orthodoxies that must be reexamined: Assumption #1. The poor are not our target consumers because with our current cost structures, we cannot profitably compete for that market. Assumption #2. The poor cannot afford and have no use for the products and services sold in developed markets. Assumption #3. Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology. Assumption #4. The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits. Assumption #5. Managers are not excited by business challenges that have a humanitarian dimension. Assumption #6. Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid. Each of these key assumptions obscures the value at the bottom of the pyramid. It is like the story of the person who finds a US$20 bill on the sidewalk. Conventional economic wisdom suggests if the bill really existed, someone would already have picked it up! Like the
global perspective
35
Exhibit 2: Innovation and MNC Implications in Tier 4

Drivers of Innovation Increased access among the poor to TV and information Implications for MNCs Tier 4 is becoming aware of many products and services and is aspiring to share the benefits More hospitable investment climate for MNCs entering developing countries and more cooperation from nongovernmental organizations Tier 4 represents a huge untapped market for profitable growth
Deregulation and the diminishing role of governments and international aid
Global overcapacity combined with intense competition in Tiers 1, 2, and 3
The need to discourage migration to overcrowded urban centers
MNCs must create products and services for rural populations
$20 bill, the bottom of the pyramid defies conventional managerial logic, but that doesnt mean it isnt a large and unexplored territory for profitable growth. Consider the drivers of innovation and opportunities for companies in Tier 4. (See Exhibit 2.) MNCs must recognize that this market poses a major new challenge: how to combine low cost, good quality, sustainability, and profitability. Furthermore, MNCs cannot exploit these new opportunities without radically rethinking how they go to market. Exhibit 3 suggests some (but by no means all) areas where an entirely new perspective is required to create profitable markets in Tier 4.
Tier 4 Pioneers
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Hindustan Lever Ltd. (HLL), a subsidiary of Great Britains Unilever PLC and widely considered the bestmanaged company in India, has been a pioneer among MNCs exploring markets at the bottom of the pyramid. For more than 50 years, HLL has served Indias small elite who could afford to buy MNC products. In the 1990s, a local firm, Nirma Ltd., began offering detergent products for poor consumers, mostly in rural areas. In fact, Nirma created a new business system that included a new product formulation, low-cost manufacturing process, wide distribution network, special packaging for daily purchasing, and value pricing. HLL, in typical MNC fashion, initially dismissed Nirmas strategy. However, as Nirma grew rapidly, HLL could see its local competitor was winning in a market it had disregarded. Ultimately, HLL saw its vulnerability and its opportunity: In 1995, the company responded with its own offering for this market, drastically altering its traditional business model.
HLLs new detergent, called Wheel, was formulated to substantially reduce the ratio of oil to water in the product, responding to the fact that the poor often wash their clothes in rivers and other public water systems. HLL decentralized the production, marketing, and distribution of the product to leverage the abundant labor pool in rural India, quickly creating sales channels through the thousands of small outlets where people at the bottom of the pyramid shop. HLL also changed the cost structure of its detergent business so it could introduce Wheel at a low price point. Today, Nirma and HLL are close competitors in the detergent market, with 38 percent market share each, according to IndiaInfoline.com, a business intelligence and market research service. Unilevers own analysis of Nirma and HLLs competition in the detergent business reveals even more about the profit potential of the marketplace at the bottom of the pyramid. (See Exhibit 4.) Contrary to popular assumptions, the poor can be a very profitable market especially if MNCs change their business models. Specifically, Tier 4 is not a market that allows for the traditional pursuit of high margins; instead, profits are driven by volume and capital efficiency. Margins are likely to be low (by current norms), but unit sales can be extremely high. Managers who focus on gross margins will miss the opportunity at the bottom of the pyramid; managers who innovate and focus on economic profit will be rewarded. Nirma has become one of the largest branded detergent makers in the world. Meanwhile, HLL, stimulated by its emergent rival and its changed business model, registered a 20 percent growth in revenues per year and a 25 percent growth in profits per year between 1995 and 2000. Over the same period, HLLs market capital-
global perspective
ization grew to $12 billion a growth rate of 40 percent per year. HLLs parent company, Unilever, also has benefited from its subsidiarys experience in India. Unilever transported HLLs business principles (not the product or the brand) to create a new detergent market among the poor in Brazil, where the Ala brand has been a big success. More important, Unilever has adopted the bottom of the pyramid as a corporate strategic priority. As the Unilever example makes clear, the starting assumption must be that serving Tier 4 involves bringing together the best of technology and a global resource base to address local market conditions. Cheap and lowquality products are not the goal. The potential of Tier 4 cannot be realized without an entrepreneurial orientation: The real strategic challenge for managers is to visualize an active market where only abject poverty exists today. It takes tremendous imagination and creativity to engineer a market infrastructure out of a completely unorganized sector. Serving Tier 4 markets is not the same as serving existing markets better or more efficiently. Managers first must develop a commercial infrastructure tailored to the needs and challenges of Tier 4. Creating such an infrastructure must be seen as an investment, much like the more familiar investments in plants, processes, products, and R&D. Further, contrary to more conventional investment strategies, no firm can do this alone. Multiple players must be involved, including local governmental authorities, nongovernmental organizations (NGOs), communities, financial institutions, and other companies. Four elements creating buying power, shaping aspirations, improving access, and tailoring local solutions are the keys to a thriving Tier 4 market. (See Exhibit 5.) Each of these four elements demands innovation in technology, business models, and management processes. And business leaders must be willing to experiment, collaborate, empower locals, and create new sources of competitive advantage and wealth.
Creating Buying Power
cial providing access to credit, and increasing the earning potential of the poor. A few farsighted companies have already begun to blaze this trail with startlingly positive results. Commercial credit historically has been unavailable to the very poor. Even if those living in poverty had access to a bank, without collateral it is hard to get credit from the traditional banking system. As Peruvian economist Hernando de Soto demonstrates in his pathbreaking work, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000), commercial credit is central to building a market economy. Access to credit in the U.S. has allowed people of modest means to systematically build their equity and make major purchases, such as houses, cars, and education. The vast majority of the poor in developing countries operate in the informal or extralegal economy, since the time and cost involved in securing legal title for their assets or incorporation of their microenterprises is prohibitive. Developing countries have tried governmental subsidies to free the poor from the cycle of poverty, with little success. Even if the poor were able to benefit from government support to start small businesses, their dependence on credit from local moneylenders charging usurious rates makes it impossible to succeed. Local moneylenders in Mumbai, India, charge interest rates of up to 20 percent per day. This means that a vegetable vendor who borrows Rs.100 ($2.08) in the morning must return Rs.120 ($2.50) in the evening. Extending credit to the poor so they can elevate themselves economically is not a new idea. Consider how I.M. Singer & Company, founded in 1851, provided credit as a way for millions of women to purchase
Exhibit 3: New Strategies for the Bottom of the Pyramid
Price Performance Product development Manufacturing Distribution Views of Quality New delivery formats Creation of robust products for harsh conditions (heat, dust, etc.) Profitability Investment intensity Margins Volume
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According to the International Labor Organizations World Employment Report 2001, nearly a billion people roughly one-third of the worlds workforce are either underemployed or have such low-paying jobs that they cannot support themselves or their families. Helping the worlds poor elevate themselves above this desperation line is a business opportunity to do well and do good. To do so effectively, two interventions are cru-
Sustainability Reduction in resource intensity Recyclability Renewable energy
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In addition, Grameen Banks rate of return is not easy to assess. Historically, the bank was an entirely manual, field-based operation, a structure that undercut its efficiency. Today, spin-offs such as Grameen Telecom (a provider of village phone service) and Grameen Shakti (a developer of renewable energy sources) are helping Grameen Bank build a technology infrastructure to automate its processes. As the bank develops its online business model, profitability should increase dramatically, highlighting the importance of information technology in the acceleration of the microcredit revolution. Perhaps the most pertinent measure of Grameen Banks success is the global explosion of institutional interest in microlending it has stimulated around the world. In South Africa, where 73 percent of the population earns less than R5,000 ($460) per month, according to a 2001 World Bank study, retail banking services for low-income customers are becoming one of the most competitive and fast-growing mass markets. In 1994, Standard Bank of South Africa Ltd., Africas leading consumer bank, launched a low-cost, volume-driven e-banking business, called AutoBank E, to grow revenue by providing banking services to the poor. Through the use of 2,500 ATMs and 98 AutoBank E-centres, Standard now has the largest presence in South Africas townships and other under-serviced areas of any domestic bank. As of April 2001, Standard served nearly 3 million low-income customers and is adding roughly 60,000 customers per month, according to South Africas Sunday Times. Standard does not require a minimum income of customers opening an AutoBank E account, although they must have some regular income. People who have never used a bank can open an account with a deposit of as little as $8. Customers are issued an ATM card and shown how to use it by staff who speak a variety of African dialects. A small flat fee is charged for each ATM transaction. An interestExhibit 4: Nirma vs. HLL in Indias Detergent Market (1999) bearing savings purse is attached to every account to encourage Nirma HLL (Wheel) HLL (High-end Products) poor customers to save. Interest rates on deposits are low, but Total Sales (US$ Million) 150 100 180 superior to keeping cash in a jar. The Sunday Times also reported Gross Margin (%) 18 18 25 that Standard Bank is considering a loan program for low-income ROCE (%) 121 93 22 clients. Computerization of microSource: Presentation by John Ripley, senior vice president, Unilever, at the Academy of Management Meeting, August 10, 1999 lending services not only makes sewing machines. Very few of those women could have afforded the steep $100 price tag, but most could afford a payment of $5 per month. The same logic applies on a much larger scale in Tier 4. Consider the experience of the Grameen Bank Ltd. in Bangladesh, one of the first in the world to apply a microlending model in commercial banking. Started just over 20 years ago by Muhammad Yunus, then a professor in the economics department at Chittagong University in Bangladesh, Grameen Bank pioneered a lending service for the poor that has inspired thousands of microlenders, serving 25 million clients worldwide, in developing countries and wealthy nations, including the United States and the United Kingdom. Grameen Banks program is designed to address the problems of extending credit to lowest-income customers lack of collateral, high credit risk, and contractual enforcement. Ninety-five percent of its 2.3 million customers are women, who, as the traditional breadwinners and entrepreneurs in rural communities, are better credit risks than men. Candidates for loans must have their proposals thoroughly evaluated and supported by five nonfamily members of the community. The banks sales and service people visit the villages frequently, getting to know the women who have loans and the projects in which they are supposed to invest. In this way, lending due diligence is accomplished without the mountain of paperwork and arcane language common in the West. With 1,170 branches, Grameen Bank today provides microcredit services in more than 40,000 villages, more than half the total number in Bangladesh. As of 1996, Grameen Bank had achieved a 95 percent repayment rate, higher than any other bank in the Indian subcontinent. However, the popularity of its services has also spawned more local competitors, which has cut into its portfolio and shrunk its profits over the past few years.
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Exhibit 5: The Commercial Infrastructure at the Bottom of the Pyramid
Creating Buying Power Access to credit Income generation
Improving Access Distribution systems Communications links
Shaping Aspirations Consumer education Sustainable development
Tailoring Local Solutions Targeted product development Bottom-up innovation
ondary market to multinational financial institutions like Citigroup. This would greatly expand the capital available for microlending beyond the current pool from donors and governments. In the United States, microlending has also taken root over the past decade in poor urban neighborhoods. For example, the ShoreBank Corporation, formerly South Shore Bank, has demonstrated the profitability of banking for the poor in Chicagos troubled South Side. Project Enterprise, a Grameen-like program based in New York City, is aimed at minority entrepreneurs. Several multinational banks are beginning to offer microbanking services in developing countries. Citigroup, for instance, is experimenting in Bangalore, India, with 24/7 services for customers with as little as $25 on deposit. Initial results are very positive.
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Shaping Aspirations
the overall operation more efficient, but also makes it possible to reach many more people lending money to individuals with no collateral and no formal address. Since there is lower overhead and little paperwork, AutoBanks costs are 30 to 40 percent lower than those at traditional branches. At the 1999 Microcredit Summit, the United Nations, in conjunction with several major MNCs, such as Citigroup Inc. and Monsanto Company, set a goal of making basic credit available to the 100 million poorest families in the world by the year 2005. Unfortunately, the success of this undertaking has been slowed by high transaction costs, a lack of automation, and poor information and communications infrastructures in rural areas. To address these issues and accelerate the development of microlending, French banker Jacques Attali, the founding president of the European Bank for Reconstruction and Development and a former chief aide of French President Franois Mitterrand during the 1980s, has created PlaNet Finance. Its website, www.planetfinance.org, links thousands of microcredit groups worldwide into a network to help microbanks share solutions and lower costs. Ultimately, the development of an automated solution for tracking and processing the millions of small loans associated with microlending should be possible. If processing and transaction costs can be reduced enough, they can then be bundled together and sold in the sec-
Sustainable product innovations initiated in Tier 4, and promoted through consumer education, will not only positively influence the choices of people at the bottom of the pyramid, but may ultimately reshape the way Americans and others in Tier 1 live. Indeed, in 20 years, we may look back to see that Tier 4 provided the early market pull for disruptive technologies that replaced unsustainable technologies in developed countries and advanced the fortunes of MNCs with foresight. For example, Unilevers HLL subsidiary has tackled the lack of practical, inexpensive, low-energy-consuming refrigeration in India. HLLs laboratories developed a radically different approach to refrigeration that allows ice cream to be transported across the country in standard nonrefrigerated trucks. The system allows quantum reductions in electricity use and makes dangerous and polluting refrigerants unnecessary. As a bonus, the new system is cheaper to build and use. Electricity, water, refrigeration, and many other essential services are all opportunities in developing countries. A U.S.-based NGO, the Solar Electric Light Fund (SELF), has creatively adapted technology and applied microcredit financing to bring electrical service to people in remote villages in Africa and Asia who otherwise would spend money to burn hazardous kerosene, candles, wood, or dung for their light and cooking. SELFs rural electrification system is based on smallscale on-site power generation using renewable resources. A revolving loan fund gives villagers the financial means to operate these electrical systems themselves, also creating jobs. Since its founding in 1990, SELF has
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Bringing modern IT equipment to Tier 4 villages makes possible such applications as tele-education, telemedicine, microbanking, and agricultural extension services.
launched projects in China, India, Sri Lanka, Nepal, Vietnam, Indonesia, Brazil, Uganda, Tanzania, South Africa, and the Solomon Islands. The success of SELF and other NGOs focused on small-scale distributed energy solutions has begun to attract the attention of Western companies such as the U.S.s Plug Power Inc. (fuel cells) and Honeywell Inc. (microturbines). They see the logic in moving into a wide-open market in Tier 4 rather than trying to force their technology prematurely into applications for the developed markets, where incumbents and institutions stand in their way. With several billion potential customers around the world, investments in such innovations should be well worth it.
Improving Access
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Because Tier 4 communities are often physically and economically isolated, better distribution systems and communication links are essential to development of the bottom of the pyramid. Few of the large emergingmarket countries have distribution systems that reach more than half of the population. (Hence the continued dependence of the poorest consumers on local products and services and moneylenders.) As a consequence, few MNCs have designed their distribution systems to cater to the needs of poor rural customers. Creative local companies, however, lead the way in effective rural distribution. In India, for instance, Arvind Mills has introduced an entirely new delivery system for blue jeans. Arvind, the worlds fifth-largest denim manufacturer, found Indian domestic denim sales limited. At $40 to $60 a pair, the jeans were not affordable to the masses, and the existing distribution system reached only a few towns and villages. So Arvind
introduced Ruf & Tuf jeans a ready-to-make kit of jeans components (denim, zipper, rivets, and a patch) priced at about $6. Kits were distributed through a network of thousands of local tailors, many in small rural towns and villages, whose self-interest motivated them to market the kits extensively. Ruf & Tuf jeans are now the largest-selling jeans in India, easily surpassing Levis and other brands from the U.S. and Europe. MNCs can also play a role in distributing the products of Tier 4 enterprises in Tier 1 markets, giving bottom-of-the-pyramid enterprises their first links to international markets. Indeed, it is possible through partnerships to leverage traditional knowledge bases to produce more sustainable, and in some cases superior, products for consumption by Tier 1 customers. Anita Roddick, CEO of the Body Shop International PLC, demonstrated the power of this strategy in the early 1990s through her companys trade not aid program of sourcing local raw material and products from indigenous people. More recently, the Starbucks Corporation, in cooperation with Conservation International, has pioneered a program to source coffee directly from farmers in the Chiapas region of Mexico. These farms grow coffee beans organically, using shade, which preserves songbird habitat. Starbucks markets the product to U.S. consumers as a high-quality, premium coffee; the Mexican farmers benefit economically from the sourcing arrangement, which eliminates intermediaries from the business model. This direct relationship also improves the local farmers understanding and knowledge of the Tier 1 market and its customer expectations. Information poverty may be the single biggest roadblock to sustainable development. More than half of
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humanity has yet to make a single phone call. However, where telephones and Internet connections do exist, for the first time in history, it is possible to imagine a single, interconnected market uniting the worlds rich and poor in the quest for truly sustainable economic development. The process could transform the digital divide into a digital dividend. Ten years ago, Sam Pitroda, currently chairman and CEO of London-based Worldtel Ltd., a company created by a telecommunications union to fund telecom development in emerging markets, came to India with the idea of rural telephones. His original concept was to have a community telephone, operated by an entrepreneur (usually a woman) who charged a fee for the use of the telephone and kept a percentage as wages for maintaining the telephone. Today, from most parts of India, it is possible to call anyone in the world. Other entrepreneurs have introduced fax services, and some are experimenting with low-cost e-mail and Internet access. These communication links have dramatically altered the way villages function and how they are connected to the rest of the country and the world. With the emergence of global broadband connections, opportunities for information-based business in Tier 4 will expand significantly. New ventures such as CorDECT in India and Celnicos Communications in Latin America are developing information technology and business models suited to the particular requirements of the bottom of the pyramid. Through shared-access models (e.g., Internet kiosks), wireless infrastructure, and focused technology development, companies are dramatically reducing the cost of being connected. For example, voice and data connectivity typically costs companies $850 to $2,800 per line in the developed world; CorDECT has reduced this cost to less than $400 per line, with a goal of $100 per line, which would bring telecommunications within reach of virtually everyone in the developing world. Recognizing an enormous business and development opportunity, Hewlett-Packard Company has articulated a vision of world e-inclusion, with a focus on providing technology, products, and services appropriate to the needs of the worlds poor. As part of this strategy, HP has entered into a venture with the MIT Media Lab and the Foundation for Sustainable Development of Costa Rica led by former President Jose Maria Figueres Olsen to develop and implement telecenters for villages in remote areas. These digital town centers provide modern information technology equipment
with a high-speed Internet connection at a price that is affordable, through credit vehicles, at the village level. Bringing such technology to villages in Tier 4 makes possible a number of applications, including tele-education, telemedicine, microbanking, agricultural extension services, and environmental monitoring, all of which help to spur microenterprise, economic development, and access to world markets. This project, named Lincos, is expected to spread from todays pilot sites in Central America and the Caribbean to Asia, Africa, and central Europe.
Tailoring Local Solutions
As we enter the new century, the combined sales of the worlds top 200 MNCs equal nearly 30 percent of total world gross domestic product. Yet these same corporations employ less than 1 percent of the worlds labor force. Of the worlds 100 largest economies, 51 are economies internal to corporations. Yet scores of Third World countries have suffered absolute economic stagnation or decline. If MNCs are to thrive in the 21st century, they must broaden their economic base and share it more widely. They must play a more active role in narrowing the gap between rich and poor. This cannot be achieved if these companies produce only so-called global products for consumption primarily by Tier 1 consumers. They must nurture local markets and cultures, leverage local solutions, and generate wealth at the lowest levels on the pyramid. Producing in, rather than extracting wealth from, these countries will be the guiding principle. To do this, MNCs must combine their advanced technology with deep local insights. Consider packaging. Consumers in Tier 1 countries have the disposable income and the space to buy in bulk (e.g., 10-pound boxes of detergent from superstores like Sams Club) and shop less frequently. They use their spending money to inventory convenience. Tier 4 consumers, strapped for cash and with limited living space, shop every day, but not for much. They cant afford to stock up on household items or be highly selective about what they buy; they look for single-serve packaging. But consumers with small means also have the benefit of experimentation. Unburdened by large quantities of product, they can switch brands every time they buy. Already in India, 30 percent of personal care products and other consumables, such as shampoo, tea, and cold medicines, are sold in single-serve packages. Most are priced at Rs. 1 (about 1). Without innovation in
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packaging, however, this trend could result in a mountain of solid waste. Dow Chemical Company and Cargill Inc. are experimenting with an organic plastic that would be totally biodegradable. Such packaging clearly has advantages in Tier 4, but it could also revolutionize markets at all four tiers of the world pyramid. For MNCs, the best approach is to marry local capabilities and market knowledge with global best practices. But whether an initiative involves an MNC entering Tier 4 or an entrepreneur from Tier 4, the development principles remain the same: New business models must not disrupt the cultures and lifestyles of local people. An effective combination of local and global knowledge is needed, not a replication of the Western system. The development of Indias milk industry has many lessons for MNCs. The transformation began around 1946, when the Khira District Milk Cooperative, located in the state of Gujarat, set up its own processing plant under the leadership of Verghese Kurien and created the brand Amul, today one of the most recognized in the country. Unlike the large industrial dairy farms of the West, in India, milk originates in many small villages. Villagers may own only two to three buffaloes or cows each and bring their milk twice a day to the village collection center. They are paid every day for the milk they deliver, based on fat content and volume. Refrigerated vans transport the milk to central processing plants, where it is pasteurized. Railroad cars then transport the milk to major urban centers. The entire value chain is carefully managed, from the village-based milk production to the world-scale processing facilities. The Khira District cooperative provides such services to the farmers as veterinary care and cattle feed. The cooperative also manages the distribution of pasteurized milk, milk powder, butter, cheese, baby food, and other products. The uniqueness of the Amul cooperative is its blending of decentralized origination with the efficiencies of a modern processing and distribution infrastructure. As a result, previously marginal village farmers are earning steady incomes and being transformed into active market participants. Twenty years ago, milk was in short supply in India. Today, India is the worlds largest producer of milk. According to Indias National Dairy Development Board, the countrys dairy cooperative network now claims 10.7 million individual farmer memberowners, covers 96,000 village-level societies, includes 170 milkproducer unions, and operates in more than 285 dis-
tricts. Milk production has increased 4.7 percent per year since 1974. The per capita availability of milk in India has grown from 107 grams to 213 grams per day in 20 years.
Putting It All Together
Creating buying power, shaping aspirations, improving access, and tailoring local solutions the four elements of the commercial infrastructure for the bottom of the pyramid are intertwined. Innovation in one leverages innovation in the others. Corporations are only one of the actors; MNCs must work together with NGOs, local and state governments, and communities. Yet someone must take the lead to make this revolution happen. The question is, Why should it be MNCs? Even if multinational managers are emotionally persuaded, it is not obvious that large corporations have real advantages over small, local organizations. MNCs may never be able to beat the cost or responsiveness of village entrepreneurs. Indeed, empowering local entrepreneurs and enterprises is key to developing Tier 4 markets. Still, there are several compelling reasons for MNCs to embark on this course: Resources. Building a complex commercial infrastructure for the bottom of the pyramid is a resourceand management-intensive task. Developing environmentally sustainable products and services requires significant research. Distribution channels and communication networks are expensive to develop and sustain. Few local entrepreneurs have the managerial or technological resources to create this infrastructure. Leverage. MNCs can transfer knowledge from one market to another from China to Brazil or India as Avon, Unilever, Citigroup, and others have demonstrated. Although practices and products have to be customized to serve local needs, MNCs, with their unique global knowledge base, have an advantage that is not easily accessible to local entrepreneurs. Bridging. MNCs can be nodes for building the commercial infrastructure, providing access to knowledge, managerial imagination, and financial resources. Without MNCs as catalysts, well-intentioned NGOs, communities, local governments, entrepreneurs, and even multilateral development agencies will continue to flounder in their attempts to bring development to the bottom. MNCs are best positioned to unite the range of actors required to develop the Tier 4 market. Transfer. Not only can MNCs leverage learning
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New business models must not disrupt local cultures and lifestyles. An effective combination of local and global knowledge is needed, not a Western system.
from the bottom of the pyramid, but they also have the capacity to transfer innovations up-market all the way to Tier 1. As we have seen, Tier 4 is a testing ground for sustainable living. Many of the innovations for the bottom can be adapted for use in the resource- and energy-intensive markets of the developed world. It is imperative, however, that managers recognize the nature of business leadership required in the Tier 4 arena. Creativity, imagination, tolerance for ambiguity, stamina, passion, empathy, and courage may be as important as analytical skill, intelligence, and knowledge. Leaders need a deep understanding of the complexities and subtleties of sustainable development in the context of Tier 4. Finally, managers must have the interpersonal and intercultural skills to work with a wide range of organizations and people. MNCs must build an organizational infrastructure to address opportunity at the bottom of the pyramid. This means building a local base of support, reorienting R&D to focus on the needs of the poor, forming new alliances, increasing employment intensity, and reinventing cost structures. These five organizational elements are clearly interrelated and mutually reinforcing. Build a local base of support. Empowering the poor threatens the existing power structure. Local opposition can emerge very quickly, as Cargill Inc. found in its sunflower-seed business in India. Cargills offices were twice burned, and the local politicians accused the firm of destroying locally based seed businesses. But Cargill persisted. Through Cargills investments in farmer education, training, and supply of farm inputs, farmers have significantly improved their productivity per acre of land. Today, Cargill is seen as the friend of the farmer. Political opposition has vanished.
To overcome comparable problems, MNCs must build a local base of political support. As Monsanto and General Electric Company can attest, the establishment of a coalition of NGOs, community leaders, and local authorities that can counter entrenched interests is essential. Forming such a coalition can be a very slow process. Each player has a different agenda; MNCs have to understand these agendas and create shared aspirations. In China, this problem is less onerous: The local bureaucrats are also the local entrepreneurs, so they can easily see the benefits to their enterprise and their village, town, or province. In countries such as India and Brazil, such alignment does not exist. Significant discussion, information sharing, the delineation of benefits to each constituency, and sensitivity to local debates is necessary. Conduct R&D focused on the poor. It is necessary to conduct R&D and market research focused on the unique requirements of the poor, by region and by country. In India, China, and North Africa, for example, research on ways to provide safe water for drinking, cooking, washing, and cleaning is a high priority. Research must also seek to adapt foreign solutions to local needs. For example, a daily dosage of vitamins can be added to a wide variety of food and beverage products. For corporations that have distribution and brand presence throughout the developing world, such as Coca-Cola Company, the bottom of the pyramid offers a vast untapped market for such products as water and nutritionals. Finally, research must identify useful principles and potential applications from local practices. In Tier 4, significant knowledge is transmitted orally from one generation to the next. Being respectful of traditions but willing to analyze them scientifically can lead to new
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knowledge. The Body Shops creative CEO, Anita Roddick, built a business predicated on understanding the basis for local rituals and practices. For example, she observed that some African women use slices of pineapple to cleanse their skin. On the surface, this practice appears to be a meaningless ritual. However, research showed active ingredients in pineapple that cleared away dead skin cells better than chemical formulations. MNCs must develop research facilities in emerging markets such as China, India, Brazil, Mexico, and Africa, although few have made a big effort so far. Unilever is an exception; it operates highly regarded research centers in India, employing more than 400 researchers dedicated to the problems of India-like markets. Form new alliances. MNCs have conventionally formed alliances solely to break into new markets; now they need to broaden their alliance strategies. By entering into alliances to expand in Tier 4 markets, MNCs gain insight into developing countries culture and local knowledge. At the same time, MNCs improve their own credibility. They may also secure preferred or exclusive access to a market or raw material. We foresee three kinds of important relationships: Alliances with local firms and cooperatives (such as the Khira District Milk Cooperative); alliances with local and international NGOs (like Starbuckss alliance with Conservation International in coffee); and alliances with governments (e.g., Merck & Companys alliance in Costa Rica to foster rain forest preservation in exchange for bioprospecting rights). Given the difficulty and complexity of constructing business models dependent on relationships with national or central governments (e.g., large infrastructure development), we envision more alliances at the
local and regional level. To succeed in such alliances, MNC managers must learn to work with people who may not have the same agenda or the same educational and economic background as they do. The challenge and payoff is how to manage and learn from diversity economic, intellectual, racial, and linguistic. Increase employment intensity. MNCs accustomed to Tier 1 markets think in terms of capital intensity and labor productivity. Exactly the opposite logic applies in Tier 4. Given the vast number of people at the bottom of the pyramid, the production and distribution approach must provide jobs for many, as in the case of Ruf & Tuf jeans from Arvind Mills: It employed an army of local tailors as stockers, promoters, distributors, and service providers, even though the cost of the jeans was 80 percent below that of Levis. As Arvind demonstrated, MNCs need not employ large numbers of people directly on their payroll, but the organizational model in Tier 4 must increase employment intensity (and incomes) among the poor and groom them to become new customers. Reinvent cost structures. Managers must dramatically reduce cost levels relative to those in Tier 1. To create products and services the poor can afford, MNCs must reduce their costs significantly to, say, 10 percent of what they are today. But this cannot be achieved by fine-tuning the current approaches to product development, production, and logistics. The entire business process must be rethought with a focus on functionality, not on the product itself. For example, financial services need not be distributed only through branch offices open from 9 A.M. to 5 P.M. Such services can be provided at a time and place convenient to the poor consumer after 8 P.M. and at their homes. Cash-dispensing
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machines can be placed in safe areas police stations and post offices. Iris recognition used as a security device could substitute for the tedious personal-identification number and card for identification. Lowering cost structures also forces a debate on ways to reduce investment costs. This will inevitably lead to greater use of information technology to develop production and distribution systems. As noted, villagebased phones are already transforming the pattern of communications throughout the developing world. Add the Internet, and we have a whole new way of communicating and creating economic development in poor, rural areas. Creative use of IT will emerge in these markets as a means to dramatically lower the costs associated with access to products and services, distribution, and credit management.
A Common Cause
The emergence of the 4 billion people who make up the Tier 4 market is a great opportunity for MNCs. It also represents a chance for business, government, and civil society to join together in a common cause. Indeed, we believe that pursuing strategies for the bottom of the pyramid dissolves the conflict between proponents of free trade and global capitalism on one hand, and environmental and social sustainability on the other. Yet the products and services currently offered to Tier 1 consumers are not appropriate for Tier 4, and accessing this latter market will require approaches fundamentally different from those even in Tiers 2 and 3. Changes in technology, credit, cost, and distribution are critical prerequisites. Only large firms with global reach have the technological, managerial, and financial resources to dip into the well of innovations needed to profit from this opportunity. New commerce in Tier 4 will not be restricted to businesses filling such basic needs as food, textiles, and housing. The bottom of the pyramid is waiting for hightech businesses such as financial services, cellular telecommunications, and low-end computers. In fact, for many emerging disruptive technologies (e.g., fuel cells, photovoltaics, satellite-based telecommunications, biotechnology, thin-film microelectronics, and nanotechnology), the bottom of the pyramid may prove to be the most attractive early market. So far, three kinds of organizations have led the way: local firms such as Amul and Grameen Bank; NGOs such as the World Resources Institute, SELF, The Rainforest Alliance, The Environmental Defense
Fund, and Conservation International, among others; and a few MNCs such as Starbucks, Dow, HewlettPackard, Unilever, Citigroup, DuPont, Johnson & Johnson, Novartis, and ABB, and global business partnerships such as the World Business Council for Sustainable Business Development. But to date, NGOs and local businesses with far fewer resources than the MNCs have been more innovative and have made more progress in developing these markets. It is tragic that as Western capitalists we have implicitly assumed that the rich will be served by the corporate sector, while governments and NGOs will protect the poor and the environment. This implicit divide is stronger than most realize. Managers in MNCs, public policymakers, and NGO activists all suffer from this historical division of roles. A huge opportunity lies in breaking this code linking the poor and the rich across the world in a seamless market organized around the concept of sustainable growth and development. Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce. Those in the private sector who commit their companies to a more inclusive capitalism have the opportunity to prosper and share their prosperity with those who are less fortunate. In a very real sense, the fortune at the bottom of the pyramid represents the loftiest of our global goals. +
Reprint No. 02106
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Resources
Robert Chambers, Whose Reality Counts? Putting First Last (ITDG Publishing, 1997). Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000). Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalization (Farrar, Straus and Giroux, 1999). Stuart Hart, Beyond Greening: Strategies for a Sustainable World, Harvard Business Review, JanuaryFebruary 1997, www.hbsp.harvard.edu/ hbr/index.html. Is the Digital Divide a Problem or an Opportunity? Business Week Supplement, December 18, 2000. C.K. Prahalad and Kenneth Lieberthal, The End of Corporate Imperialism, Harvard Business Review, JulyAugust 1998, www.hbsp .harvard.edu/hbr/index.html. Amartya Sen, Development as Freedom (Alfred A. Knopf, 1999). For more thought leadership on this topic, see s+b s website at: www.strategy-business.com/global_perspective.
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BY GARY NEILSON, BRUCE A. PASTERNACK, AND DECIO MENDES
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DNA
Every economic era has a theme. The 1960s are
Four Bases OF Organizational

