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 comment
editor’s letter
editor’s letter
Sharp-Edged Professionals 1

Many business leaders resist the idea contributing editor Sally Helgesen’s with six executives, shows how one
that management, like medicine, profile, “Frances Hesselbein’s Merit Mexico-based company did exactly
law, or education, is a profession. Badge in Leadership” (page 72), we that, becoming a world leader in
They regard professionals as insular see how this supremely influential its field through the capabilities it
academics, and businesspeople as networker and writer has helped developed. Other articles describe
freewheeling entrepreneurs who do hundreds of not-for-profit organiza- how to raise your professional busi-
whatever it takes to attract and hold tions (starting with the Girl Scouts, ness acumen in innovation decision
customers. Nonetheless, manage- where she was CEO) realize their making (page 12), technology mega-
ment expertise doesn’t come easily. potential. deal success (page 22), and organiza-
As an executive, you may be natu- Another consummate business tion design (page 28). This edition’s
rally sharp-edged, pragmatic, and professional is Aetna CEO Mark “Young Prof,” Kristin Behfar of the
down to earth. But like any pro you Bertolini. In our Thought Leader Darden School at the University of
have to learn your counterintuitive interview (page 82), by Jon R. Katz- Virginia, points out the subtle cues
skills through years of apprentice- enbach, Gretchen Anderson, and in arguments that can make it easier
ship and practice. me, Bertolini reveals the think- to overcome dissent and return to
For evidence that management ing behind his headline-making your professional cool (page 9).
is a profession, see the cover story on recent decision to raise the wages With this issue, strategy+business
succession planning, by Ken Favaro, of Aetna’s lowest-paid employ- welcomes senior editor Jan Alexan-
Per-Ola Karlsson, and Gary L. Neil- ees. (Other companies, including der, and begins its second year as
son (“The $112 Billion CEO Suc- Walmart and McDonald’s, have part of PwC’s network of firms, a
cession Problem,” page 42). Compa- since followed suit.) He frames it community of more than 195,000
nies that pay attention to developing as a strategic shift in the company’s people. So if you’ll excuse me, I
their top executive talent achieve culture, which will help Aetna make have to go sharpen my management
better financial performance, on the transition from pure-play insur- skills. In an enterprise this large, you
average, than other companies, and ance provider to visionary catalyst in never know when you’ll have to aug-
they avoid the messy, expensive fire the healthcare system. ment your freewheeling entrepre-
Illustration by Lars Leetaru

drill of a sudden, forced chief execu- On page 34, Strategy&’s John neurship with some truly polished
tive departure. Jullens explains how emerging econ- professional acumen.
Frances Hesselbein, the ageless omies must cultivate their business
leader of the eponymous institute professionals to gain entry into the Art Kleiner
she cofounded with Peter Drucker, global economy. And on page 58, Editor-in-Chief
also clearly understands the value a profile of the global cement com- kleiner_art@
of management professionalism. In pany CEMEX, based on interviews strategy-business.com
 leading ideas 18
6 The Right Track for Connected Cars
Evan Hirsh, Marian H. Mueller, and Kumar Krishnamurthy
Five ways automakers can design for safety and profitability.

9 Kristin Behfar on How We Fight at Work,

and Why It Matters
Laura W. Geller
The Darden School of Business professor describes a new
framework for predicting conflict outcomes.

12 Boost Your Innovation Confidence

Catherine Palmieri
Know your customers, understand new technologies,
embrace failure, then take a leap of faith.

14 Brands and Retailers Should Team Up in

Emerging Markets
Nikhil Bhandare, Pali Tripathi, and Aparajita Kapoor
When companies “share the shelf,” everyone wins.

58
18 Agility Is Within Reach
Kayvan Shahabi, Antonia Cusumano, and Sid Sohonie
With strategic responsiveness and organizational flexibility,
you can move quickly when your industry changes.

20 s+b Trend Watch

R&D Investment Pays Off in Oil and Gas

essays
TECHNOLOGY
22 Let’s Megadeal
Rob Fisher, Gregg Nahass, and J. Neely
Seven strategies for managing the unique challenges of
large technology acquisitions.

ORGANIZATIONS & PEOPLE

28 10 Principles of Organization Design
Gary L. Neilson, Jaime Estupiñán, and Bhushan Sethi
These fundamental guidelines can help you reshape your 54
organization to fit your business strategy.

GLOBAL PERSPECTIVE
34 How Emerging Markets Can Finally
Arrive
John Jullens
Building world-class domestic firms is the overlooked key
to economic development.
 features
STRATEGY & LEADERSHIP THE THOUGHT LEADER
INTERVIEW
42 The $112 Billion CEO 82 Mark Bertolini
Succession Problem Jon R. Katzenbach, Gretchen
Anderson, and Art Kleiner
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson For Aetna’s CEO, the lauded move
Poor planning for changes in leadership costs to raise employee wages is just
companies dearly. Getting it right is worth more one part of a broader strategy to
adapt to changes in healthcare.
than you might think.