THE
Trait by trait, companies can evolve their own execution cultures.
Illustration by Brian Cairns
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still recalled as the Go-Go years, when Wall Street was fueling mergers and conglomerations of unprecedented scale. The 1990s were the Internet Boom years, when a rising economic tide lifted the boat of just about any company with a plausible business model tale to tell. The agonizingly slow recovery since the Internet bubble burst has inspired the latest motif. Executives no longer believe that a strategy consolidation, transformation, or breakaway is enough. Weve made the right strategic decision, but my organization isnt motivated or set up right to get on with it, they are saying. Everyone says they understand the vision, but the businesses and functions just arent working together to get results. Welcome to the Era of Execution.
Execution has become the new mantra for this first decade of the new millennium. Larry Bossidy, who led AlliedSignal Inc.s turnaround and its merger with Honeywell International Inc., wrote a book with Ram Charan, titled Execution: The Discipline of Getting Things Done (Crown Business, 2002), thats been on the business bestseller lists for more than a year. Former IBM CEO Louis V. Gerstner Jr. put forth the same message in his memoir, Who Says Elephants Cant Dance? Inside IBMs Historic Turnaround (HarperBusiness, 2002). In it, he says flatly that the revival of the computer giant wasnt due to vision. Fixing IBM, he wrote, was all about execution. Boards of directors, increasingly impatient with CEOs who dont deliver, have climbed on the execution bandwagon too. Booz & Companys annual study of
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Gary Neilson gary.neilson@booz.com is a senior partner with Booz & Company in Chicago. He works on the development of new organizational models and designs, restructuring, and the leadership of major change initiatives for Fortune 500 companies across industries.
Bruce A. Pasternack is a former senior partner with Booz & Company. He is now an operating partner with Venrock Associates.
Decio Mendes is a former principal with Booz & Company. He is now at the Boston Consulting Group.
Originally published Winter 2003.
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CEO succession trends showed that forced turnover of underperforming CEOs at major corporations reached a new high in 2002, rising a staggering 70 percent from 2001 and accounting for 39 percent of all chief executive transitions. But is execution simply a matter of firing the CEO and bringing in a charismatic leader who can get on with getting things done? Not at all. Underlying the quest for an execution-driven enterprise is one central question: How does a company design its organization to execute the strategy whatever the strategy is and successfully adapt when circumstances change? Execution is woven deeply into the warp and woof of organizations. It is embedded in the management processes, relationships, measurements, incentives, and beliefs that collectively define the rules of the game for each company. Although we often think of companies as monolithic entities, theyre not. Theyre collections of individuals who typically act in their own self-interest. Superior and consistent corporate execution occurs only when the actions of individuals within it are aligned with one another, and with the overall strategic interests and values of the company. Performance is the sum total of the tens of thousands of actions and decisions that, at large companies, thousands of people, at every level, make every day. Because individual behaviors determine an organizations success over time, the first step in resolving dysfunctions is to understand how the traits of an organization influence each individuals behavior and affect his or her performance. We like to use the familiar metaphor of DNA to attempt to codify the idiosyncratic characteristics of a company. Just as the double-stranded DNA molecule is held together by bonds between base
Exhibit 1: The Hourglass Organization

Vice President (8 to 9 direct reports)
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Senior Director (6 to 8 direct reports)
Director (3 to 6 direct reports)
Lead Manager (4 to 6 direct reports)
Manager (5 to 7 direct reports)
Supervisor (8 to 14 direct reports)

Source: Booz & Company
pairs of four nucleotides, whose sequence spells out the exact instructions required to create a unique organism, we describe the DNA of a living organization as having four bases that, combined in myriad ways, define an organizations unique traits. These bases are: Structure. What does the organizational hierarchy look like? How are the lines and boxes in the organization chart connected? How many layers are in the hierarchy, and how many direct reports does each layer have? Decision Rights. Who decides what? How many people are involved in a decision process? Where does one persons decision-making authority end and anothers begin? Motivators. What objectives, incentives, and career alternatives do people have? How are people rewarded, financially and nonfinancially, for what they achieve?
What are they encouraged to care about, by whatever means, explicit or implicit? Information. What metrics are used to measure performance? How are activities coordinated, and how is knowledge transferred? How are expectations and progress communicated? Who knows what? Who needs to know what? How is information transferred from the people who have it to the people who require it? Any metaphor can be pushed too far, of course. Although the basic comparison of corporate and human DNA is often invoked in general discussions of institutional culture and conduct, we think it provides a practical framework senior executives can use to diagnose problems, discover hidden strengths, and modify company behavior. With a framework that examines all aspects of a companys architecture, resources, and relationships, it is much easier to see what is working and what isnt deep inside a highly complex organization, to understand how it got that way, and to determine how to change it. (See Focus: Testing Quest Diagnostics DNA, page 50.)
Structure
In principle, companies make structural choices to support a strategy (for example, the decision to organize business units around customers, products, or geography). In practice, however, a companys organizational structure and strategic intent often are mismatched. The variance can usually be exposed by, in effect, superimposing the organization chart an efficient commu-
nicator of power and status in a firm over a business units strategic plan. A common structural problem impeding the execution of strategy is the existence of too many management tiers (deep layers), with too many individuals at each tier having too few direct reports (narrow spans). Portrayed graphically, this structure resembles an hourglass. (See Exhibit 1.) Narrower spans in the middle often result from unclear decision rights and the companys mix of motivators. Generally, a structure shaped this way indicates trouble. There are many reasons a certain management position may legitimately call for a narrower or wider span than another positions. Managers in complex jobs that require them to create and maintain multiple information linkages across individual units cannot handle the same number of direct reports as managers with simpler information aggregation roles. But its also easy for spans to become too narrow for no legitimate reason. Consider the spans of control for three senior positions at one consumer goods company with which we have worked. As shown in Exhibit 2, the category/product line manager had five direct reports, compared with seven and 10 reports for senior managers at two best-practice companies. The vice president of sales had six direct reports, versus eight and 10 at the other companies. The manufacturing manager had only seven direct reports; in other companies, similar managers had 11 or more. We have taken this measurement at more
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Exhibit 2: Comparing Spans of Control

25 23 20 15 12 10 5 10 7 5 10 8 6 7 11
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Average No. of Direct Reports
Co. A
Co. B
CG Co.
Co. A
Co. B
CG Co.
Co. A
Co. B
Co. C
CG Co.
Category/Product Line Manager
Vice President, Sales
Manufacturing Manager
Best-practice Company
Source: Booz & Company
Consumer Goods Company
Focus: Testing Quest Diagnostics DNA
then the newly appointed leader of Quest Diagnostics, recognized that the DNA of an enterprise formed by the union of so many different entities, each born in a different time and place, with many different parents, could readily become a monster. So he
Prior to the deal, revenues had typically declined upward of 20 percent following a major acquisition. In this case, Quest Diagnostics not only didnt lose business, revenues grew at or above industry growth rates during the integration process. This was the first time such postmerger growth occurred in the industry. As Quest Diagnostics turnaround progressed, decision rights were decentralized gradually, first by placing supervisors into various units who led change and taught employees new behaviors, and then by empowering frontline staff. Although many parts of the Quest Diagnostics organization are now high performers and largely self-directed, it has taken seven years to get there. Today when Quest Diagnostics acquires a company, Mr. Freeman and his team concentrate on two of the four organizational bases, motivators and information, recognizing their interdependency and combined influence on individual and organizational
NA testing can be as valuable to corporate health as it has
was determined to focus his attention on improving organizational DNA across the entire company. Immediately after the spin-off, Freeman and his top management team took control of key decision rights to ensure that the companys turnaround effort was coherent and driven hard. When the company acquired SmithKline Beecham Clinical Labs in August 1999, they again deliberately centralized decision rights among a small senior team. A set of integration teams headed by the leaders of both companies methodically worked through the long-term vision and short-term tactics for each area of the new company, again, to ensure consistency across the enterprise. The financial payoff was immediate:
become to human healthcare. An analysis of a companys genetic material can isolate the underlying causes of and potential solutions to organizational dysfunctions, and even head off problems before they start. Consider the case of the U.S.-based medical laboratory testing company Quest Diagnostics. Originally a division of Corning Inc., Quest Diagnostics grew in the 1990s through the acquisition of hundreds of small independent testing laboratories. Spun off from Corning in 1997, the company was losing money and battling fines for billing fraud and other abuses in a number of the laboratories it had bought. Chairman and CEO Ken Freeman,
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than 100 companies, and our data indicates that this company fell well outside the range found at comparable firms. In our experience, numbers this far off the norm provide strong evidence that a companys spans are narrower than they should be. Often this results in a structure that has too many layers as well. This became evident when we explored how senior managers at the consumer goods company spent their time. About a third of it was devoted to making plans, ensuring target corporate goals were met, and dealing with exceptions and high-impact/high-risk decisions, all appropriate roles for these managers. But they were spending far too much time (roughly 40 percent) justifying and reporting performance to senior executives above them and participating in tactical, operational decisions with their direct reports. In other words, too much of their time was devoted to second-guessing the work of people below them and preparing reports so that superiors
could second-guess their work. They should have been giving more of their time to preparing action plans to achieve the strategic and operational objectives of the company. This structure kept the consumer goods organization from executing to its potential. Among specific dysfunctions we found: Because there were no clear standards that allowed basic decisions to be made at lower levels, decisions regarding such matters as authorization for PC purchases and travel were decided too high in the organization. Managers and supervisors tended to discourage their staffs from troubleshooting to resolve routine problems on their own. Managers rotated rapidly through jobs, reaching senior positions without sufficient experience. Not only did they require close supervision, but they continually struggled to figure out what they needed to know. The company seemed to rapidly promote its best
behavior. Among the first gene therapies they perform is to introduce a comprehensive and varied set of metrics that go well beyond the typical financial performance measures that most companies use. There are measures for customer retention, the time it takes to pick up a call in the call center, the time it takes to process a specimen in the labs, employee satisfaction and attrition rates, and more. The system is designed so that all employees know how they can personally influence one or more core performance measures. The only way this information can influence the day-to-day behavior and decisions of employees throughout the organization is if decision makers have the information on hand when they need it. Quest Diagnostics posts various metrics on different timetables depending on the type of management issue: Customer retention metrics are posted at least once a month; specimen turnaround time is posted every morning.
Finally, the company ties these metrics to individuals bonus payments so that information not only informs, but also motivates productive behavior. Since virtually everyone in the company can affect customer retention in some way, Quest Diagnostics uses the customer retention metric very broadly in its performance-based compensation programs. Ultimately, the bonuses of all 37,000 Quest Diagnostics employees depend in some way on meeting the customer retention target. If we have a shared goal that says were going to reduce customer attrition, that doesnt mean it is only for people in sales. It impacts people picking up the specimens, people who draw and perform tests on the specimens, and certainly people in billing. If there are lots of complaints, the customer is going to leave. By having shared goals, you get speed and alignment, says Freeman. To make the motivators as specific and powerful as possible, customer
retention metrics are measured not just organization-wide. They are divided up by region, so that people are paid on the basis of customer retention performance in their own region, where they can have the greatest influence. The aligning and motivating power of bringing information and incentives together is reflected in the firms strong financial performance. Since Quest Diagnostics was spun off from Corning in 1997, the companys stock price has increased 730 percent, compared with a 41 percent increase in the S&P 500 Index during the same period. Having successfully carried out a classic turnaround and taken the lead in consolidating the industry, Quest Diagnostics is now driving growth organically and has become the clear leader in the U.S. medical laboratory testing market. In 2002, the company earned US$322 million on $4.1 billion in revenues. G.N., B.A.P., and D.M.
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and brightest just so it could retain them. This added unnecessary layers to the hierarchy and created more work at lower levels. Large cross-departmental meetings filled the workday. The rationale was to have all parties in one room to resolve the issues. All of this activity is costly these are managers with salaries in the low six figures. Their compensation, plus the actual cost of their activities, pushed the companys general and administrative costs to a level that was 20 percent higher than the average of our benchmark companies. Because each of its many layers got involved in almost every decision, the companys speed to market was slowing, and it was losing share to new, more nimble competitors in several categories. The obvious structural change was to reduce layers and increase spans that is, to add direct reports to each manager. We recommended a new structure that resulted in a reduction of 10 percent of the positions
in the management ranks across all six divisions. Ultimately, with the elimination and repositioning of managers and support staff, about 2,300 management jobs were cut, which saved the company more than US$250 million. Still, simply cutting layers and extending spans would have had little long-term effect if underlying behaviors didnt change. One way the company could do this was by setting clear standards (e.g., which PC to buy and which airline to fly) so high-level managers would not need to review every transaction and provide approvals. With a monthly report, they could easily track exceptions to the standards. Another solution: Reset promotion expectations to slow the upward movement of managers and encourage more horizontal moves use promotions not just as a reward, but to develop a managers breadth of experience. Long and cumbersome reporting processes designed to satisfy the information preferences of each layer and the tremen-
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Executives promoted to new positions often cling to their prior responsibilities, burdening themselves with unnecessary tasks and disempowering their subordinates.
dous desire for detail also had to go. In their place would be a report on the key lagging and leading measures of critical business activity, a top-down setting of targets, and the monitoring of variances. To further dissolve the reflexive addition of layers, the company also had to do more managerial training and communicate better about the change in promotion principles. Following the restructuring and changes in management, time to market for product introductions shrank by months, enabling the company to regain the first-to-market advantage it had traditionally held.
Decision Rights
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Decision rights specify who has the authority to make which decisions. Clarifying these rights puts flesh on an organization chart and makes crystal clear where responsibility lies. Clear decision rights enable wider spans and fewer layers, which translates into lower costs and speedier execution. Unarticulated decision rights are more than a time sink; theyre a central cause of substandard performance and even of nonperformance. An employee at a financial-services company expressed this problem quite concretely in a focus group we conducted, saying, Responsibilities are blurred intentionally around here so everyone has an excuse for not getting involved. At one industrial company, we found yet again that senior executives were spending too much time reviewing small projects. It turned out the company had not reassessed managers spending-approval limits in more than 10 years. We suggested the authorization process be adjusted so that managers lower in the organization could be accountable for the final approval of more projects. The capital expenditure amount requiring CEO
authorization was raised from $5 million to $15 million. The objective was to free up senior managements time to focus on the longer-term issues associated with market growth and potential acquisitions. Based on historical analysis, it was determined that raising the level at which projects required CEO authorization to $15 million would reduce the number of projects crossing the CEOs desk by 49 percent. All large projects would still come to the CEO, so the aggregate value of projects approved at the top would decline by only 13 percent. Decision rights become blurred for many reasons, not all of them intentional. After a large industrial company completed a leveraged buyout, the management of one of its business units became the new entitys corporate management, charged with reviewing the operating decisions of all business units. That change required every level of management to take on greater decisionmaking responsibility an unnatural act for executives accustomed to hands-on involvement in operating unit decisions. Rather than allow their general managers to make basic decisions about product design and resource allocation, the CEO and COO still involved themselves deeply in these activities. Meanwhile, they were neglecting other areas where their attention was expected, notably strategic planning, long-range business portfolio decisions, and the firms financial condition. The solution was to create a process for corporate officers to delegate decisions to the business units general managers. An executive committee was established to review business unit decisions, and several general managers were charged with integrating marketing, product engineering, and manufacturing. These structures and processes made effective delegation possible. It doesnt take a leveraged buyout to distort a com-
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panys decision-rights structure. People naturally lean toward the familiar when faced with change. Executives promoted to new positions often cling to their prior responsibilities, burdening themselves with unnecessary tasks and disempowering their subordinates. The press of the urgent at the business unit level drives out the important at the corporate level. The lesser decisions seem concrete and knowable. Forward thinking and big decisions regarding long-term direction seem undefined, amorphous, and tougher to tackle. Often the process of assigning decision rights is a response to a crisis or a shift in political power. When this happens, decisions can fall between the cracks. Or they can be made twice by different parties. Or they can be reviewed repeatedly, becoming a Sisyphean exercise in backsliding. It is possible to assign decision rights systematically and rationally. At a global industrial company, we helped create an organizational matrix of functions, products, and geographies. The structure was undergirded by a set of specific organizational and decisionmaking principles, among them: Responsibility does not imply exclusive authority; different units should have joint goals and performance measures; and certain positions need to report upward to multiple managers. Over several months, we worked with the company to apply these and several other principles to more than 300 critical decisions. Because we undertook this effort explicitly while also changing the structure, the company was able to execute its new strategy faster, and with fewer missteps. The overall change process took two years (one less than had been anticipated). The company returned to profitability, reduced its net debt by the targeted amount, and reached several other critical financial goals a year ahead of schedule. Making decision rights explicit in companies in which they are not requires management to set rules for the most common business situations and for each position. In effect, the company is creating a constitution that says who will decide what and under what circumstances. The decision rights of groups must also be clear. At a consumer goods company, we saw large numbers of executives meeting frequently to resolve conflicts among functional units. It appeared that operations, finance, and marketing were each doing an excellent job of analyzing new factories, new products, and new business opportunities, but they werent talking to one another along the way. Operations planned the perfect factory
without guidance from finance on the cost. In marathon meetings, managers from each function brought their independent analyses together. Then they struggled to reach a joint conclusion, because each unit, by that time, was wedded to its own recommendation. To solve this silo problem, one top executive was made responsible for managing a cross-functional team, so there would always be communication across disciplines. As a result, only a few top executives were needed to make routine decisions, and the company reduced dedicated staff support for these efforts by more than 30 percent.
Motivators
The third of the four bases in a companys DNA-like makeup involves motivation. Employees generally dont deliberately act counterproductively; they dont try to derail a companys strategy. Rather, they respond quite rationally on the basis of what they see, what they understand, and how theyre rewarded. An exhortation to follow the vision and pursue the strategy is only so much air if the organizations incentives and information flows make it difficult for employees to understand and do what theyre supposed to do. An organization can send confusing signals to individuals in many ways. Think about what happens when an appraisal system inflates performance ratings. At a consumer goods company we once worked with, employees were appraised on a 1 to 10 scale. Eighty percent received a rating of 9 or above, and everyone felt good. But superior employees didnt feel they needed to do any better. Other workers thought their performance was acceptable when it wasnt. Appraisers were avoiding the unpleasant task of delivering bad performance ratings, and the organization wasnt giving them any reason to be tough. For every deficient employee who stayed at the company because the organization said he or she was competent, the companys execution suffered. Because of its unwillingness to differentiate peoples contributions through performance assessments and raises, the company lost the opportunity to send important feedback to employees on what was relevant to executing the strategy and where their performance was unsatisfactory. Several years ago we worked with the new CEO of a technology company who had been the head of a business unit and had served for several years on the executive committee that made investment decisions. The new CEO knew from experience that the committee wasnt tough enough on new investment requests. They
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were a collegial group; members supported their colleagues investment requests with the understanding their own requests would be supported in return. The new CEO wanted a more discriminating process that would judge investment proposals on their merits. He also knew executive committee members faced little downside from approving unsound investment requests. Future bonuses might suffer if company performance wasnt good, but that money wasnt already in their pockets. So the CEO introduced a new system to change this attitude: Each committee member was required to take out a personal loan of $1 million and invest it in company stock (the loan was guaranteed by the company, so the individuals could borrow at good rates). Unlike an outright stock grant, this scheme ensured that the executives had existing wealth at risk, and that they would lose money, and perhaps the ability to repay the debt, if they permitted poor investment decisions. With this new incentive to scrutinize investment requests, the committee became much tougher and more effective. And after a few sessions, teams began bringing betterresearched and smarter investment proposals to the table because they knew if they didnt, the committee was likely to turn them down. There are other market mechanisms that can be used to send more accurate signals to managers about the cost and value of certain activities. This approach was used successfully at a large agribusiness company that came to us for help in improving the services of its human resources department. The HR departments performance had always been judged by how well it stayed on budget. Internal customer satisfaction was rarely measured. Each customer was allocated a share of the HR budget, but these figures didnt represent the true cost of the services. Meanwhile, customers had little influence on the kind and amount of services they received. Neither HR nor its customers had an incentive to offer or ask for services tailored to the specific needs of a division. Working with the company, we created a scorecard to measure HR performance on such things as call center response time and payroll errors. Achieving scorecard
targets became a significant component of management incentives and rewards. HRs internal customers were given the right to negotiate service-level agreements with HR. The true cost of services was established using outside benchmarks. Once HRs customers understood what they were paying for and could better manage their costs, they had an incentive to use HR services more wisely. Today, they often decline or reduce some services and request new ones. The market-based measurement and incentive program improved the quality of the companys HR services and reduced costs by more than 15 percent. Organizations that are ready to implement multiple profit-and-loss statements and market-based motivational systems will find that these powerful new tools can help them operate effectively with less commandand-control oversight. But not all companies are ready for these systems; it takes strong leadership, persistence, and patience to introduce them and overcome employee resistance to using them.
Information
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Underlying a companys ability to ensure clear decision rights and to measure and motivate people to apply them is one critical matter: information. Making sure high-quality information is available and flowing where it needs to go throughout a company, all the time, is among the most challenging tasks of the modern corporation, and one of the most underappreciated contributors to high performance and competitive advantage. A 2002 study of the management and financial performance of 113 Fortune 1000 companies over the five-year period 1996 to 2000, conducted by Booz & Company and Ranjay Gulati of the Kellogg School of Management at Northwestern University, found that the companies with the highest shareholder returns were more focused on managing and enhancing communication with their customers, suppliers, and employees than other firms in the study. We have seen this informationperformance linkage often in practice. A few years ago, the board of an agricultural grower and processor became concerned about the companys operating efficiency. Among other problems, farm managers were using equipment without discipline ordering a machine at will, driving it hard, and returning it with an empty gas tank, all because headquarters was responsible for maintenance and replacement costs. Our benchmark data indicated that this companys expenses were far higher than those
of independent farms. We worked with corporate and farm management to develop a new business model, centered on turning each farm into an independent business. For this to happen, farm managers needed new information specifically, individual farm P&Ls that reflected, among many other things, the cost of the equipment they used. The redesigned organization executed more efficiently, as reflected in a 48 percent jump in its imputed share price in the first year. Better information flows did more than keep costs down; they helped allocate scarce resources far more efficiently than before. The company had a silo problem literally and figuratively. Any field ready for harvest had a peak yield window of about 15 days. But there was only so much mill capacity during the peak window. Coordinating and timing the harvesting and milling activities fell to a hapless employee at headquarters, a central planner who relied on historical data that didnt reveal much about current conditions. We showed in a simulation that if farm managers could bid for use of the mill on particular dates, it would strikingly improve the companys efficiency. If a manager saw that his highest-yielding acreage was ready to harvest and couldnt wait because rain was predicted, he could bid more for mill time. No longer would someone back at headquarters have to hunker down with a spreadsheet, making educated guesses based on the previous years yield data and taking frantic phone calls from farm managers. Market-based pricing of mill time would allocate scarce resources better than a central planner could. And with this new system, decisions would reflect the real-time knowledge of the farmer in the field observing the sky, testing the ripeness of the crop, hour by hour, acre by acre.
Adaptive DNA
DNA holistically means weaving intelligence, decisionmaking capabilities, and a collective focus on common goals widely and deeply into the fabric of the organization so that each person and unit is working smartly and working together. Its one thing to achieve wellcoordinated intelligence among senior executives. Its another thing entirely to touch every level of an organization all the way down to the loading dock. What every employee does every day, aggregated across the company, constitutes performance. The best organizational designs are adaptive, are self-correcting, and become more robust over time. But creating such an organization doesnt happen quickly; it can take several years to get the basics right, and there is always a need for fine-tuning. This may explain why leaders of companies that are truly ailing and who need to reassure shareholders as fast as they can often dont have the patience for changing decision rights, motivators, and information flows. Theyre more likely to cut the structure and see what happens than to take time to ensure that structural changes actually result in sustained productivity improvements and steady gains in shareholder value. But neglecting this hard work may also partly explain why some of these CEOs are no longer in charge. No company may ever totally master the enigma of execution. But the most resilient and consistently successful ones have discovered that the devil is in the details of organization. For them, organizing to execute has truly become a competitive edge. +
Reprint No. 03406
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Resources
Jeffrey W. Bennett, Thomas E. Pernsteiner, Paul F. Kocourek, and Steven B. Hedlund, The Organization vs. the Strategy: Solving the Alignment Paradox, s+b, Fourth Quarter 2000, www.strategy-business.com/ press/article/14114. Michael C. Jensen, Foundations of Organizational Strategy (Harvard University Press, 1998). Paul F. Kocourek, Steven Y. Chung, and Matthew G. McKenna, Strategic Rollups: Overhauling the Multi-Merger Machine, s+b, Second Quarter 2000, www.strategy-business.com/press/article/16858. Chuck Lucier, Rob Schuyt, and Eric Spiegel, CEO Succession 2002: Deliver or Depart, s+b, Summer 2003, www.strategy-business.com/ press/article/21700. Gary Neilson, David Kletter, and John Jones, Treating the Troubled Corporation, s+b enews, 03/28/03, www.strategy-business.com/press/ enewsarticle/22230. Randall Rothenberg, Larry Bossidy: The Thought Leader Interview, s+b, Third Quarter 2002, www.strategy-business.com/press/article/20642.
Although we have illustrated the four bases of organizational DNA separately to emphasize their distinct characteristics, they clearly are intertwined. Changing structure requires changing decision rights; to make effective decisions, employees need new incentives and different information. At the agricultural grower and processor, the new structure touched each of these elements the individual farm as a business required new decision authority for farm managers, new metrics by which to measure their performance, and new rewards based on their individual success. This interdependency is evident in all of these company stories. Considering and changing a companys
BY MARSHALL GOLDSMITH AND HOWARD MORGAN
Leadership Is a Contact Sport

The Follow-up Factor in Management Development
Leadership is not just for leaders anymore. Top
Illustration by Robert Goldstrom
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companies are beginning to understand that sustaining peak performance requires a firm-wide commitment to developing leaders that is tightly aligned to organizational objectives a commitment much easier to understand than to achieve. Organizations must find ways to cascade leadership from senior management to men and women at all levels. As retired Harvard Business School professor John P. Kotter eloquently noted in a previous issue of strategy+business, this ultimately means we must create 100 million new leaders throughout our society. (See Leading Witnesses, s+b, Summer 2004.) Organizational experts Paul Hersey and Kenneth Blanchard have defined leadership as working with and through others to achieve objectives. Many companies
are stepping up to the challenge of leadership development and their results are quite tangible. In Leading the Way: Three Truths from the Top Companies for Leaders (John Wiley & Sons, 2004), a study of the top 20 companies for leadership development, Marc Effron and Robert Gandossy show that companies that excel at developing leaders tend to achieve higher long-term profitability. But it sometimes seems there are as many approaches to leadership development as there are leadership developers. One increasingly popular tool for developing leaders is executive coaching. Hay Group, a human resources consultancy, reported that half of 150 companies surveyed in 2002 said that they had increased their use of executive coaching, and 16 percent reported using coaches for the first time.
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Marshall Goldsmith marshall@ marshallgoldsmith.com is a founder of Marshall Goldsmith Partners, a leadership coaching network. He has worked with more than 70 major CEOs and their management teams and is the author or coauthor of many books on leadership and coaching, including Mojo: How to Get It, How to Keep It, How to Get It Back if You Lose It (with Mark Reiter; Hyperion, 2009).
Howard Morgan howard@howardjmorgan.com is the founder of 50 Top Coaches, a collective of many of the worlds leading executive advisors. He specializes in executive coaching as a strategic change-management tool. He is co-editor of The Art and Practice of Leadership Coaching: 50 Top Executive Coaches Reveal Their Secrets (John Wiley & Sons, 2004).
Originally published Fall 2004.
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Yet even executive coaching is a broad category. In reviewing a spate of books on coaching in 2003, Des Dearlove and Stuart Crainer identified at least three types of coaching: behavioral change coaching, personal productivity coaching, and energy coaching. (See My Coach and I, s+b, Summer 2003.) Our own book, The Art and Practice of Leadership Coaching: 50 Top Executive Coaches Reveal Their Secrets (with Phil Harkins; John Wiley & Sons, 2004), includes discussions about five types of leadership coaching: strategic, organizational change/execution, leadership development, personal/life planning, and behavioral. Given the increasingly competitive economic environment and the significant human and financial capital expended on leadership development, it is not only fair but necessary for those charged with running companies to ask, Does any of this work? And if so, how? What type of developmental activities will have the greatest impact on increasing executives effectiveness? How can leaders achieve positive long-term changes in behavior? With admitted self-interest our work was described in the CrainerDearlove article, and is frequently cited in reviews of and articles about leadership coaching we wanted to see if there were consistent principles of success underlying these different approaches to leadership development. We reviewed leadership development programs in eight major corporations. Although all eight companies had the same overarching goals to determine the desired behaviors for leaders in their organizations and to help leaders increase their effectiveness by better aligning actual practices with these desired behaviors they used different leadership development methodologies: off-site training versus on-site coaching, short
Eight Approaches
The eight companies whose leadership development programs we studied were drawn from our own roster of clients over a 16-year period. Although all are large corporations, each company is in a different sector and each faces very different competitive pressures. Each company customized its leadership development approach to its specific needs. Five of the eight
duration versus long duration, internal coaches versus external coaches, and traditional classroom-based training versus on-the-job interaction. Rather than just evaluating participant happiness at the end of a program, each of the eight companies measured the participants perceived increase in leadership effectiveness over time. Increased effectiveness was not determined by the participants in the development effort; it was assessed by preselected co-workers and stakeholders. Time and again, one variable emerged as central to the achievement of positive long-term change: the participants ongoing interaction and follow-up with colleagues. Leaders who discussed their own improvement priorities with their co-workers, and then regularly followed up with these co-workers, showed striking improvement. Leaders who did not have ongoing dialogue with colleagues showed improvement that barely exceeded random chance. This was true whether the leader had an external coach, an internal coach, or no coach. It was also true whether the participants went to a training program for five days, went for one day, or did not attend a training program at all. The development of leaders, we have concluded, is a contact sport.
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focused on the development of high-potential leaders, and between 73 and 354 participants were involved in their programs. The three other companies included almost all managers (above midlevel), and involved between 1,528 and 6,748 managers. The degree of international representation varied among organizations. At two companies, almost all of the participants were American. Non-U.S. executives made up almost half of the participants in one companys program. The other five had varying levels of international participation. Some of the companies used traditional classroombased training in their development effort. In each of these companies, participants would attend an off-site program and receive instruction on what the desired characteristics were for leaders in their organization, why these characteristics were important, and how participants might better align their own leadership behavior with the desired model. Some companies, by contrast, used continuing coaching, a methodology that did not necessarily involve off-site training, but did rely on regular interaction with a personal coach. Some companies used both off-site training and coaching. Along with differences, there were commonalities among the programs. Each company had spent extensive time reviewing the challenges it believed its leaders would uniquely face as its business evolved. Each had developed a profile of desired leadership behaviors that had been approved by upper management. After ensuring that these desired leadership behaviors were aligned with the company vision and values, each company developed a 360-degree feedback process to help leaders understand the extent to which their own behavior (as perceived by co-workers) matched the desired behavior for leaders in the corporation. All eight placed a set of
expectations upon participants. The developing leaders were expected to: Review their 360-degree feedback with an internal or external consultant. Identify one to three areas for improvement. Discuss their areas for improvement with key co-workers. Ask colleagues for suggestions on how to increase effectiveness in selected areas for change. Follow up with co-workers to get ideas for improvement. Have co-worker respondents complete a confidential custom-designed mini-survey three to 15 months after the start of their program. Each participant received mini-survey summary feedback from three to 16 co-workers. Colleagues were asked to rate the participants increased effectiveness in the specific selected behaviors as well as participants overall increase (or decrease) in leadership effectiveness. Co-workers were also asked to measure the degree of follow-up they had with the participant. In total, we collected more than 86,000 mini-survey responses for the 11,480 managers who participated in leadership development activities. This huge database gave us the opportunity to explore the points of commonality and distinction among these eight very different leadership development efforts. Three of the organizations permitted their names to be used in articles or conference presentations, enabling us to reference them in this report; the rest have requested anonymity, although we are able to describe their sector and activities. Two of the organizations also have allowed their results to be published elsewhere, without disclosure of the organizations name. The companies
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whose programs we studied were: An aerospace/defense contractor: 1,528 managers (ranging from midlevel to the CEO and his team) received training for two and a half days. Each person reviewed his or her 360-degree feedback in person with an outside consultant. All received at least three reminder notes to help ensure that they would follow up with their co-workers. A financial-services organization: At GE Capital, 178 high-potential managers received training that lasted five days. Each leader was assigned a personal human resources coach from inside the company. Each coach had one-on-one sessions with his or her client on an ongoing basis (either in person or by phone). An electronics manufacturer: 258 upper-level managers received in-person coaching from an external coach. They did not attend an off-site training program. They were then each assigned an internal coach who had been trained in effective coaching skills. This coach followed up with the managers every three to four months. A diversified services company: 6,748 managers (ranging from midlevel to the CEO and his team) received one-on-one feedback from an external coach during two training programs, each two and a half days long, which were conducted 15 months apart. Although there was no formal follow-up provided by the coach, participants knew they were going to be measured on their follow-up efforts. A media company: 354 managers (including the CEO and his team) received one-on-one coaching and feedback during a one-day program. An external coach provided follow-up coaching every three to four months. A telecommunications company: 281 managers
(including the CEO and his team) received training for one day. Each leader was given an external coach, who had continuing one-on-one sessions with his or her client. A pharmaceutical/healthcare organization: Johnson & Johnson involved 2,060 executives and managers, starting with the CEO and his team, in one and a half days of leadership training. Each person reviewed his or her initial 360-degree feedback with an outside consultant (almost all by phone). Participants received at least three reminder notes to help ensure that they would follow up with their co-workers. A high-tech manufacturing company: At Agilent Technologies Inc., 73 high-potential leaders received coaching for one year from an external coach, an effort unconnected to any training program. Each coach had one-on-one sessions with his or her client on an ongoing basis, either in person or by phone.
Personal Touch
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The overarching conclusion distilled from the surveys in all the programs was that personal contact mattered and mattered greatly. Five of the corporations used the same measurement methodologies, while three used a slightly different approach. All eight companies measured the frequency of managers discussions and follow-up with co-workers and compared this measure with the perceived increase in leadership effectiveness, as judged by co-workers in the mini-surveys. The first five firms the aerospace/defense contractor, GE Capital, the electronics manufacturer, the diversified services company, and the media company used a seven-point scale, from 3 to +3, to measure perceived change in leader-
Leadership is a relationship, not between the coach and the coachee, but between the leader and the colleague.
ship effectiveness, and a ve-point scale to plot the amount of follow-up, ranging from a low of no followup to a high of consistent or periodic follow-up. They then compared the two sets of measurements by plotting the effectiveness scores and the follow-up tallies on charts. The remaining three rms used slightly different measurement criteria. The telecommunications company used a percentage improvement scale to measure perceived increases in leadership effectiveness, as judged by co-workers. It then compared percentage improvement on leadership effectiveness with each level of follow-up. Johnson & Johnson and Agilent Technologies measured leadership improvement using the same seven-point scale employed by the first five companies, but they did not categorize the degree of follow-up beyond the simple followed up versus did not follow up. As noted earlier, follow-up here refers to efforts that leaders make to solicit continuing and updated ideas for improvement from their co-workers. In the two companies that compared followed up with did not follow up, participants who followed up were viewed by their colleagues as far more effective than the leaders who did not. In the companies that measured the degree of follow-up, leaders who had frequent or periodic/ consistent interaction with co-workers were reliably seen as having improved their effectiveness far more than the leaders who had little or no interaction with co-workers. Exhibit 1 shows the results among the first five companies, which, despite their different leadership development programs, used the same measurement methodology. This apples-to-apples comparison shows strong correlations across all five companies between the
degree of follow-up and the perceived change in leadership effectiveness. Leadership, its clear from this research, is a relationship. And the most important participants in this relationship are not the coach and the coachee. They are the leader and the colleague. Most of the leaders in this study work in knowledge environments in companies where the value of the product or service derives less and less from manufacturing scale and, to use Peter Druckers formulation, more and more from the processing and creation of information to define and solve problems. In discussing leadership with knowledge workers, Drucker has said, The leader of the past was a person who knew how to tell. The leader of the future will be a person who knows how to ask. Our studies show that leaders who regularly ask for input are seen as increasing in effectiveness. Leaders who dont follow up are not necessarily bad leaders; they are just not seen as getting better.
Ask and Receive
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In a way, our work reinforces a key learning from the Hawthorne studies. These classic observations of factory workers at suburban Chicagos Western Electric Hawthorne Works, which Harvard professor Elton Mayo made nearly 80 years ago, showed that productivity tended to increase when workers perceived leadership interest and involvement in their work, as evidenced by purposeful change in the workplace environment. Our studies show that when co-workers are involved in leadership development, the leaders they are helping tend to become more effective. Leaders who ask for input and then follow up to see if progress is being made are seen as people who care. Co-workers might well infer that
Exhibit 1: The Impact of Follow-up
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Combined results from five companies with very different leadership development programs, but that measured leadership effectiveness the same way show how the perceived quality of leaders correlates to the frequency of their follow-up. Follow-up, here, means efforts by leaders to solicit ideas from their coworkers about their own improvement. TYPE OF FOLLOW-UP
Distribution of respondents
CONSISTENT FREQUENT SOME A LITTLE NONE

Much Somewhat Slightly Less Less Less No change Slightly more Somewhat More Much More
PERCEIVED CHANGE IN LEADERSHIP EFFECTIVENESS
leaders who dont respond to feedback must not care very much. Historically, a great deal of leadership development has focused on the importance of an event. This event could be a training program, a motivational speech, or an off-site executive meeting. The experience of the eight companies we studied indicates that real leadership development involves a process that occurs over time, not an inspiration or transformation that occurs in a meeting. Physical exercise provides a useful analogy. Imagine having out-of-shape people sit in a room and listen to a speech on the importance of exercising, then watch some tapes on how to exercise, and perhaps practice exercising. Would you ever wonder why these people were still unfit a year later? The source of physical fitness
is not understanding the theory of working out; it is engaging in exercise. As Arnold Schwarzenegger has said, Nobody ever got muscles by watching me work out! So, too, with leadership development. As Drucker, Hersey, and Blanchard have pointed out, leadership involves a reliance on co-workers to achieve objectives. Who better than these same co-workers to help the leader increase effectiveness? Indeed, the executive coach is, in many ways, like a personal trainer. The trainers role is to remind the person being trained to do what he or she knows should be done. Good personal trainers spend far more time on execution than on theory. The same seems to be true for leadership development. Most leaders already know what to do. They have read the same books and listened
to the same gurus giving the same speeches. Hence, our core conclusion from this research: For most leaders, the great challenge is not understanding the practice of leadership: It is practicing their understanding of leadership. Beyond the basic finding that follow-up matters several other conclusions arise from our research. For example, the eight-program study indicates that the follow-up factor correlates with improved leadership effectiveness among both U.S. and non-U.S. executives. As companies globalize, many executives have begun to wrestle with issues of cultural differences among their executives and employees. Recent research involving high-potential leaders from around the world has shown that cross-cultural understanding is seen as a key to effectiveness for the global leader. (See, for example, Marshall Goldsmith et al., Global Leadership: The Next Generation, Financial Times Prentice Hall, 2003.) Our study addressed this issue as it affects leadership development programs. Nearly 10,000 of the respondents in the eight companies whose programs we reviewed almost 12 percent of our mini-survey sample were located outside the United States. We found that the degree of follow-up was as critical to changing perceived leadership effectiveness internationally as it was domestically. This was true for both training and coaching initiatives. At Johnson & Johnson, there were almost no differences in scores among participants in Europe, Latin America, and North America. The group seen as improving the most was in Asia. In analyzing the findings, J&J determined that the higher scores in Asia were more a function of dedicated local management than of cultural differences, again supporting the correlation between a caring, contact-rich leadership and its per-
ceived effectiveness. That follow-up works globally contravenes assumptions that different cultures will have differing levels of receptiveness to intimate conversations about workplace behaviors. But the universality of the follow-up principle doesnt imply universality in its application. Leaders learn from the people in their own environment, particularly in a cross-cultural context. Indeed, research by the Center for Creative Leadership in Greensboro, N.C., has shown that encouraging feedback and learning from those around us are both central to success for leaders in cross-cultural environments. Companies with successful leadership development programs encourage executives to adapt the universal principle of follow-up and the frequency of such conversations to fit the unique requirements of the culture in which they working. Despite other cultural differences, there seems to be no country in the world where co-workers think, I love it when you ask me for my feedback and then ignore me.
Inside and Outside
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Interaction between the developing leader and his or her colleagues is not the sole connection that counts. Also vital is the contact between the leader and the coach. Our third major finding concerns that relationship: Both internal and external coaches can make a positive difference. One reason coaching can be so effective is that it may inspire leaders to follow up with their people. Agilent, for one, found a strong positive correlation between the number of times the coach followed up with the client and the number of times the client followed up with co-workers. The coach, however, does not have to be part of the company. This conclusion was readily apparent when
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we compared the two companies most distinct in the composition of their coaching corps. Agilent used only external coaches. GE Capital, by contrast, used only internal coaches from human resources. Yet both approaches produced very positive long-term increases in perceived leadership effectiveness. Given the apparent ease of accessibility to internal coaches, firms might naturally use this finding to justify going inside. But there are at least three important variables to consider in determining whether to use an internal HR coach: time, credibility, and confidentiality. In many organizations, internal coaches are not given the time they need for ongoing interaction with the people they are coaching. In some cases, they may not seem as credible as trained development experts. In other cases, especially those that involve human resources personnel filling multiple roles, there may appear to be a conflict of interest between a professionals responsibilities as coach and as evaluator. If these perceptions exist, then external coaches may well be preferable to internal coaches. But internal coaches can overcome these obstacles. At GE Capital, the internal coaches were HR professionals who were given time to work with their coachees. Coaching was treated as an important part of their responsibility to the company and was not seen as an add-on if they got around to it. Moreover, the coachees were given a choice of internal coaches and picked coaches they saw as most credible. Finally, each internal coach worked with a leader in a different part of the business. They assured their coachees that this process was for high-potential development, not evaluation. As a result of this thorough screening process, client satisfaction with internal coaches was high and
results achieved by internal coaches (as judged by coworkers) were very positive. Inside or outside, we discovered that the mechanics of the coachleader relationship were not a major limiting factor. Our fourth finding was that feedback or coaching by telephone works about as well as feedback or coaching in person. Intuitively, one might believe that feedback or coaching is a very personal activity that is better done face-to-face than by phone. However, the companies we reviewed do not support this supposition. One company, Johnson & Johnson, conducted almost all feedback by telephone, yet produced increased effectiveness scores almost identical to those of the aerospace/defense organization, which conducted all feedback in person. Moreover, all the companies that used only external coaches similarly found little difference between telephone coaching and live coaching. These companies made sure that each coach had at least two one-on-one meetings with individual executive clients. Some coaches did this in person, whereas others interacted mostly by phone. There was no clear indication that either method of coaching was more effective than the other. Although sophisticated systems involving some combination of e-mail, intranets, extranets, and mobile connectivity are available, follow-up neednt be expensive. Internal coaches can make follow-up telephone calls. New computerized systems can send reminder notes and give ongoing suggestions. However its done, follow-up is the sine qua non of effective leadership development. Too many companies spend millions of dollars for the program of the year but almost nothing on follow-up and reinforcement. Companies should also take care to measure the
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Continual contact with colleagues is so effective it can succeed even without a formal program.
effectiveness of their leadership development initiatives, and not just the employees satisfaction with them. Our results indicate that when participants know that surveys or other methods of measuring program effectiveness are slated to occur three to 15 months from the date of the program, a higher level of commitment is created among them. This follow-up measurement creates a focus on long-term change and personal accountability. Although measuring outcomes would seem to be second nature for most companies, the success of leadership development programs has conventionally been assessed through the satisfaction of the participants. This metric is of limited relevance. Among the companies in our study that offered leadership development training, virtually all participants came away highly satisfied. At the aerospace/defense contractor and Johnson & Johnson, the average satisfaction rating among more than 3,500 participants was 4.7 out of a possible 5.0. Executives loved the training, but that didnt mean they used the training or improved because of it.
Learning to Learn
ing processes and reminder notes to help leaders achieve a positive long-term change in effectiveness, without using coaches at all. If the organization can teach the leader to reach out to co-workers, to listen and learn, and to focus on continuous development, both the leader and the organization will benefit. After all, by following up with colleagues, a leader demonstrates a commitment to selfimprovement and a determination to get better. This process does not have to take a lot of time or money. Theres something far more valuable: contact. +
Reprint No. 04307
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Resources
Diane Anderson, Brian Underhill, and Robert Silva, The Agilent APEX Case Study, in Best Practices in Leadership Development 2004, edited by Dave Ulrich, Louis Carter, and Marshall Goldsmith (Best Practices Publications, 2004). Des Dearlove and Stuart Crainer, My Coach and I, s+b, Summer 2003, www.strategy-business.com/press/article/22062. Marshall Goldsmith, Ask, Learn, Follow Up, and Grow, in The Leader of the Future: New Visions, Strategies, and Practices for the Next Era, edited by Frances Hesselbein, Marshall Goldsmith, and Richard Beckhard (Peter Drucker Foundation and Jossey-Bass, 1996). Marshall Goldsmith et al., Global Leadership: The Next Generation (Financial Times Prentice Hall, 2003). Linda Sharkey, Leveraging HR: How to Develop Leaders in Real Time, in Human Resources in the 21st Century, edited by Marc Effron, Robert Gandossy, and Marshall Goldsmith (John Wiley & Sons, 2003). Elizabeth Thach, The Impact of Executive Coaching and 360 Feedback on Leadership Effectiveness, Leadership & Organization Development Journal, vol. 23, no. 4, 2002; http://fiordiliji.emeraldinsight.com/ vl=2762214/cl=12/nw=1/rpsv/lodj.htm. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/strategy_and_leadership.
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Of even greater import is this: Continual contact with colleagues regarding development issues is so effective it can succeed even without a large, formal program. Agilent, for example, produced excellent results, even though its leaders received coaching that was completely disconnected from any training. In fact, leaders who do not have coaches can be coached broadly by their coworkers. The key to changing behavior is learning to learn from those around us, and then modifying our behavior on the basis of their suggestions. The aerospace/defense contractor and the telecommunications company used very streamlined and efficient train-
BY KAJ GRICHNIK, CONRAD WINKLER, AND PETER VON HOCHBERG
Instead of drifting into decline and irrelevance, producers of goods have a chance to seize the future.
Myopia
MANUFACTURING
During the past few decades, many industrial
Illustration by Peter Krmer
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companies have attempted to achieve manufacturing excellence. They have had at their disposal any number of methodologies and theories, quality initiatives, and cost-reducing concepts. But few companies have made much headway. Manufacturing strategies decisions related to siting, designing, and running factories are often the same as they were 10 or 20 years ago. Plants often look and feel as they did then. Programs intended to improve performance, such as total quality management, lean production, and Six Sigma, seem to ebb away, without producing the desired results. Sometimes it seems as though the harder manufacturers try to improve, the worse they perform. Consider, for example, the bad news from the Middle East that hit Household GmbH, a Europe-
based consumer goods manufacturer, in 2003. (The company name is changed, but the details are accurate.) Households market share in hygiene products, one of its flagship divisions, had recently tumbled in such cities as Cairo and Abu Dhabi. When Households regional managers investigated, they discovered that a privatelabel producer based in Egypt had begun to aggressively undercut the shelf price of Households products. At first glance, it seemed as if Household could easily win a price war with any local private label. After all, Households Middle Eastern manufacturing sites were running at higher capacity than the competitions sites, with advanced proprietary technology and a highly productive, well-trained staff. But the private-label manufacturer refused to go away, and its prices remained low while its market share kept rising.
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Kaj Grichnik kaj.grichnik@booz.com is a partner with Booz & Company based in Paris and a leader of research and practice in manufacturing. He focuses on the pharmaceutical, food, aerospace, and automotive industries.
Conrad Winkler conrad.winkler@booz.com is a partner with Booz & Company based in Chicago. He advises companies across industries on supply chain management improvement and manufacturing strategies, with a focus on the automotive and aerospace sectors.
Peter von Hochberg peter.vonhochberg@booz.com is a partner with Booz & Company based in Dsseldorf. He has extensive experience in consulting with clients on manufacturing and lean production, focusing on automotive OEMs and suppliers, and industrial goods manufacturers.
Also contributing to this article were John Potter, a Booz & Company partner based in London, and Georgina Grenon, a former Booz & Company senior associate. Originally published Spring 2006.
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Households managers had assumed that their competitor was selling under cost. But gradually it became clear that despite Households scale and technological edge, the competitor spent less to make most hygiene products, without any sacrifice in quality at least as perceived by customers. In short, Households ostensible manufacturing advantage its distinctive technology had become its biggest disadvantage. To make matters worse, Household had nearly completed a new factory in Ukraine, which had been intended, in part, to add capacity to serve the Mideast, but which now would simply add to Households manufacturing costs. There are many such stories in manufacturing today. Executives do all the right things to improve operations, but somehow get outperformed on cost, quality, or delivery. They may turn to benchmarking exercises, but those are rarely meaningful. Low-cost competitors appear with prices that cant be completely explained by lower wages. Rising warranty costs or dramatic product recall levels indicate the ongoing erosion of quality. As a last resort, companies outsource production, and thus erode their own companys competence in it. Gradually, manufacturing is treated more and more as an outcast, and plant communities become disenfranchised. We call this condition manufacturing myopia. It is akin to the marketing myopia that Harvard Business School lecturer Theodore Levitt identified in the 1960s. Levitt argued that companies made themselves vulnerable when they defined their brands too narrowly. Railroads are not in the passenger-train business, he argued; theyre in transportation. Every business should define itself through the interests of its market, not its own production priorities. Today, myopia is even more prevalent and danger-
ous in manufacturing than it was in marketing four decades ago. Like marketing myopia, manufacturing myopia is caused by isolation; it is the inevitable outcome of keeping manufacturing strategies contained to the functional or even plant level, with little or no connection to enterprise-wide strategies. As the factories and supply chain oversight functions are cut off from the rest of the executive decision makers, the manufacturing focus grows narrower, and overall competence can atrophy. This compels companies to cut costs even more blindly and irresponsibly, often by setting companywide targets determined by financial fiat rather than by competitive or customer insights. (See Exhibit 1.)
Building Awareness
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Surprisingly few major multinational or large-scale manufacturing companies have been able to break free of this trap. Household GmbH was one of them. The Middle East episode prodded its senior executives into a multiyear, systematic endeavor to rethink the companys operations and to glean and use better information about its manufacturing costs. Today, rather than a few state-ofthe-art plants, Household operates a variety of plants that are designed for flexibility and can be moved or revamped as customer needs and the competitive climate change. The cure for manufacturing myopia is 20/20 vision that is, the cultivation of awareness about manufacturing costs and means. Companies can sharpen their own ability, as Household did, to see their operations more clearly and redesign them more flexibly. For companies that achieve this kind of manufacturing prowess, the manufacturing function is no longer seen primarily as a cost center, ripe for cutbacks or outsourcing. Instead, the ability to produce higher-quality goods at lower
prices in a more flexible manner is a key component of their long-term competitive strategy and a central, dependable part of their identity. This involves two major commitments: first, dedication of resources to building awareness. Leaders can peel back the layers of their own manufacturing operations and those of their competitors so that processes, advantages, and disadvantages can be viewed more clearly. This means becoming more aware of a companys unique technological capabilities, the unfulfilled potentials of each plant (for reaching the appropriate markets), and the specific drivers responsible for their costs. Many manufacturers look at cost data primarily as justification and leverage for continually trimming expenses, rather than as a source of insights about scale, capital spending, labor deployment, technology, logistics, and supply chain efficiency all critical factors in measuring how well a companys manufacturing processes stack up against the competition. Toyotas
Exhibit 1: The Anatomy of a Manufacturers Dilemma
manufacturing competence, widely admired for many years, stems in large part from the companys insistence on building fine-grained awareness of every facet of production, at all levels of the company. The second commitment is patience, demonstrated by investing the time and resources to address manufacturing productivity as a long-term, organization-wide strategic imperative and not as an isolated operational or functional issue. Plant managers are often expected to show the same fast pace of change as marketing, finance, and procurement, where six- to 18-month transformations are feasible. But those metrics dont apply to manufacturing efforts, where improving results requires a very different set of time frames. A new manufacturing program frequently involves motivating, as well as hiring or moving, thousands of employees; new construction; new technology deployment; and perhaps the closing of a plant or two, which takes years rather than months. That time is well invested if it is used to develop an
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Companies facing manufacturing pressure can seek to solve the problem in one of two ways: cost reduction, mandated from the top, or strategic realignment of manufacturing resources. This diagram shows four possible decisions as they play out in the manufacturing system and the real-world results they produce.
Who chooses the cost reductions?
What guides the decision?
What are the results?
Option #1 Locally controlled: Plant reduction targets are voluntary. We need 10% cost reduction across all plants. Centrally controlled: Top executives and central staff establish the process for a 10% cost reduction.
Consultation with local team, perhaps with shop floor workers.
2%4% cost reduction; evolutionary changes; no strategic shift in process or product.
Option #2 Company-wide rules and uniform reduction targets are applied to all plants.
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Targets considered unfair; plants object. Excuses, passiveaggressive resistance. No strategic shift in process or product.
Option #3 Reduction is based on selected key performance indicators, or KPIs (such local metrics as costs, etc.).
Option #4 We need a comprehensive manufacturing strategy. Top executives and manufacturing managers look at the constellation of plants and priorities together.
KPIs do not reflect leverage in reducing product complexity or designing cross-plant strategies. Few long-term gains. No strategic shift in process or product.
Cost data (shows opportunities and limitations in the system), strategic objectives, competitive position.
Strategic changes (probably) lead to cost, quality, speed, and service advantages.
A manufacturer of air conditioning supplies built its factories on freighter ships that can be moved from port to port as the seasonal marketplace changes.
effective, flexible manufacturing capability, unique to the business and its customers, as a platform for more rapid change once it is established. How does one go about building this kind of awareness? At most companies, there are four dimensions of manufacturing in which highly visible data and analysis, projected farther into the future, can yield both shortterm gains and long-term advantage: technological distinctiveness, network sophistication, in-plant transformation, and labor modernization.
Technological Distinctiveness
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One of the first places to eliminate myopia is in the design, engineering, or purchasing of manufacturing technology. (We call this the inherent dimension of manufacturing, because it involves the physical nature of the products and the processes that create them.) There is a staggering level of underinvestment in business process innovation as compared with product innovation. In 2004, according to Booz & Company analysis, only 10.2 percent of the R&D budgets at the top 500 industrial companies was set aside for process innovation, down from 15 percent in 1980. Because theyve neglected this essential activity, manufacturers tend to rely on machine builders and other vendors to fill in the gap. In most cases, this is counterproductive. Equipment manufacturers do not generally have a strong track record for innovation, particularly for the kinds of creative and customized solutions that would enable individual companies to overcome their manufacturing shortcomings. And even when equipment providers are innovators, their technology is unlikely to give manufacturers a competitive edge, because it generally can be freely purchased by any of their rivals.
Moreover, in many organizations, there is little patience for process innovation, which in manufacturing is by its very nature a long-term event. After the production technology is replaced, it could take two to three years before the capital investment bears fruit in the semiconductor sector, five years in major manufacturing, and as much as 20 years in process industries, such as petrochemicals and electricity production. Additionally, to improve processes, companies have to train entire plant communities in dozens of different tools and techniques and completely different ways of working. All of that consumes time and resources. Some extremely successful manufacturers, such as packaging giant Tetra Pak, Procter & Gamble, and Toyota, have bucked the trend and used in-house machine development and internal process innovation to protect their competitive advantages. P&G has long been a pioneer of novel factory floor environments; for example, letting shop floor employees not just lay out the flow of machinery but design the machines themselves. This approach began at P&G in the early 1960s and has developed in scope, efficiency, and sophistication ever since. In one celebrated example at a P&G plant in Lima, Ohio, a team of shop floor technicians, as hourly workers were called, designed a machine for placing detergent bottles into position on the assembly line a mechanical feat that P&Gs professional engineers had said was impossible. The team commissioned a machine-tool supplier to produce the device, and put it successfully into operation. But for every P&G, there are dozens of companies faced with an equivalent to Households dilemma in the Middle East: Their state-of-the-art factories, more capable than those of competitors on a worldwide basis, are
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not flexible enough to respond to local conditions. Sometimes, a promising process innovation effort is disbanded because top management changes or because the sponsoring executives lose interest, even though they have known all along about the nature of the investment theyve been making. As a result, outmoded technological principles may endure for 30 or 40 years while the company cycles through a series of half-realized qualityimprovement or plant-restructuring initiatives. Other times, process innovation is consigned to the plant level only. When approached in this way, companies become little more than multiple small organizations with no scale, unable to harness process technology as a competitive advantage. Myopia also afflicts efforts to modify existing manufacturing processes. For example, there has been a lot of excitement in the last 15 years about design for manufacturing (DFM), an approach by which companies engineer products not just for their intrinsic qualities but also for how efficiently they can be manufactured. But despite the allure of DFM, the relationship between engineering and manufacturing groups at most companies is chilly or nonexistent. The shop floor community is often excluded from direct communication about the manufacturability of products with the engineering/ design function. Even if the two groups are allowed to communicate, manufacturing companies may not have the budget to cover the engineers internal rates and therefore may lose contact.
Network Sophistication
Most companies organize their production and supply operations on a project-by-project basis. As market conditions change, they move plants from Detroit to
Mexico, and a few years later they shift subassembly to Asia. They do not envision their manufacturing system for what it must be: A global, flexible supply chain network that can be reconfigured anywhere in the world as market conditions change. (We think of this dimension as structural, because it involves such infrastructureoriented features as the location and size of plants and the supply chain flow among them.) Companies that realize this and design their plants accordingly gain a tremendous time advantage. It can take two years to close down a factory and thats typically after several years of wavering over the decision to shutter it in the first place. It is far better to design the configuration of individual plants so that it is easy to enlarge, shrink, or reconfigure them based on the business landscape. Then fewer factories ever have to be abandoned and the manufacturing network neednt be completely overhauled. Theres also an expense advantage as the one-time cost penalty of moving plants from one place to another is reduced. This approach, known as flexible footprints, is practiced with great success by a few dozen large organizations among them, the U.S. Army, which constantly and proactively reassigns military bases to fresh uses. In an extremely novel implementation, a European manufacturer of specialized air conditioning supplies built its factories on large freighter ships that can be moved from port to port as the seasonal marketplace changes. The company chooses not to broadcast this manufacturing innovation publicly, perceiving it as a competitive advantage. A Qatari company, Cement International, has recently begun similar operations, putting a cement factory onboard a ship that docks in ports around the Persian Gulf, wherever building materials are needed.
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The Roots of Myopia
said, it would help if sales provided reliable forecasts and didnt ask us for last-minute changes for important clients. And finance would be less of a hindrance if the CFO would finally approve funding for new machines to
unsustainable status quo of rising fixed costs and a widening gap between projected and actual profits. Manufacturing companies are usually not set up with the kinds of incentives and decision rights that would encourage executives to review plant operations with a full understanding of the companys competitive cost drivers. Consequently, a narrow, selfinterested view of plant performance tends to prevail, even when everyone involved has the best interests of the whole company at heart. Business education reinforces the division. Students interested in manufacturing are tracked into a ghetto in many business schools; they dont share many classes or associate much with their counterparts in finance and strategy. Nor do they expect to cross over to other positions when they enter the working world. Once a plant manager, always a plant
ow did manufacturing myopia become so prevalent? There
simplify operational bottlenecks. The companys vice president of sales responded that manufacturing needed to eliminate its oversized workforce and sharply curtail labor costs by shifting more of the production to low-cost countries. Only then could his team sell significantly more. The vice president of R&D expressed the opinion that manufacturing still had not managed to sufficiently operate the existing production technology. Were simply not up to world-class standards, he said. Later, the CEO said privately that he was fed up with all these points of view. None of them had much to do with the problem as he saw it: an
are several roots. Probably most pernicious was the separation of manufacturing, marketing, and finance in corporate structures that date back to the mid-20th century. Turf wars often unconsciously reinforce those divisions, particularly when the stakes are high. Heres one typical story we recently encountered in a consumer products company: The vice president of manufacturing stated at a meeting that his factories could deliver at lower costs, but only if R&D can come up with a better factory blueprint and reduce the number of product parts. Also, he
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Unfortunately, we observe that there is little cooperation among companies within a supply chain to jointly optimize plant networks, another potentially lucrative example of flexible footprints. In the outdoor equipment industry and in basic chemicals, some companies have shared parts of their production capacity, sometimes spinning off manufacturing. But capacity pooling is a rarity outside those two industries.
In-plant Transformation
It is now more than 30 years since the notion of manufacturing excellence variously attributed to the Toyota production system, socio-technical systems, quality management, lean manufacturing, and highperformance systems became widely known in Europe and the United States. By now, practically every manufacturing manager can tell you about pokayoke, kanban, or self-steering teams. But plants that have successfully implemented the manufacturing practices that produce efficient and optimal operations are few and far between. And most of these are greenfield sites: previously undeveloped locations where elite processes could
be designed into the factory from the beginning. The competitive advantage of process optimization remains high, in part, because of the woefully poor record of the manufacturing industry in general. We think of in-plant transformation as systemic, because it takes place when people see the processes on the shop floor as interrelated parts of a whole system. Why has this kind of in-plant transformation lagged so badly, even though its successes are so visible? Manufacturing myopia is the primary reason. Typically, process improvement is seen by company executives as a go ahead, just do it manufacturing issue managed solely by the plants. This isolation contributes to the lack of patience among decision makers, who feel pressured to show results before the systemic change is ready. By contrast, a well-designed manufacturing change initiative is deliberately set up like a developmental path, with a menu of results expected in the short term, medium term, and long term. Some systemic drivers can have an effect on costs almost instantly (e.g., changing maintenance contractor purchasing procedures); some take a bit longer
manager, people say. Manufacturing functions consequently suffer in the war for talent; they recruit from a smaller pool. The result is often an unnecessary tension between manufacturing and finance; manufacturing executives may have far more contact with, and feel more loyalty to, employees than shareholders. And finance executives may not appreciate the strategic importance of manufacturing talent, particularly on the shop floor. This tendency was exacerbated during the service boom of the 1990s, when it became fashionable to assert that mere manufacturing was not strategically important. Some companies followed cost-cutting strategies that downplayed the importance of their long-standing manufacturing knowledge, and then found themselves needing to rebuild it. This was one of the key components of the decline of the American manufacturer
Sunbeam. After being acquired by Allegheny International in the early 1980s, the companys manufacturing division was starved of capital to update its factories and refresh its product line, as management writer John Byrne put it. This ultimately led the shareholders to appoint costcutting turnaround artist Al Dunlap as CEO in 1996; manufacturing capacity suffered even more erosion during Dunlaps time as CEO. In his book Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price (HarperBusiness, 1999), Byrne describes how Sunbeam shut down a high-quality, efficient hair-clipper plant in McMinnville, Tenn., and moved production to a chaotic, money-losing, poorly managed new facility near Mexico City. To counterbalance all these trends, some companies now make deliberate efforts to integrate manufacturing
with the rest of the enterprise. Toyota sends manufacturing employees and managers on sales calls to areas including those where their products have low penetration. ASML, a Dutch company that is a leading producer of lithography and semiconductor manufacturing equipment, went from a 10 percent to a 70 percent market share in its product categories, in part by bridging this gap. ASMLs head of manufacturing started as an accountant, then led a finance function, and only then moved into production. This perspective recently helped the company reduce lead times and generally improve the integration of manufacturing with other functions. K.G., C.W., and P.V.H.
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(e.g., installing pull systems, in which the production line sets its own pace, to replace the top-down controls of a manufacturing resource planning approach). Even in full-scale manufacturing transformation initiatives, it should not take more than two years for the first visible effects to appear. The leaders of many manufacturing projects stop paying attention after that. But in a welldesigned initiative, those first results become a base for continuous improvement. In a so-called brownfield site (an established factory with a long-standing workforce), one may often find high fixed costs or blatant overstaffing. Installing intelligent tools, lean solutions, or high-performance systems will not solve these problems. If there are already more workers than work to do, improving production speed or throughput will not lead to higher levels of productivity, in part because overcapacity breeds process creep, in which workers and managers merely overlay the new work rules and practices on top of their old routines. Despite knowing this, all too often, manufacturers myopically push a lean program through plants that are overstaffed and have a high share of non-value-added
work. We call this the fat ballerina syndrome: Only slimmed-down organizations stand a chance of performing smart moves. Companies also are often greedy or formulaic when it comes to assigning improvement objectives to plants. Its not atypical for a factory manager to be told to save 10 percent of fixed costs, while improving output and quality by 20 percent. Often a basic analysis will reveal that enhancing a plants productivity dwarfs the value of firing a group of maintenance technicians and engineers, and more importantly that increasing productivity and cutting personnel are not mutually compatible objectives. For one thing, plant communities often resist cooperating with management to alter their work methods and increase output while their colleagues are being let go.
Labor Modernization
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Lets face it: In most plants, industrial relations and treatment of the workforce are reminiscent of the 19th century. This statistic illustrates the point: From 1999 to 2004, there were more strikes in most western
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European countries than occurred between 1950 and 1975. In one German aerospace plant, where three generations have worked on the shop floor, absenteeism and illness rates have risen a steady 3 percent per generation. Overall, Western companies made few strides in aligning factory workers more closely to the companies that employ them. Only 20 percent of production workers in western Europe and the U.S. receive compensation linked to performance, and more than 75 percent work under a compensation system that is so rigid it unintentionally drives people to take overtime. We use the term realized because the modernization of a labor force takes place only in the real-world dimension of the community around each manufacturing location. The principles of effective workforce management are universal: The improvement of labor practices and customization of human resource policies are essential to developing creative, innovative, and motivated employees. But the most appropriate methods for accomplishing those things are decidedly local. Labor issues vary significantly from one place to another. Workforces in different locales have their own particular cultures, holidays, workdays, family structures, community resources, demographics, education levels, and assumptions about the type of work they will do. Productivity can also deviate dramatically among regions. Over the years, effective manufacturers have experimented with a wide variety of means for engaging shop floor employees. Some companies establish workerfocused principles. At one Dutch chemical company, the budget line for work space and plant maintenance and modernization was sacrosanct and could not be cut. This was important because workers perceived the company as a reliable protector of their safety. A cosmetics
manufacturer demonstrated the same kind of commitment by installing an on-site health spa, free to employees. We have seen plants in which windows and skylights are carefully placed to make the most of natural light, the architecture fits local styles, and social spaces reflect the way employees naturally interact. These types of factories, which fit their social and physical environment so well, are usually owned by companies that realize the value of an inspired workforce to the finished product. Such companies often make concerted efforts to link employees with more in-depth knowledge of the company and the product. Danone, Procter & Gamble, Harley-Davidson, and MercedesBenz are all known for plant communities that take part in word-of-mouth and face-to-face sales campaigns and provide testimonials for marketing and public relations programs. Mercedes, for example, encourages customerto-factory interaction by suggesting that car buyers pick up their new vehicles at, say, the Sindelfingen plant, where they can talk to plant workers about quality and other issues pertaining to the making of their automobiles. Very successful companies create products that command an emotional premium, and they make certain that their manufacturing employees are among the first to emotionally promote them. Ultimately, how can your product be loved by your customers if thousands of your own employees who make the product dont love producing it? In a brownfield site, labor modernization often represents a daunting challenge. Managers may believe that they can employ greenfield policies (those applicable to a new factory) in a brownfield plant, but this assumption is flawed. The brownfield workforce is generally older; they may have already lived through shutdowns,
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Exhibit 2: A Framework for Building Awareness

Dimension Definition Commitment Time Frame
Inherent
Technological distinction: the machines and production techniques that either allow for unique combinations of features or reduce costs. Network sophistication: recognizing that a companys manufacturing competence depends on its total supply and production chain, not on individual components of that chain. In-plant transformation: continuous improvement of process quality and effectiveness.
Maintaining command over technological adeptness; continuing to improve and increase quality; reducing complexity. Continuing willingness to adapt factory networks to new products and markets as conditions demand; design for flexible footprints and capabilities.
Capital investment requires a five- to 10-year outlook.
Structural
Up-front investment in greenfields may require slightly more time than converting old plants to this way of thinking; structural change gradually becomes ingrained, taking place on an ongoing basis. With comprehensive, long-term initiatives, some initial results can be seen within months. Efforts begin to pay off in one to two years and continue to produce gains thereafter. This requires immediate moves, but it may be five years or more before a cynical community is willing to admit that the plant is actually worthy of their respect and commitment.
Systemic
The adoption of lean production techniques, self-organizing teams, and many of the other process innovations of the past 30 years.
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Realized
Labor modernization: recognition of each plants unique community and workforce needs, and the ability to meet those needs more than halfway.
Policies and plant designs that attract workers, engage local governments, and enhance communities; executive recruiting and training practices oriented toward these goals.
layoffs, and closures. Moreover, unions dont usually forget the bitter relations they had with the prior plant management and are less willing to forge alliances with the new factory team. In some locations, sophisticated lean production concepts, implemented in a one-sizefits-all pattern, have been viewed by the cynical, dispirited workforce as micromanagement and paternalism. For a brownfield renewal to succeed, the surrounding community has to be fundamentally remotivated and more closely tied to the enterprise through new compensation systems and governance roles. The German agricultural equipment maker Claas demonstrated the value that can be unlocked if the right formula is found. In the midst of substantial growth and as part of a constant drive to improve flexibility, Claas spun off a large part of the factory through a management buyout and made the newly independent plant a primary supplier. The newly formed business unit was able to secure quality standards and to better balance its capacity, signing up additional customers besides Claas. Meanwhile, employee motivation improved in the factory as managers used the space they had reclaimed to fundamentally reengineer activities, aiming at a one-
piece-flow philosophy. The plants positive development defied the long slump in commodity machining and metalworking factories in the region.
Manifesto for Manufacturers
A company seeking to overcome its manufacturing myopia may find the task daunting at first, but easier over time. The goal is not to fix manufacturing, but to build the capacity for long-term and medium-term manufacturing management among engineers, suppliers, and staff (including unionized staff ), and to redesign the technology to take advantage of these capabilities and augment them. There are no universal rules for doing this because each manufacturer has a unique combination of inhouse capabilities, labor histories, supply chain relationships, market demands, and technological innovations. A holistic manufacturing strategy emerges only from an analysis that assesses the critical operational data buried in the four dimensions of manufacturing design: inherent, structural, systemic, and realized. (See Exhibit 2.) Consider the recent case of a European auto manufacturer. The company was desperate for a way to cut
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costs per car, which had risen to almost 30 percent above those of its nearest competitor. The carmakers initial inclination was to close plants and implement flexible manufacturing lines that could produce multiple models in remaining factories. Pressure from unhappy unions convinced the company to think twice about this plan. Analysis of the automakers cost drivers found that the gains from minimizing inherent costs (by increasing plant flexibility) and structural-level costs (by eliminating plants) would do little to close the gap between its manufacturing costs and those of its closest competitor. In fact, the only way that the company could catch up to its rival was by systemic improvements (adopting lean processes), a category that accounted for 65 percent of the cost gap. The automaker would never have learned this had it relied only on traditional analyses and not exposed the interconnections among all of the critical components of its manufacturing operations. To address its shortcomings, the company appointed experienced managers from outside the region to critical posts in its European plants, retooled its production system, and began to implement those lean manufacturing processes. By separating manufacturing operations into their four dimensions and exploring the way they are interrelated, management can accurately measure manufacturing costs and perfect what if?style decision making. This is not possible with a conventional cost accounting approach. Even the most advanced cost accounting systems are usually designed for only two tasks: calculating product costs to provide marketing with a basis for pricing, and tracking actual and forecasted results in individual cost centers. In addition, accountants at most companies do not have the experience in operations to spell out the finan-
cial consequences of manufacturing decisions. For example, they cannot estimate the overall cost position of a plant that would result if more automated equipment were installed, specific processes were farmed out to a low-cost nation, the demand for a product doubled, the number of SKUs were reduced, or the competition opened two new plants in eastern Europe using the latest manufacturing technology. Even in the best of circumstances, it is tricky to distinguish the effects of individual manufacturing drivers. For instance, how much advantage does a competitor gain from operating continuous instead of batch processes, and how does that balance out the disadvantage it has maintaining smaller plants with greater indirect and overhead requirements? Manufacturing, finance, and research and development executives cant answer such questions in isolation from one another; they need regular opportunities to think and strategize together. Companies that are willing to invest in a long-term change cycle discover that the learning curve in manufacturing is nonlinear. Even though the investment may be steady, measurable improvement is typically slow at first and accelerates over time. It may take five years to cross the initial threshold of a new production system, but after that first experience, the capacity for changing technology grows rapidly in part because the technologies themselves become more flexible, and in part because employees develop the skills and knowledge to deploy new production machines more efficiently. The candy and chocolate manufacturer Cadbury [since acquired by Kraft Foods] grasped this particularly well. When the company installed a new production system, it assumed it would take up to five years for the plant to reach maturity. Cadbury measured this evolu-
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Computer technology, materials science, and energy innovation have progressed dramatically, but few companies are trying to realize their potential.
tion by how well employees responded to the new system. As the plant matured and its capabilities grew, productivity was expected to increase. Management assumed that either head count would decrease or production quality would increase during the first five years, depending on the level of sales and scope of the plants market. Indeed, as employees became more familiar with the processes, the cost of production dropped and quality stayed high. This type of approach represents an alternative to the prevailing despondent mood at many manufacturing companies. Indeed, perhaps the most tragic result of manufacturing myopia, for many companies, is the lost opportunity for manufacturing leadership. Computer technology, materials science, and energy innovation have progressed dramatically over the past 20 years. There are many futuristic manufacturing options available. They include instant and inkjet manufacturing, where computer-based molding machines turn out individually customized plastic components with the speed of mass fabrication; biomimicry, in which industrial processes reproduce the cell-by-cell process by which, for example, a seashell is formed; and environmentally friendly fermentation-based fabrication methods that eschew toxic chemicals and reuse waste more effectively. In many industries, there exists great unfulfilled potential for moving beyond commoditization by rethinking manufacturing prowess as part of the companys identity. Few companies today are trying to realize that potential; there are few 21st-century equivalents to the original Ford Motor Company, with its breakthroughs in assembly-line manufacturing, or even to the 1990s-era Intel. We believe that manufacturing myopia helps explain why.
Over the past 20 years, manufacturing managers have learned that even the most effective supply chain management will not lead to results unless these capabilities are implemented not just within the function, but at the level of the executive suite. In a confrontational, competitive environment, the choice is engaging in manufacturing competence as the core of your corporate identity or continuing to pay the price of myopia. +
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Resources
John A. Byrne, Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price (HarperBusiness, 1999): Myopia and its consequences at the formerly competent manufacturer Sunbeam. Neil Hopkinson, Richard Hague, and Philip Dickens, editors, Rapid Manufacturing: An Industrial Revolution for the Digital Age (John Wiley & Sons, 2006): Flexible and customized manufacturing, grounded in computer-based prototyping techniques. Bill Jackson and Conrad Winkler, Building the Advantaged Supply Network, s+b, Fall 2004, www.strategy-business.com/press/article/04304: Focused, flexible, and lower-cost manufacturing through supply chain network innovations. Art Kleiner, The Age of Heretics: Heroes, Outlaws, and the Forerunners of Corporate Change (Doubleday, 1996): History of socio-technical systems and Procter & Gambles manufacturing innovations. Art Kleiner, Leaning Toward Utopia, s+b, Summer 2005, www.strategybusiness.com/press/article/05208: Profile of lean experts James P. Womack and Daniel T. Jones. Jeffrey Liker, The Toyota Way: 14 Management Principles from the Worlds Greatest Manufacturer (McGraw-Hill, 2003): Comprehensive, accessible look at a company with renowned production awareness. Josh Whitford, The New Old Economy: Networks, Institutions, and the Organizational Transformation of American Manufacturing (Oxford University Press, 2005): Myopia in the U.S. Rust Belt. James P. Womack and Daniel T. Jones, Lean Solutions: How Companies and Customers Can Create Value and Wealth Together (Free Press, 2005): Evokes a world of customer-oriented manufacturing foresight.
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BY A.G. LAFLEY, WITH AN INTRODUCTION BY RAM CHARAN
P & G S INNOVATION
CULTURE
How we built a world-class organic growth engine by investing in people.
THE HEART OF A COMPANY S BUSINESS MODEL
Illustrations by Michael Klein

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should be game-changing innovation. This is not just the invention of new products and services, but the ability to systematically convert ideas into new offerings that alter the very context of the business.
As they lead to repeat purchases, these offerings reshape the market, so that the company is playing an entirely new (and profitable) game to which others must adapt. A number of game-changing innovators are operating today, including such household-name enterprises as Procter & Gamble, Nokia, the Lego Group, Apple, Hewlett-Packard, Honeywell, DuPont, and General Electric. Wherever you see a steady flow of noteworthy innovations from one company, you can probably assume that it is a game-changing innovator, with the distinctive kinds of social connections, culture, and supporting behaviors that enable it to play that role.
Consider the case of Procter & Gamble Company. Since A.G. Lafley became chief executive officer in 2000, the leaders of P&G have worked hard to make innovation part of the daily routine and to establish an innovation culture. Lafley and his team preserved the essential part of P&Gs research and development capability world-class technologists who are masters of the core technologies critical to the household and personal-care businesses while also bringing

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A.G. Lafley editors@ strategy-business.com was the chairman and CEO of Procter & Gamble Company when this article was published. He was named Executive of the Year by the Academy of Management in 2007. He is the coauthor, with Ram Charan, of The GameChanger: How You Can Drive Revenue and Profit Growth with Innovation (Crown Business, 2008).
Ram Charan www.ram-charan.com is a Dallas-based advisor to boards and CEOs of Fortune 500 companies and the author or coauthor of 14 books, including the bestsellers Execution (with Larry Bossidy; Crown Business, 2002), Confronting Reality (with Larry Bossidy; Crown Business, 2004), and Know-How (Crown Business, 2007).
Also contributing to this article was Geoffrey Precourt.
Originally published Autumn 2008.
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Ram Charan
more P&G employees outside R&D into the innovation game. They sought to create an enterprisewide social system that would harness the skills and insights of people throughout the company and give them one common focus: the consumer. Without that kind of culture of innovation, a strategy of sustainable organic growth is far more difficult to achieve. A.G. Lafley and I coauthored The GameChanger: How You Can Drive Revenue and Profit Growth with Innovation (Crown Business, 2008) to explain how to make game-changing innovation drive growth on a consistent, well-paced basis. The critical factors that we cover in the book include keeping a laser-sharp focus on the customer; establishing a disciplined, repeatable, and scalable innovation process; creating organizational and funding mechanisms that support innovation; and demonstrating the kind of leadership necessary for profitable top-line growth as well as cost reduction. One aspect of building an innovation culture deserves more attention than we could give it in The Game-Changer : designing a social system that would spark new ideas and enable critical decisions. In the article that follows, A.G. explains the human factors that fostered innovation at Procter & Gamble. It could be thought of as the missing chapter to The Game-Changer ; a vital component that isnt always obvious, even to experts, precisely because it is so fundamental.
hen I became CEO of Procter & Gamble
in 2000, we were introducing new brands and products with a commercial success rate of 15 to 20 percent. In other words, for every six new product introductions, one would return our investment. This had been the prevailing ratio in our industry, consumer packaged goods, for a long time. Today, our companys success rate runs between 50 and 60 percent. About half of our new products succeed. Thats as high as we want the success rate to be. If we try to make it any higher, well be tempted to err on the side of caution, playing it safe by focusing on innovations with little game-changing potential. The decision to focus on innovation as a core strength throughout the company has had a direct influence on our performance. P&G has delivered, on average, 6 percent organic sales growth since the beginning of the decade, virtually all of it driven by innovation. Over the same period, weve reduced R&D spending as a percentage of sales; it was about 4.5 percent in the late 1990s and only 2.8 percent in 2007. In that year, we spent US$2.1 billion on innovation, and received $76.5 billion in revenues. Were getting more value from every dollar we invest in innovation today. The focus on innovation has also had a direct effect on our portfolio of businesses. The Game-Changer describes how we sold off most of P&Gs food and beverage businesses so we could concentrate on products that were driven by the kinds of innovation we knew best. As it turns out, with this narrower mix of businesses, we can more easily devote the resources and attention needed to build a broad-scale innovation culture. We also focused on creating a practice of open innovation: taking advantage of the skills and interests of
The days of achieving automatic growth by entering new markets are over. We can grow in these countries only with new products, processes, and forms of community presence.
people throughout the company and looking for partnerships outside P&G. This was important to us for several reasons. First, we needed to broaden our capabilities. Each of our businesses was already practicing some form of innovation improvement, but they were not all improving at the same rate. As the CEO, I could lead and inspire the company as a whole, but I could not substitute my judgment for that of other leaders who knew and understood their specific businesses far better than I could. The decision makers in each business would have to examine their competitive landscape and their own capabilities to figure out what kinds of innovation would work best and win with consumers. Second, building an open innovation culture was critical for realizing the essential growth opportunity presented by emerging markets. During the next 10 years, between 1 billion and 2 billion people in Asia, Latin America, eastern Europe, and the Middle East will move from rural, subsistence living to relatively urban and increasingly affluent lives. They will have more choices, a greater connection with the global economy, and the ability to realize more aspirations. Along the way, they will become, for the first time, regular consumers of branded products in categories such as personal care, fabric care, and prepared food. It would seem relatively simple to execute a strategy for reaching these new consumers. But the days of achieving automatic growth by entering new markets are essentially over. Just as retailers often reach a level of saturation where it doesnt make sense to open any more stores in a particular market many mature consumer products companies are rapidly running out of the so-called white space in new regions. P&G, for
example, already has a market presence in more than 160 countries, with large operations on the ground in more than 80 of them. We can grow our business in these countries only by consistently developing new products, processes, and forms of community presence. And to do that, we need to involve people, inside the company and out, who are comfortable and familiar with the values and needs of consumers in these parts of the world. A third reason for focusing on open innovation had to do with fostering teams. The kinds of innovation needed at Procter & Gamble must be realized through teams. The idea for a new product may spring from the mind of an individual, but only a collective effort can carry that idea through prototyping and launch. If innovation is to be integrated with both business strategy and work processes, as we believe it should be, it requires a broad network of social interactions. Moreover, our experience suggests that many of the failures of innovation are social failures. Promising ideas, with real potential business value, often get left behind during the development process. Some innovations are timed too early for their market; others are lost in execution. Often, the root cause is poor social interaction; the right people simply dont engage in productive dialogue frequently enough. For all these reasons, we consciously set in place a series of measures for building an open innovation culture at P&G.
The Consumer Is Boss

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Procter & Gamble is known for its highly capable and motivated workforce. But in the early 2000s, our people were not oriented to any common strategic purpose. We
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had a corporate mission to meaningfully improve the everyday lives of the customers we served. If 15 seconds with a deodorant or two minutes with a disposable diaper have made a small part of your life a little bit better, then weve made a difference. But we hadnt explicitly or inspirationally enrolled enough of our 100,000-plus people around the world in our mission; it was neither fully embraced by employees nor fully leveraged by the companys leadership. Our innovation efforts suffered accordingly. So we expanded our mission to include the idea that the consumer is boss. In other words, the people who buy and use P&G products are valued not just for their money, but as a rich source of information and direction. If we can develop better ways of learning from them by listening to them, observing them in their daily lives, and even living with them then our mission is more likely to succeed. The consumer is boss became far more than a slogan to us. It was a clear, simple, and inclusive cultural priority for both our employees and our external stakeholders, such as suppliers and retail partners. We also linked the concept directly to innovation.
From the ideation stage through the purchase of a product, the consumer should be the heart of all we do at P&G. I talked about it that way at dozens of company town hall meetings during my first months as CEO. More and more people began thinking about how to apply the consumer is boss concept to their work. Resources were still scarce, and there were fierce debates about which ideas deserved the most attention and where to deploy money and people. But this concept came to matter more than those other concerns. People became more willing to subjugate their egos to the greater good to improving consumers lives. Its natural for a mature company to become more insular. So we explicitly tried to build better connections with the people who bought our products. For example, in the early 1990s, we had acquired the Max Factor and Ellen Betrix cosmetic and fragrance lines from Revlon Inc. Innovation in fine fragrances had always been driven by fashion. With slow growth of 2 to 3 percent a year, low margins, and weak cash flow, fine fragrances didnt seem to be an attractive business for P&G. But we saw a chance to change the game.
We began by clearly and precisely defining the target consumer for each fragrance brand, and identifying subgroups of consumers for some brands. We didnt walk away from the traditional approaches of the fine fragrance business. We still maintained partnerships with established fashion houses, such as Dolce & Gabbana, Gucci, and Lacoste. But we also made the consumer our boss. We focused on a few big launches and on innovation that was meaningful to consumers, including fresh new scents, distinctive packaging, provocative marketing, and delightful in-store experiences. We also took advantage of our global scale and supply chain to reduce complexity and enable a significantly lower cost structure. The result? Our team turned a small, underperforming business into a global leader. In 2007, P&G became the largest fine fragrance company in the world, with more than $2.5 billion in sales a 25-fold increase in 15 years. Elsewhere in our company, we experimented with new ways to build social connections through digital media and other forms of direct interaction. We designed websites to reinforce consumer connections, to better understand consumers needs, and to experiment with prototypes. For example, we used to hand-make baby diapers for a product test. Now, we show people digitally created alternatives in an onscreen virtual world. If the consumers were talking to have an idea, we can redesign it immediately and ask them, Do you like that better? How would you use it? It allows us to iterate very quickly. In effect, we are building a social system with the purchasers (and potential purchasers) of our products, enabling them to codesign and co-engineer our innovations.
Integrating Innovation
We are constantly innovating how we innovate. We keep refining our product-launch model from idea to prototype, to development, to qualification, to commercialization. Applying this sequential practice on a large scale, and making it replicable, does not mean eliminating judgment. In fact, theres still a fair amount of judgment thats applied along the way. Thats why we need active leaders and a strong innovation culture. Scalability is critical at a company the size of Procter & Gamble. If we cant scale our processes, they dont have much value for us. In fact, scalability is often the justification for our existence as a multinational, diversified company. Our innovation practices are thus designed for deliberate learning, across all our functions, product categories, and geographic locations. Once people understand a particular process, they can replicate it and train others. It soon becomes a part of normal decision making. P&G had not treated innovation as scalable in the past. We had always invested a great deal in research and development. When I became CEO, we had about 8,000 R&D people and roughly 4,000 engineers, all working on innovation. But we had not integrated these innovation programs with our business strategy, planning, or budgeting process well enough. At least 85 percent of the people in our organization thought they werent working on innovation. They were somewhere else: in line management, marketing, operations, sales, or administration. We had to redefine our social system to get everybody into the innovation game. Today, all P&G employees are expected to understand the role they play in innovation. Even when youre operating, youre always innovating youre making

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Becoming a Great Innovation Team Leader
will contribute to them. They determine which projects to accelerate or cut on the basis of resource consumption as well as market potential. They dont hesitate to pull the plug on projects that dont clear the hurdles or that simply consume more time or
for example, technologists, marketing people, and those responsible for commercializing a new product. Inevitably, trade-offs will be required among these groups. Leaders thus must ensure that communication channels are open from the start and that facts and sound judgment prevail. They must be prepared to break deadlocks and resolve conflicts by keeping individuals focused on their common goal: the customer.
innovation culture, you may be thinking, There are some good ideas herefor someone else. In my shop, we can barely keep the trains running on time. How am I supposed to do all this? Leaders of innovation take their game to another level through a particular set of practices: Establish clear criteria and dont hesitate to shift resources. Great innovation leaders keep a sharp eye on their short-term and long-term business goals and think through how and when various innovation projects
s you read about Procter & Gambles social system and
money than the business can afford. Concentrate on possibility. The process of innovation is inherently uncertain. Innovation leaders live with ambiguity as ideas are shaped and reimagined; they dont let ideas die before theyre fully formed or understood. Once a project is selected, these leaders inspire the team to keep going even as they encounter obstacles and go through iterations. At the same time, leaders are vigilant for indications that the projects market potential has diminished. Cross boundaries and help others do the same. Innovation becomes riskier when there are gulfs between,
Reward effort and learning.

Failure is a fact of life for companies that pursue innovation seriously, and a leaders response to it has a huge effect on company culture and therefore on future projects. Innovation leaders know that failures represent opportunities to learn. They keep people energized by publicly recognizing their earnest efforts and willingness to venture from the tried and true. Ram Charan
P&G used to recruit for values, brains, accomplishment, and leadership. We still look for these qualities, but we also look for agility and flexibility. We believe the soft skills of emotional intelligence fundamental social skills such as self-awareness, self-fulfillment, and empathy are needed to complement the traditional IQ skills. (See Tea and Empathy with Daniel Goleman, by Lawrence M. Fisher, s+b, Autumn 2008.) Maybe soft isnt the right word: These skills are every bit as

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the cycles shorter, or developing new commercial ideas, or working on new business models. And all innovation is connected to the business strategy. In fostering this approach and building the social system to support it, the P&G leadership has had to be very disciplined. For instance, we are now set up to see many more new ideas. Our external business development group is very small; all it does is meet with individuals, groups, research labs, and other potential collaborators, including (as we noted in The GameChanger) P&Gs competitors on occasion. Any of these may propose new technologies, new product prototypes, or new ways to connect us to our consumer base. In 2007, the business development group reviewed more than 1,000 external ideas. In 2008, they saw 1,500. We tend to act on about 5 to 7 percent of them. We are also open to ideas from more regions than in the past. Innovation used to travel primarily from developed markets to developing markets. When new technology appeared in Japan, Germany, or the U.S., it flowed across the regions and down the hierarchy. Today, more than 40 percent of our innovation comes from outside the United States. People in India, China,
Latin America, and some African countries have become part of our social system. Their presence has made us more open, and this helps compensate for our natural tendency to become more insular. We maintain open work systems in a lot of places around the world. Executives offices dont have doors. Leaders dont have a secretary cordoning them off. All the offices on the executive floor at Procter & Gamble are open; the conference room is an open, round space. We made it round as a small symbol of the new approach. Were seeing indications that this new social process is catching on all over the world.
The Talent Component
Once people see the simplicity, durability, and sustainability of an innovation mind-set, it continually reinforces itself.
hard to master as some tough analytical skills. People just learn them in a different way. Some people at Procter & Gamble have struggled with this new approach, but most of our best people have done really well with it. Curiosity, collaboration, and connectedness are easy to talk about but difficult to develop in practice. We have tried to carefully identify and ease out people who are controlling or insecure, who dont want to share, open up, or learn who are not curious. And in the process, we have discovered that most of our people are naturally collaborative. We also try to develop people by giving them new stimulation and greater challenges. As they move through their careers, we deliberately increase the complexity of their assignments. That might mean entering a market thats not developed yet or a market with a competitor already firmly established. Whatever the challenge, it stretches them. We give our most promising people time in both functional and line positions, because we think our best leaders are great operating leaders and great innovation leaders. We also move people around geographically. We bring people into our Cincinnati headquarters from around the world, and we make a point of moving our
headquarters people to our global businesses. Almost all of us have worked outside our home region. Almost all of us have worked in developing or emerging markets. And almost all of us have worked across the businesses. We track that progress very carefully. Weve been fortunate that some of this flexible, multifaceted ethic exists in our heritage. For example, Procter & Gamble pioneered a technician-based system in its manufacturing plants during the 1960s and 70s. In this system, we avoided the approach in which one person was assigned to do only one job. The technician system still operates today: To get the highest evaluation rating in a P&G factory, you learn how to do all the jobs on the line. And, once you have that rating, we expect you to be capable of problem identification, problem solving, and innovation. This background has made it easier for us to plug manufacturing and engineering into the innovation culture. Once people have succeeded at innovation, you can see the energy in the company changing. People routinely say, We can do this. This is feasible. The attitude changes are incredible to watch; once people see the simplicity, durability, and sustainability of an inno-

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Integrative Thinking
One of our favorite examples of integrative thinking involves Febreze, a very successful odor-control product. One of the active ingredients in Febreze surrounds a malodor and removes it, as opposed to covering it up or
vative mind-set, it continually reinforces itself. On average, younger managers and younger employees are more open to fresh, innovative thinking. Since 2000, weve lowered the average age of our people by almost 10 years because of our acquisitions and our moves in emerging markets. We have also recently brought in people from outside to enable and stimulate creative thinking. This was unprecedented for a company that has traditionally hired only entry-level people and promoted from within. Virtually every leading practitioner of our new design capability came from the outside as a mid-career hire. They arrived from BMW, Nike, and some of the best design shops in the world. We probably have 150 to 200 such people and, although its not a huge proportion of the P&G staff, its big enough to make a difference. They bring us not just the art and science and practice of design, but an integrative way of thinking.
masking it. Febreze started out as a fabric refresher. Now its also an air freshener in the U.S. and elsewhere. Not long ago we took the Febreze package, product, and brand name to Japan. We tested it on a small scale with Japanese consumers. They rejected it. As interpreted by the P&G team (a relatively junior-level group), the gut reaction of the Japanese was: Heres another Western product thats not going to work in our country. But we persisted. Were there any Japanese households or consumers who really liked the product? we asked. The team didnt know, but they went back and looked at the research. Lo and behold, 20 percent of the first survey group absolutely loved the product. Personally, I wasnt surprised. I had spent eight years living and working in Japan and I knew that Japanese people can be hypersensitive to malodors. A man can smoke cigarettes outside or in a subway station, but many Japanese women wont let their husbands smoke in the house. When the husband comes home, he may have to take his smoky clothes off and wash them before he can sit down. So we resolved to try again. The P&G team changed the viscosity of the product. They changed the fragrance from high profile to a very low profile scent. They changed the bottle to a much more delicate design that more Japanese people felt comfortable having visible in their homes. They changed the spray pattern to a mist. They changed everything but the core technology of the product, and it became a phenomenal success in Japan. This is a story we tell ourselves at P&G to drive home the need for integrative thinking. The project started with a consumer-centric concept. It involved
people in a variety of functions and at least two regions. It opened our team members eyes to other possibilities. And it came to fruition because we were skilled at having the kinds of processes and conversations that would lead people to synthesize their ideas. Our long-standing middle managers, people who have grown up in the P&G system (as I did), are starting to recognize that better innovation processes can expand their personal and leadership skills. Theyve all been through cost-cutting and productivity exercises. But thats not the same as creating top-line opportunities that can earn kudos from consumers. Nobody is telling them they have to be the geniuses who invent an idea. They will get credit for turning ideas into replicable processes and learning from their mistakes. In operating cross-functionally, they are also moving away naturally from the old silos. The result of P&Gs focus on innovation has been reliable, sustainable growth. Since the beginning of the decade, P&G sales have more than doubled, from $39 billion to more than $80 billion; the number of billiondollar brands, those that generate $1 billion or more in sales each year, has grown from 10 to 24; the number of brands with sales between $500 million and $1 billion has more than quadrupled, from four to 18. This growth is being led by energized managers innovation leaders who continually learn new ways to grow revenues, improve margins, and avoid commoditization. Our culture of innovation is helping P&G leaders be more effective, and in the process, theyre renewing our company every day. Once people have succeeded at a game-changing innovation, the level of energy in the company elevates. Even people who werent directly involved are affected
through the social networks. It becomes easier for them to expand their idea of what is feasible. Building this sort of capability often has the rhythm of, say, skilled basketball practice: a group of people who gradually learn seamless teamwork, reading one anothers intentions and learning to complement other team members, ultimately creating their own characteristic, effective, and uncopyable style of successful play. +
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Resources
Daniel Goleman, Emotional Intelligence: Why It Can Matter More Than IQ (Bantam Books, 1996): Developing individual maturity for an organizational innovation culture. Larry Huston and Nabil Sakkab, P&Gs New Innovation Model, Harvard Business Review, March 2006: Anatomy of an open approach for attracting ideas and consumer insights from around the world. A.G. Lafley and Ram Charan, The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation (Crown Business, 2008): Guide for giving large, mature companies the sustainable capacity for breakthrough innovation. Roger Martin, The Opposable Mind: How Successful Leaders Win through Integrative Thinking (Harvard Business School Press, 2007): Gaining the ability to overcome the limits of partisan thinking, to enhance innovation or anything else. Steven Wheeler, Walter McFarland, and Art Kleiner, A Blueprint for Strategic Leadership, s+b, Winter 2007, www.strategy-business .com/press/article/07405: Context for chief executives, drawing on A.G. Lafleys example, among others. Procter & Gamble website, www.pg.com: Includes Connect + Develop, a portal for engaging innovation partners, and Everyday Solutions, through which the company connects with consumers. For more thought leadership on this topic, see the s+b website: www.strategy-business.com/innovation.
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BY DAVID ROCK
Neuroscience research is revealing the social nature of the high-performance workplace.
Managing
with the Brain in Mind
Naomi Eisenberger, a leading social neuroscience
Illustration by Leigh Wells
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researcher at the University of California at Los Angeles (UCLA), wanted to understand what goes on in the brain when people feel rejected by others. She designed an experiment in which volunteers played a computer game called Cyberball while having their brains scanned by a functional magnetic resonance imaging (fMRI) machine. Cyberball harks back to the nastiness of the school playground. People thought they were playing a ball-tossing game over the Internet with two other people, Eisenberger explains. They could see an avatar that represented themselves, and avatars [ostensibly] for two other people. Then, about halfway through this game of catch among the three of them, the subjects stopped receiving the ball and the two other supposed players threw the ball only to each other. Even after
they learned that no other human players were involved, the game players spoke of feeling angry, snubbed, or judged, as if the other avatars excluded them because they didnt like something about them. This reaction could be traced directly to the brains responses. When people felt excluded, says Eisenberger, we saw activity in the dorsal portion of the anterior cingulate cortex the neural region involved in the distressing component of pain, or what is sometimes referred to as the suffering component of pain. Those people who felt the most rejected had the highest levels of activity in this region. In other words, the feeling of being excluded provoked the same sort of reaction in the brain that physical pain might cause. (See Exhibit 1.) Eisenbergers fellow researcher Matthew Lieberman, also of UCLA, hypothesizes that human beings evolved
SPECIAL REPORT: THE TALENT OPPORTUNITY
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David Rock davidrock@ workplacecoaching.com is the founding president of the NeuroLeadership Institute (www.neuroleadership.org). He is also the CEO of Results Coaching Systems and the author of Your Brain at Work (HarperBusiness, 2009) and Quiet Leadership: Six Steps to Transforming Performance at Work (Collins, 2006).
Originally published Autumn 2009.
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this link between social connection and physical discomfort within the brain because, to a mammal, being socially connected to caregivers is necessary for survival. This study and many others now emerging have made one thing clear: The human brain is a social organ. Its physiological and neurological reactions are directly and profoundly shaped by social interaction. Indeed, as Lieberman puts it, Most processes operating in the background when your brain is at rest are involved in thinking about other people and yourself. This presents enormous challenges to managers. Although a job is often regarded as a purely economic transaction, in which people exchange their labor for financial compensation, the brain experiences the workplace first and foremost as a social system. Like the experiment participants whose avatars were left out of the game, people who feel betrayed or unrecognized at work for example, when they are reprimanded, given an assignment that seems unworthy, or told to take a pay cut experience it as a neural impulse, as powerful and painful as a blow to the head. Most people who work in companies learn to rationalize or temper their reactions; they suck it up, as the common parlance puts it. But they also limit their commitment and engagement. They become purely transactional employees, reluctant to give more of themselves to the company, because the social context stands in their way. Leaders who understand this dynamic can more effectively engage their employees best talents, support collaborative teams, and create an environment that fosters productive change. Indeed, the ability to intentionally address the social brain in the service of optimal performance will be a distinguishing leadership capability in the years ahead.
Triggering the Threat Response
One critical thread of research on the social brain starts with the threat and reward response, a neurological mechanism that governs a great deal of human behavior. When you encounter something unexpected a shadow seen from the corner of your eye or a new colleague moving into the office next door the limbic system (a relatively primitive part of the brain, common to many animals) is aroused. Neuroscientist Evian Gordon refers to this as the minimize danger, maximize reward response; he calls it the fundamental organizing principle of the brain. Neurons are activated and hormones are released as you seek to learn whether this new entity represents a chance for reward or a potential danger. If the perception is danger, then the response becomes a pure threat response also known as the fight or flight response, the avoid response, and, in its extreme form, the amygdala hijack, named for a part of the limbic system that can be aroused rapidly and in an emotionally overwhelming way. Recently, researchers have documented that the threat response is often triggered in social situations, and it tends to be more intense and longer-lasting than the reward response. Data gathered through measures of brain activity by using fMRI and electroencephalograph (EEG) machines or by gauging hormonal secretions suggests that the same neural responses that drive us toward food or away from predators are triggered by our perception of the way we are treated by other people. These findings are reframing the prevailing view of the role that social drivers play in influencing how humans behave. Matthew Lieberman notes that Abraham Maslows hierarchy of needs theory may have been wrong in this respect. Maslow proposed that
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humans tend to satisfy their needs in sequence, starting with physical survival and moving up the ladder toward self-actualization at the top. In this hierarchy, social needs sit in the middle. But many studies now show that the brain equates social needs with survival; for example, being hungry and being ostracized activate similar neural responses. The threat response is both mentally taxing and deadly to the productivity of a person or of an organization. Because this response uses up oxygen and glucose from the blood, they are diverted from other parts of the brain, including the working memory function, which processes new information and ideas. This impairs analytic thinking, creative insight, and problem
solving; in other words, just when people most need their sophisticated mental capabilities, the brains internal resources are taken away from them. The impact of this neural dynamic is often visible in organizations. For example, when leaders trigger a threat response, employees brains become much less efficient. But when leaders make people feel good about themselves, clearly communicate their expectations, give employees latitude to make decisions, support peoples efforts to build good relationships, and treat the whole organization fairly, it prompts a reward response. Others in the organization become more effective, more open to ideas, and more creative. They notice the kind of information that passes them by when fear or resentment
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Neuroscience has discovered that the brain is highly plastic. Even the most entrenched behaviors can be modified.
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makes it difficult to focus their attention. They are less susceptible to burnout because they are able to manage their stress. They feel intrinsically rewarded. Understanding the threat and reward response can also help leaders who are trying to implement large-scale change. The track record of failed efforts to spark higher-perfomance behavior has led many managers to conclude that human nature is simply intractable: You cant teach an old dog new tricks. Yet neuroscience has also discovered that the human brain is highly plastic. Neural connections can be reformed, new behaviors can be learned, and even the most entrenched behaviors can be modified at any age. The brain will make these shifts only when it is engaged in mindful attention. This is the state of thought associated with observing ones own mental processes (or, in an organization, stepping back to observe the flow of a conversation as it is happening). Mindfulness requires both serenity and concentration; in a threatened state, people are much more likely to be mindless. Their attention is diverted by the threat, and they cannot easily move to self-discovery. In a previous article (The Neuroscience of Leadership, s+b, Summer 2006), brain scientist Jeffrey Schwartz and I proposed that organizations could marshal mindful attention to create organizational change. They could do this over time by putting in place regular routines in which people would watch the patterns of their thoughts and feelings as they worked and thus develop greater self-awareness. We argued that this was the only way to change organizational behavior; that the carrots and sticks of incentives (and behavioral psychology) did not work, and that the counseling and empathy of much organizational development was not efficient enough to make a difference.
Research into the social nature of the brain suggests another piece of this puzzle. Five particular qualities enable employees and executives alike to minimize the threat response and instead enable the reward response. These five social qualities are status, certainty, autonomy, relatedness, and fairness: Because they can be expressed with the acronym SCARF, I sometimes think of them as a kind of headgear that an organization can wear to prevent exposure to dysfunction. To understand how the SCARF model works, lets look at each characteristic in turn.
Status and Its Discontents
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As humans, we are constantly assessing how social encounters either enhance or diminish our status. Research published by Hidehiko Takahashi et al. in 2009 shows that when people realize that they might compare unfavorably to someone else, the threat response kicks in, releasing cortisol and other stress-related hormones. (Cortisol is an accurate biological marker of the threat response; within the brain, feelings of low status provoke the kind of cortisol elevation associated with sleep deprivation and chronic anxiety.) Separately, researcher Michael Marmot, in his book The Status Syndrome: How Social Standing Affects Our Health and Longevity (Times Books, 2004), has shown that high status correlates with human longevity and health, even when factors like income and education are controlled for. In short, we are biologically programmed to care about status because it favors our survival. As anyone who has lived in a modest house in a high-priced neighborhood knows, the feeling of status is always comparative. And an executive with a salary of US$500,000 may feel elevated. . . until he or she is
the skills they have acquired, rather than for their seniority, is a status booster in itself. Values have a strong impact on status. An organization that appears to value money and rank more than a basic sense of respect for all employees will stimulate threat responses among employees who arent at the top of the heap. Similarly, organizations that try to pit people against one another on the theory that it will make them work harder reinforce the idea that there are only winners and losers, which undermines the standing of people below the top 10 percent.
A Craving for Certainty
assigned to work with an executive making $2.5 million. A study by Joan Chiao in 2003 found that the neural circuitry that assesses status is similar to that which processes numbers; the circuitry operates even when the stakes are meaningless, which is why winning a board game or being the first off the mark at a green light feels so satisfying. Competing against ourselves in games like solitaire triggers the same circuitry, which may help explain the phenomenal popularity of video games. Understanding the role of status as a core concern can help leaders avoid organizational practices that stir counterproductive threat responses among employees. For example, performance reviews often provoke a threat response; people being reviewed feel that the exercise itself encroaches on their status. This makes 360-degree reviews, unless extremely participative and well-designed, ineffective at generating positive behavioral change. Another common status threat is the custom of offering feedback, a standard practice for both managers and coaches. The mere phrase Can I give you some advice? puts people on the defensive because they perceive the person offering advice as claiming superiority. It is the cortisol equivalent of hearing footsteps in the dark. Organizations often assume that the only way to raise an employees status is to award a promotion. Yet status can also be enhanced in less-costly ways. For example, the perception of status increases when people are given praise. Experiments conducted by Keise Izuma in 2008 show that a programmed status-related stimulus, in the form of a computer saying good job, lights up the same reward regions of the brain as a financial windfall. The perception of status also increases when people master a new skill; paying employees more for
When an individual encounters a familiar situation, his or her brain conserves its own energy by shifting into a kind of automatic pilot: it relies on long-established neural connections in the basal ganglia and motor cortex that have, in effect, hardwired this situation and the individuals response to it. This makes it easy to do what the person has done in the past, and it frees that person to do two things at once; for example, to talk while driving. But the minute the brain registers ambiguity or confusion if, for example, the car ahead of the driver slams on its brakes the brain flashes an error signal. With the threat response aroused and working memory diminished, the driver must stop talking and shift full attention to the road. Uncertainty registers (in a part of the brain called the anterior cingulate cortex) as an error, gap, or tension: something that must be corrected before one can feel comfortable again. That is why people crave certainty. Not knowing what will happen next can be profoundly debilitating because it requires extra neural energy. This diminishes memory, undermines performance, and disengages people from the present. Of course, uncertainty is not necessarily debilitating. Mild uncertainty attracts interest and attention: New and challenging situations create a mild threat response, increasing levels of adrenalin and dopamine just enough to spark curiosity and energize people to solve problems. Moreover, different people respond to uncertainty in the world around them in different ways, depending in part on their existing patterns of thought. For example, when that car ahead stops suddenly, the driver who thinks, What should I do? is likely to be ineffective, whereas the driver who frames the incident as manageable I need to swerve left now because theres a car on the right is well equipped to respond. All of life is uncertain; it is the perception of
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too much uncertainty that undercuts focus and performance. When perceived uncertainty gets out of hand, people panic and make bad decisions. Leaders and managers must thus work to create a perception of certainty to build confident and dedicated teams. Sharing business plans, rationales for change, and accurate maps of an organizations structure promotes this perception. Giving specifics about organizational restructuring helps people feel more confident about a plan, and articulating how decisions are made increases trust. Transparent practices are the foundation on which the perception of certainty rests. Breaking complex projects down into small steps can also help create the feeling of certainty. Although its highly unlikely everything will go as planned, people function better because the project now seems less ambiguous. Like the driver on the road who has enough information to calculate his or her response, an employee focused on a single, manageable aspect of a task is unlikely to be overwhelmed by threat responses.
The Autonomy Factor
given more control over decision making lived longer and healthier lives than residents in a control group who had everything selected for them. The choices themselves were insignificant; it was the perception of autonomy that mattered. Another study, this time of the franchise industry, identified worklife balance as the number one reason that people left corporations and moved into a franchise. Yet other data showed that franchise owners actually worked far longer hours (often for less money) than they had in corporate life. They nevertheless perceived themselves to have a better worklife balance because they had greater scope to make their own choices. Leaders who know how to satisfy the need for autonomy among their people can reap substantial benefits without losing their best people to the entrepreneurial ranks.
Relating to Relatedness
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Studies by Steven Maier at the University of Boulder show that the degree of control available to an animal confronted by stressful situations determines whether or not that stressor undermines the ability to function. Similarly, in an organization, as long as people feel they can execute their own decisions without much oversight, stress remains under control. Because human brains evolved in response to stressors over thousands of years, they are constantly attuned, usually at a subconscious level, to the ways in which social encounters threaten or support the capacity for choice. A perception of reduced autonomy for example, because of being micromanaged can easily generate a threat response. When an employee experiences a lack of control, or agency, his or her perception of uncertainty is also aroused, further raising stress levels. By contrast, the perception of greater autonomy increases the feeling of certainty and reduces stress. Leaders who want to support their peoples need for autonomy must give them latitude to make choices, especially when they are part of a team or working with a supervisor. Presenting people with options, or allowing them to organize their own work and set their own hours, provokes a much less stressed response than forcing them to follow rigid instructions and schedules. In 1977, a well-known study of nursing homes by Judith Rodin and Ellen Langer found that residents who were
Fruitful collaboration depends on healthy relationships, which require trust and empathy. But in the brain, the ability to feel trust and empathy about others is shaped by whether they are perceived to be part of the same social group. This pattern is visible in many domains: in sports (I hate the other team), in organizational silos (the suits are the problem), and in communities (those people on the other side of town always mess things up). Each time a person meets someone new, the brain automatically makes quick friend-or-foe distinctions and then experiences the friends and foes in ways that are colored by those distinctions. When the new person is perceived as different, the information travels along neural pathways that are associated with uncomfortable feelings (different from the neural pathways triggered by people who are perceived as similar to oneself ). Leaders who understand this phenomenon will find many ways to apply it in business. For example, teams of diverse people cannot be thrown together. They must be deliberately put together in a way that minimizes the potential for threat responses. Trust cannot be assumed or mandated, nor can empathy or even goodwill be compelled. These qualities develop only when peoples brains start to recognize former strangers as friends. This requires time and repeated social interaction. Once people make a stronger social connection, their brains begin to secrete a hormone called oxytocin in one anothers presence. This chemical, which has been linked with affection, maternal behavior, sexual arousal, and generosity, disarms the threat response and
We now have reason to believe that economic incentives are effective only when people perceive them as supporting their social needs.
further activates the neural networks that permit us to perceive someone as just like us. Research by Michael Kosfeld et al. in 2005 shows that a shot of oxytocin delivered by means of a nasal spray decreases threat arousal. But so may a handshake and a shared glance over something funny. Conversely, the human threat response is aroused when people feel cut off from social interaction. Loneliness and isolation are profoundly stressful. John T. Cacioppo and William Patrick showed in 2008 that loneliness is itself a threat response to lack of social contact, activating the same neurochemicals that flood the system when one is subjected to physical pain. Leaders who strive for inclusion and minimize situations in which people feel rejected create an environment that supports maximum performance. This of course raises a challenge for organizations: How can they foster relatedness among people who are competing with one another or who may be laid off?
Playing for Fairness
The perception that an event has been unfair generates a strong response in the limbic system, stirring hostility and undermining trust. As with status, people perceive fairness in relative terms, feeling more satisfied with a fair exchange that offers a minimal reward than an unfair exchange in which the reward is substantial. Studies conducted by Matthew Lieberman and Golnaz Tabibnia found that people respond more positively to being given 50 cents from a dollar split between them and another person than to receiving $8 out of a total of $25. Another study found that the experience of fairness produces reward responses in the brain similar to those that occur from eating chocolate.
The cognitive need for fairness is so strong that some people are willing to fight and die for causes they believe are just or commit themselves wholeheartedly to an organization they recognize as fair. An executive told me he had stayed with his company for 22 years simply because they always did the right thing. People often engage in volunteer work for similar reasons: They perceive their actions as increasing the fairness quotient in the world. In organizations, the perception of unfairness creates an environment in which trust and collaboration cannot flourish. Leaders who play favorites or who appear to reserve privileges for people who are like them arouse a threat response in employees who are outside their circle. The old boys network provides an egregious example; those who are not a part of it always perceive their organizations as fundamentally unfair, no matter how many mentoring programs are put in place. Like certainty, fairness is served by transparency. Leaders who share information in a timely manner can keep people engaged and motivated, even during staff reductions. Morale remains relatively high when people perceive that cutbacks are being handled fairly that no one group is treated with preference and that there is a rationale for every cut.
Putting on the SCARF
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If you are a leader, every action you take and every decision you make either supports or undermines the perceived levels of status, certainty, autonomy, relatedness, and fairness in your enterprise. In fact, this is why leading is so difficult. Your every word and glance is freighted with social meaning. Your sentences and gestures are noticed and interpreted, magnified and
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combed for meanings you may never have intended. The SCARF model provides a means of bringing conscious awareness to all these potentially fraught interactions. It helps alert you to peoples core concerns (which they may not even understand themselves) and shows you how to calibrate your words and actions to better effect. Start by reducing the threats inherent in your company and in its leaders behavior. Just as the animal brain is wired to respond to a predator before it can focus attention on the hunt for food, so is the social brain wired to respond to dangers that threaten its core concerns before it can perform other functions. Threat always trumps reward because the threat response is strong, immediate, and hard to ignore. Once aroused, it is hard to displace, which is why an unpleasant encounter in traffic on the morning drive to work can distract attention and impair performance all day. Humans cannot think creatively, work well with others, or make informed decisions when their threat responses are on high alert. Skilled leaders understand this and act accordingly. A business reorganization provides a good example. Reorganizations generate massive amounts of uncertainty, which can paralyze peoples ability to perform. A leader attuned to SCARF principles therefore makes reducing the threat of uncertainty the first order of business. For example, a leader might kick off the process by sharing as much information as possible about the reasons for the reorganization, painting a picture of the future company and explaining what the specific implications will be for the people who work there. Much will be unknown, but being clear about what is known and willing to acknowledge what is not goes a long way toward ameliorating uncertainty threats. Reorganizations also stir up threats to autonomy, because people feel they lack control over their future. An astute leader will address these threats by giving people latitude to make as many of their own decisions as possible for example, when the budget must be cut, involving the people closest to the work in deciding what must go. Because many reorganizations entail information technology upgrades that undermine peo-
ples perception of autonomy by foisting new systems on them without their consent, it is essential to provide continuous support and solicit employees participation in the design of new systems. Top-down strategic planning is often inimical to SCARF -related reactions. Having a few key leaders come up with a plan and then expecting people to buy into it is a recipe for failure, because it does not take the threat response into account. People rarely support initiatives they had no part in designing; doing so would undermine both autonomy and status. Proactively addressing these concerns by adopting an inclusive planning process can prevent the kind of unconscious sabotage that results when people feel they have played no part in a change that affects them every day. Leaders often underestimate the importance of addressing threats to fairness. This is especially true when it comes to compensation. Although most people are not motivated primarily by money, they are profoundly de-motivated when they believe they are being unfairly paid or that others are overpaid by comparison. Leaders who recognize fairness as a core concern understand that disproportionately increasing compensation at the top makes it impossible to fully engage people at the middle or lower end of the pay scale. Declaring that a highly paid executive is doing a great job is counterproductive in this situation because those who are paid less will interpret it to mean that they are perceived to be poor performers. For years, economists have argued that people will change their behavior if they have sufficient incentives. But these economists have defined incentives almost exclusively in economic terms. We now have reason to believe that economic incentives are effective only when people perceive them as supporting their social needs. Status can also be enhanced by giving an employee greater scope to plan his or her schedule or the chance to develop meaningful relationships with those at different levels in the organization. The SCARF model thus provides leaders with more nuanced and cost-effective ways to expand the definition of reward. In doing so, SCARF principles also provide a more granular understanding of the state of engagement, in which employees give their best performance. Engagement can be induced when people working toward objectives feel rewarded by their efforts, with a manageable level of threat: in short, when the brain is generating rewards in several SCARF-related dimensions. Leaders themselves are not immune to the SCARF
management
dynamic; like everyone else, they react when they feel their status, certainty, autonomy, relatedness, and fair treatment are threatened. However, their reactions have more impact, because they are picked up and amplified by others throughout the company. (If a companys executive salaries are excessive, it may be because others are following the leaders intuitive emphasis, driven by subconscious cognition, on anything that adds status.) If you are an executive leader, the more practiced you are at reading yourself, the more effective you will be. For example, if you understand that micromanaging threatens status and autonomy, you will resist your own impulse to gain certainty by dictating every detail. Instead, youll seek to disarm people by giving them latitude to make their own mistakes. If you have felt the hairs on the back of your own neck rise when someone says, Can I offer you some feedback? you will know its best to create opportunities for people to do the hard work of self-assessment rather than insisting they depend on performance reviews. When a leader is self-aware, it gives others a feeling of safety even in uncertain environments. It makes it easier for employees to focus on their work, which leads to improved performance. The same principle is evident in other groups of mammals, where a skilled pack leader keeps members at peace so they can perform their functions. A self-aware leader modulates his or her behavior to alleviate organizational stress and creates an environment in which motivation and creativity flourish. One great advantage of neuroscience is that it provides hard data to vouch for the efficacy and value of so-called soft skills. It also shows the danger of being a hard-charging leader whose best efforts to move people along also set up a threat response that puts others on guard. Similarly, many leaders try to repress their emotions in order to enhance their leadership presence, but this only confuses people and undermines morale. Experiments by Kevin Ochsner and James Gross show that when someone tries not to let other people see what he or she is feeling, the other party tends to experience a threat response. Thats why being spontaneous is key to creating an authentic leadership presence. This approach is likely to minimize status threats, increase certainty, and create a sense of relatedness and fairness. Finally, the SCARF model helps explain why intelligence, in itself, isnt sufficient for a good leader. Matthew Liebermans research suggests that high intelligence often corresponds with low self-awareness. The neural networks involved in information holding, planning,
and cognitive problem solving reside in the lateral, or outer, portions of the brain, whereas the middle regions support self-awareness, social skills, and empathy. These regions are inversely correlated. As Lieberman notes, If you spend a lot of time in cognitive tasks, your ability to have empathy for people is reduced simply because that part of your circuitry doesnt get much use. Perhaps the greatest challenge facing leaders of business or government is to create the kind of atmosphere that promotes status, certainty, autonomy, relatedness, and fairness. When historians look back, their judgment of this period in time may rise or fall on how organizations, and society as a whole, operated. Did they treat people fairly, draw people together to solve problems, promote entrepreneurship and autonomy, foster certainty wherever possible, and find ways to raise the perceived status of everyone? If so, the brains of the future will salute them. +
Reprint No. 09306
management
Resources
John T. Cacioppo and William Patrick, Loneliness: Human Nature and the Need for Social Connection (W.W. Norton, 2008): A scientific look at the causes and effects of emotional isolation. Naomi Eisenberger and Matthew Lieberman, The Pains and Pleasures of Social Life, Science, vol. 323, no. 5916, February 2009, 890891: Explication of social pain and social pleasure, and the impact of fairness, status, and autonomy on brain response. Naomi Eisenberger and Matthew Lieberman, with K.D. Williams, Does Rejection Hurt? An fMRI Study of Social Exclusion, Science, vol. 302, no. 5643, October 2003, 290292: Covers the Cyberball experiment. Michael Marmot, The Status Syndrome: How Social Standing Affects Our Health and Longevity (Times Books, 2004): An epidemiologist shows that people live longer when they have status, autonomy, and relatedness, even if they lack money. David Rock, SCARF: A Brain-based Model for Collaborating with and Influencing Others, NeuroLeadership Journal, vol. 1, no. 1, December 2008, 44: Overview of research on the five factors described in this article, and contains bibliographic references for research quoted in this article. David Rock, Your Brain at Work: Strategies for Overcoming Distraction, Regaining Focus, and Working Smarter All Day Long (HarperBusiness, 2009): Neuroscience explanations for workplace challenges and dilemmas, and strategies for managing them. David Rock and Jeffrey Schwartz, The Neuroscience of Leadership, s+b, Summer 2006, www.strategy-business.com/press/article/06207: Applying breakthroughs in brain research, this article explains the value of neuroplasticity in organizational change. NeuroLeadership Institute website, www.neuroleadership.org: Institute bringing together research scientists and management experts to explore the transformation of organizational development and performance. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/strategy_and_leadership.
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BY THEODORE KINNI
ESSENTIAL READING
HIGHLIGHTS FROM
15Years
OF S + B BOOK REVIEWS
A select shelf of books that not only expanded the corporate lexicon, but still have the power to change the way we see the world and do business.
In its premier issue in 1995, strategy+business
Illustration by Craig Frazier
best business books 19952010

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reviewed five books. One of them was the fifth anniversary edition of Peter M. Senges The Fifth Discipline: The Art and Practice of the Learning Organization (Doubleday Currency, 1990), which introduced the concept of the learning organization to a broader audience. This book remains as relevant today as it was when it was first published. Thats no mean feat, given the changes that have occurred in the past 20 years. Some of the most far-reaching of these changes have occurred in publishing, which has become digital and migrated online. This has created a sea change in the ways that ideas are communicated, the likes of which hasnt been seen since Johannes Gutenberg invented the printing press 550 years ago. Some observers are concerned that this change is
fundamentally altering not only how we write and read, but how we think and not altering it for the better. In his new book, a polemic titled The Shallows: What the Internet Is Doing to Our Brains (W.W. Norton, 2010), Nicholas Carr describes how the skimming and skipping that characterize online information gathering actually reroute the neural pathways in our brains. Carr warns that this could cause us to lose the capacity for the kind of mind-focusing deep reading that books engender, and the reflection and creativity that result from it. Whatever the prevailing trend in reading may turn out to be, it is clear from 15 years of book coverage in s+b, written by a host of distinguished reviewers, that there is much to be thoughtful about. Executives who go back to the best books that s+b has covered over the years would gain a valuable source of information and

99
Theodore Kinni tedkinni@cox.net is senior editor for books at strategy+business. He has written or collaborated on 13 business books.
insight. These are the rare books that have expanded the corporate lexicon and changed the way we do business.
Seminal Ideas
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Peter M. Senges The Fifth Discipline is surely one of the most influential management works of the past two decades. Senge, who founded the Center for Organizational Learning at MITs Sloan School of Management, pegged the problems that companies commonly encounter to the inability to adapt to changing circumstances in his words, to learning disabilities. He asserted (borrowing a theme from Arie de Geus) that organizations that are capable of learning possess a valuable competitive advantage, and went on, in the core chapters of the book, to lay out the now-familiar five components necessary to create such organizations: systems thinking, personal mastery, mental models, shared visions, and team learning. Paul Idzik, then a Booz & Company partner, reviewed The Fifth Discipline on the occasion of the books fifth anniversary. Senior executives are devoting more of their time these days to fostering a culture of learning within their organizations, wrote Idzik. They realize that many of the recurring problems they deal with would be more quickly and productively resolved if they managed and belonged to a learning organization. That is still true; the organizational learning disabilities that Senge noticed (such as a fixation on short-term events that obscures the big picture) are still very much with us, and the learning disciplines still provide a remedy when practiced. The list of seminal books that s+b reviewed must also include The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits (Wharton School
Publishing, 2005), a paean to the uplifting effect of capitalism on the human condition, by the late University of Michigan professor C.K. Prahalad. (See page 32 for his article on the same theme.) This book is so compelling that it was featured as one of the years best business books in 2005 in two categories, strategy and globalization. Prahalad tallied up the 4 billion people who lived on incomes of less than US$1,400 per year, and posited the original idea that they make up a largely untapped market valued at trillions of dollars in aggregate. In their essay on the best business books on strategy, former Booz & Company Partners Chuck Lucier and Jan Dyer picked the book as essential reading for four reasons: the emerging market business models it described; the crucial new source of corporate growth it identified; the competitive threat that companies serving the bottom of the pyramid represented; and the likelihood that the low-cost, high-volume models would eventually migrate to developed markets. The Fortune at the Bottom of the Pyramid, they wrote, provided a rare glimpse into the future for those with eyes to see of the extraordinary opportunities waiting in uncharted and seemingly impassable waters. A third seminal book covered in s+b s pages is one whose relevance grows along with the ecological impact of our industrial society. In Cradle to Cradle: Remaking the Way We Make Things (North Point Press, 2002), William McDonough and Michael Braungart, an architect and chemist, respectively, identified the conventional take, make, and waste product cycle as a major contributor to our environmental problems. They proposed that human industry be redesigned to echo nature, in which every major nutrient is endlessly recycled.
If books were to morph into shallow, short-form online works, we would miss those titles that take deep dives into the new trends that are shaping and reshaping our world.
Consider this thought experiment, which appears in [the book]: What would it take to run your company the way the Menominee tribe of Michigan runs their forest? wrote Joe Flower, a regular s+b contributor, who reviewed Cradle to Cradle in his Knowledge Review essay on sustainability in the Spring 2009 issue. In 1870, the Menominee counted 1.3 billion board feet of standing timber on their 235,000 acres of land. Over the last 138 years, they have harvested 2.3 billion board feet, and now they have 1.7 billion board feet. Neat trick. Maybe youre not in a resource-extraction industry; maybe your capital doesnt grow on trees. But isnt there an equivalent potential achievement in your sector?
A Global Trend
If books were to morph into shallow, short-form online works, we would miss those titles that take deep dives into the new trends that are shaping and reshaping our world. One of the most far-reaching and implicationladen of these trends has been globalization, and during s+bs publishing tenure, a librarys worth of books on the topic have appeared. Among the most influential and widely read of them was Thomas L. Friedmans The World Is Flat: A Brief History of the Twenty-First Century (Farrar, Straus and Giroux, 2005), which Howard Rheingold, a leading observer of the social changes stimulated by technology, chose as the best business book of 2005 in the future category. Friedman, the foreign affairs columnist for the New York Times, argued that globalization entered a new phase around the turn of the millennium. Whereas Globalization 1.0 was fueled by the drive for empire by nation-states beginning in 1492 and Globalization 2.0 was driven by the international expansion of enterprises
starting around 1800, Globalization 3.0 was driven by the newfound power of individuals to collaborate and compete globally. This power derived from 10 flatteners, according to Friedman, which were all directly related to digital technologies and networks. Friedmans flat world explained many of the challenges that companies were facing in a global economy, but business readers had to wait for the publication of Pankaj Ghemawats Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Harvard Business School Press, 2007) for a measured, strategic response. In it, the author, a professor of global strategy at IESE business school in Barcelona, takes issue with Friedmans boundaryless flat world. Ghemawat points out that there are still plenty of speed bumps for companies that rush into the global fray with a oneworld strategy that doesnt account for the myriad differences between nations. The core of the book is devoted to Ghemawats CAGE framework, a means of understanding the cultural, administrative, geographic, and economic dimensions of nations and making sure they are reflected in companies business strategies. With its combination of solid data, illuminating case studies, and helpful concepts, this book is an effective antidote to both millennial and apocalyptic visions of globalization, wrote s+b s longtime Books in Brief reviewer David Hurst in the Spring 2008 issue.
Managerial Art and Craft
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Although many management books might benefit from a shorter format, we wouldnt want to lose a word of the best of them. The books of Henry Mintzberg, McGill Universitys iconoclastic professor of management stud-
102
ies, are terrific examples of the latter category and the career-expanding insights such works can stimulate, especially the concisely titled Managing (BerrettKoehler, 2009). Mintzberg has always been more interested in the realities of managing than its theories. In his first book, The Nature of Managerial Work (Harper and Row, 1973), he shadowed five CEOs to see how their daily work jibed with the various theories of management in vogue at the time. In writing Managing some 30 years later, he bookended his body of work with a similar project this time following 29 managers. This exercise confirmed Mintzbergs conviction that managers are facilitators, who leverage the natural propensity of people to cooperate in communities. Management books often make me feel like I should head back to boot camp. But reading Managing, . . . I found my own managerial insecurities melting away, wrote Judith Samuelson, the executive director of the Aspen Institute Business and Society Program, who featured the book in her best business books essay in Winter 2009. Mintzberg reminds us that most managers are prey to events and demands they do not control, and that a wide range of styles can work well for a boss. Balance is the key: keeping up with the hectic pace of business yet making time for reflection; driving change yet maintaining stability; leading and collaborating; leavening analysis with judgment. Larry Bossidy, former chairman of Honeywell International, and Ram Charan, a prolific consultant, are also great proponents of the realist school. In their book Execution: The Discipline of Getting Things Done (Crown Business, 2002), they assert that CEOs have three primary responsibilities: analyzing the business environment and their companies, closing the gap between desired outcomes and actual performance, and, especially, ensuring execution. In choosing Execution as a 2002 best business book of the year in the leadership category, Bruce A. Pasternack, then a senior partner at Booz & Company, and James OToole, a professor at the University of Denvers Daniels College of Business, noted the books emphasis on practical advice on everything from strategy making to plant inspections. We ended up making pages of useful notes, they wrote, and in discussions about the book with clients and colleagues, we noted they are doing the same. MIT management professor emeritus Edgar Schein has written a perfect companion volume to the two pre-
vious books. In Helping: How to Offer, Give, and Receive Help (Berrett-Koehler, 2009), Schein deconstructed the act of helping, and in doing so created a valuable guide to a task that many managers face, but few truly understand and effectively execute. We often ignore [Scheins] principles amid the daily course of life, taking for granted relationships and exchanges that may not be what they seem. We get lazy, wrote Charles Handy, a noted management observer, in his review of the best business books on leadership in the Winter 2009 issue. I found this little book a salutary reminder of too many lapses on my part, while it also explained why some of my well-intentioned attempts to help only led to worsening relationships. Any aspiring leader would do well to review his or her own behavior in the light of this very useful guide.
Best Cases
Two closely related business book genres that require long-form writing are corporate histories and the biographies and memoirs of leaders. Books of this sort can be sanitized to the point that they become cures for insomnia, but when driven by a spirit of open and honest inquiry, they have the power to compel and inspire. David Packards memoir, The HP Way: How Bill Hewlett and I Built Our Company (HarperBusiness, 1995), traces how the now-famous business partners founded an electronic instrument business in a garage in Palo Alto, Calif., with $538 in capital; their startup grew into a $100 billion global corporation. Published just a year before Packards death, the book illuminates a leaders role in creating and transmitting a performance culture. The Hewlett-Packard culture was a direct reflection of the pragmatic philosophies of the companys founders. The cofounders believed in participative goal setting, decentralized authority, and a humane form of accountability that moved employees up until they reached their limits and then moved them around until they found their niches. Neither Hewlett nor Packard had any vision: They just wanted to make a profit making innovative and high-quality machines that addressed their customers needs. And so they did. Balancing the goals of the company with the realities of the marketplace and the needs of both stockholders and employees is what HP has achieved. It has done this while also producing a series of innovative products, which contributed mightily to business and the country, wrote Robert Cranny in s+b s
second issue. The HP Way should be kept in a corner of every office and den. Its good just to know its there. Louis V. Gerstner Jr. is another leader who famously eschewed the vision thing for pragmatic management and saved IBM in the process. In Who Says Elephants Cant Dance? Inside IBMs Historic Turnaround (HarperBusiness, 2002), Gerstner explains in detail how to restructure a massive organization radically changing its business model, cutting costs, and reengineering its processes and remake its culture without flying it into an unrecoverable tailspin. There are a few good leaders, and a few good new leadership books, wrote Pasternack and OToole on naming Who Says Elephants Cant Dance? one of 2003s best business books in the leadership category. Louis V. Gerstner Jr. gets the nod on both counts. And finally, there is Alice Schroeders monumental biography of Warren Buffett, The Snowball: Warren Buffett and the Business of Life (Bantam, 2008), which successfully undertook the delicate task of ferreting out what makes the Oracle of Omaha tick, with his permission. Schroeders portrait is especially compelling because she never sidesteps the real Buffett for easy answers. Instead, wrote OToole, who selected the book as one of 2009s best business books in biography, Schroeder offers us a nuanced portrait of a surprisingly complex and insecure man whose life is full of paradoxes and contradictions. Its good to know that even the most successful businessperson of our time is more man than mogul.
Disruptive Technologies
For greater insight into how technology will change publishing in the years to come, Clayton Christensens The Innovators Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997) is a good place to turn. The book, which David Hurst reviewed in the spring of 2001, introduced Christensens seminal theory of disruptive technologies and described their cyclical effect on industries. Christensen, a professor at Harvard Business School, says that successful companies in a given industry are almost always focused on improving their products and the technologies that underlie them. This creates innovation races in which the industrys offerings outpace the needs and desires of customers. New competitors inevitably arise, deploying disruptive technologies to serve customers in more effective ways, but the incumbent industry leaders ignore them as inconse-
quential. Eventually, the new competitors eclipse the industry leaders, and the cycle starts again. How does this relate to publishing? Well, one hint comes from Amazon, which announced that its e-book sales had overtaken hardcover sales as I wrote this article. Disruptive technologies bring us full circle to Nicholas Carr. Before the publication of his current volume, Carr generated controversy with Does IT Matter? Information Technology and the Corrosion of Competitive Advantage (Harvard Business School Press, 2004). In it Carr suggested that IT was well on its way to becoming a commodity technology. The idea that IT had become merely an ante in the game of business, rather than a winning hand, understandably outraged many denizens within this sector. They were, after all, still reeling from the tech-led recession in 2001 and 2002 when the book arrived. When Steve Lohr, a technology reporter for the New York Times, looked at the book in his Knowledge Review in the Summer 2004 issue, he found flaws, saying that Carrs desire to fit everything neatly into his thesis leads him astray and his thesis is often the same kind of straitjacket of standardization that packaged software, as he says, is for companies. But Lohr found Carrs indictment of faith-based investment in technology spot on. The value is not in the bits and bytes, concluded Lohr, but up a few levels in the minds of the skilled businesspeople using the tools. Large chunks of the technology may be commoditizing, but how you use it isnt. That is where competitive advantage resides. The same can be said for books. Books probably wont disappear anytime soon, but their real value is not in their pages. It is in the minds of managers and how they put what they read to use. The best insights being codified in the best business books and then deployed thoughtfully is the way that management knowledge develops these days and books are therefore one of the great vehicles of progress in our world. +
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BY ART KLEINER
Articles of Significance
Of strategy+businesss many classic articles over the years, here are a few of the editors favorites. How to Manage Creative People: The Case of Industrial Light and Magic Lawrence Fisher, Second Quarter 1997, www.strategy-business .com/article/15151: The special effects shop that George Lucas founded builds its success on good relationships. Are There Limits to Total Quality Management? Arthur M. Schneiderman, Second Quarter 1998, www.strategybusiness.com/article/16188: Yes, as you go up the hierarchy, problems grow too complex for continuous improvement. The Last Mile to Nowhere: Flaws and Fallacies in Internet Home-Delivery Schemes Tim Laseter, Pat Houston, Martha Turner, et al., Third Quarter 2000, www.strategy-business.com/article/19594: The failure of Webvan shows the trade-off between delivery speed and variety. Money Isnt Everything: Innovations Big Spenders Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, Winter 2005, www.strategy-business.com/article/05406: First of our ongoing studies of global corporate R&D spending and its complex link to performance. Love Your Dogs Harry Quarls, Thomas Pernsteiner, and Kasturi Rangan, Spring 2006, www.strategy-business.com/article/06107: The conventional wisdom about portfolio management is wrong; foster poor performers to gain value. City Planet Stewart Brand, Spring 2006, www.strategy-business.com/ article/06109: Suddenly, half the worlds human population is urban. Get ready for cosmopolitan, thriving new cities. The Future of Advertising Is Now Christopher Vollmer, John Frelinghuysen, and Randall Rothenberg, Summer 2006, www.strategy-business.com/ article/06204: After years of overhype, the digital revolution finally came and marketers learned to adapt. The Neuroscience of Leadership David Rock and Jeffrey Schwartz, Summer 2006, www.strategybusiness.com/article/06207: Change is pain, behaviorism doesnt work, focus is power, and attention changes the brain. The Flatbread Factor Alonso Martinez and Ronald Haddock, Spring 2007, www .strategy-business.com/article/07106: Emerging markets, from China to Brazil, have strikingly similar life cycles. Lights! Water! Motion! Viren Doshi, Gary Schulman, and Daniel Gabaldon, Spring 2007, www.strategy-business.com/article/07104: The worlds energy, water, and transportation infrastructure needs a US$40 trillion makeover. The Empty Boardroom Thomas Neff and Julie Hembrock Daum, Summer 2007, www.strategy-business.com/article/07206: Corporate board recruits with CEO experience are in short supply and thats good news. Oasis Economies Joe Saddi, Karim Sabbagh, and Richard Shediac, Spring 2008, www.strategy-business.com/article/08105: Open, diversified economics is a new force for stability in the Middle East. The Next Industrial Imperative Peter Senge, Bryan Smith, and Nina Kruschwitz, Summer 2008, www.strategy-business.com/article/08205: The industrial era is bursting like a bubble; climate change is just the advance signal. The Library Rebooted Scott Corwin, Elisabeth Hartley, and Harry Hawkes, Spring 2009, www.strategy-business.com/article/09108: These critically important institutions are redesigning their business models for the digital age. The Best Years of the Auto Industry Are Still to Come Ronald Haddock and John Jullens, Summer 2009, www .strategy-business.com/article/09204: Millions of new automobiles will be sold in emerging markets. Too Good to Fail Ann Graham, Spring 2010, www.strategy-business.com/ article/10106: Indias Tata, a giant and diverse conglomerate, bases its global strategy on social entrepreneurship. Why We Hate the Oil Companies John Hofmeister, Summer 2010, www.strategy-business.com/ article/10207: How corporate leaders create their reputations for arrogance, by a former CEO of Shell Oil.

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LAFLEY DAVID ROCK

Special Issue, Autumn 2010 US $12.95 Canada C$12.95

CELEBRATING15 YEARS OF THE BESTBUSINESSTHINKING

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STRATEGY & COMPETITION

10X Value: The Engine Powering Long-term Shareholder Returns

Rethinking Strategy in a Networked World

28 Six Reasons There Is a New Economy

The Fortune at the Bottom of the Pyramid

The Four Bases of Organizational DNA

P&Gs Innovation Culture

Leadership Is a Contact Sport: The Follow-up Factor in Management Development

Managing with the Brain in Mind

BEST BUSINESS BOOKS 19952010

Essential Reading: Highlights from 15 Years of s+b Book Reviews

72 The Roots of Myopia

Special Issue, Autumn 2010

Senior Editor Jeffrey Rothfeder rothfeder_jeffrey@ strategy-business.com

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HUNTERS GATHERERS CORPORATE LIFE

WHY CEOS SUCCEED (AND WHY THEY FAIL)

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Originally published Fourth Quarter 1996.

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Problems with going small: a chief without a tribe.

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BY CHARLES E. LUCIER, LESLIE MOELLER, AND RAYMOND HELD

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strategy & competition

strategy & competition

Originally published Third Quarter 1997.

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strategy & competition

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strategy & competition

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strategy & competition

Originally published Third Quarter 2001.

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strategy & competition

Six Reasons There Is a New Economy

here is nothing fundamentally new about the way capitalism

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