46 Succession Planning and Financial Performance BOOKS IN BRIEF

50 The Incoming Class of 2014: No Surprises 90 The Ghost of Financial Crises Past
Marc Levinson

STRATEGY & LEADERSHIP 92 What’s Wrong with the Internet?

Edward H. Baker
54 The Decline of the COO
Gary L. Neilson 94 Hey, Leaders: Stop Thinking So Much
Is it time to add chief operating officers to the list and Just Do It
of endangered species? Daniel Gross

96 Everyone Profits from the Return

GLOBAL PERSPECTIVE
on Character
58 CEMEX’s Strategic Mix Tom Brown
An s+b Roundtable
Moderated by Thomas A. Stewart 97 Why Beanie Babies Boomed — Then
This Mexican cement company redefined itself Busted Badly
as a global solutions provider with the critical Mark Gimein
capabilities to match.
END PAGE: RECENT RESEARCH
68 The Very Model of an Emerging Market
100 In New Product Design, “Likes” Can
Multinational
Pankaj Ghemawat Lead You Astray
Matt Palmquist
Your next innovation breakthrough probably won’t
ORGANIZATIONS & PEOPLE
come from social media.

72 Frances Hesselbein’s
Merit Badge in Cover illustration by Martin Leon Barreto
Leadership
Sally Helgesen
The former CEO of the Girl Scouts has spent
decades bringing professional management
to nonprofits.

Issue 79, Summer 2015

www.strategy-business.com

strategy+business Published by PwC Strategy& LLC

EDITORIAL
Editor-in-Chief Executive Editor Managing Editor Senior Editor Senior Editor Editor, Digital
Art Kleiner Daniel Gross Elizabeth Johnson Laura W. Geller Jan Alexander Melanie Rodier
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Associate Editor Chief Copy Editor Information Graphics Assistant to the Editors
Christie Rizk Victoria Beliveau Linda Eckstein Natasha Andre
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John Klotnia Seulgi Ho Edward H. Baker Sally Helgesen Eric J. McNulty Michael Schrage
klotnia@optodesign.com seulgi@optodesign.com Susan Cramm William J. Holstein Gary L. Neilson Thomas A. Stewart
Ken Favaro David K. Hurst Rob Norton John Sviokla
Bruce Feirstein Jon Katzenbach Jim O’Toole Christopher A.H.
Lawrence M. Fisher Theodore Kinni Matt Palmquist Vollmer
Ann Graham Tim Laseter Jeffrey Rothfeder

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leading ideas

Leading
6
Ideas
The Right hicle manufacturers have intricate
organizational structures and supply
They are also eyeing the money that
could be made selling endless tera-
chains that have evolved over de- bytes of customer data generated
Track for cades. They have long design and
development horizons, and strin-
from connected vehicle technology.
But they cannot afford to set up
Connected gent regulatory and safety man-
dates. High-tech companies have
connectivity initiatives as separate
business units with the sole purpose
Cars simpler structures and supply chains
that can shift more swiftly with
of generating incremental revenue
(which implies a lack of strategic
Five ways automakers consumer demand. They have much focus) and selling customer data
shorter development cycles and an (which carries brand-threatening
can design for safety
“act now, apologize later” mind-set privacy risks). Like the car phone
and profitability. that isn’t appropriate for products fad of the 1980s and early 1990s,
whose failure can result in the loss of these enticing prospects are a dan-
by Evan Hirsh, Marian H. Mueller, life. And then there’s Moore’s Law: gerous distraction from the auto-
and Kumar Krishnamurthy The continual compounding of makers’ real game, which remains
computing power implies that auto- selling cars.

I
t’s the Daytona 500 of vehicle makers will be called on to navigate That said, automakers should
manufacturing: the race to bring a mind-boggling explosion of con- be integrating rich connectivity fea-
connected cars, light trucks, and nectivity features and functions. tures as a way of differentiating
SUVs to market. Unprecedented Auto companies have never be- themselves as much as possible from
safety, driver assistance, and info- fore been confronted with an oppor- their competitors. Such features,
tainment features promise to revolu- tunity and challenge of this magni- which we estimate currently cost
tionize the driving experience. Still, tude. The following five imperatives only about US$500 per vehicle to
few industry executives are confident can help soften the speed bumps. manufacture, already represent an
that their current connected vehicle 1. Treat connectivity as an in- outsized portion of vehicle value in
initiatives are on the right track. tegral element of the automotive consumers’ minds: In a 2014 Auto-
Their uncertainty is under- value proposition. Auto manufactur- trader.com survey of car shoppers,
strategy+business issue 79

standable. For automakers, getting ers naturally covet the high returns 56 percent of vehicle owners said
“connected” requires joining forces and fast growth of the digital sector they would switch to a different ve-
with the high-tech consumer elec- — if for no other reason than to off- hicle brand to get the digital features
tronics industry — an unlikely set the substantial investments re- they want.
partnership, for several reasons. Ve- quired to bring vehicles to market. To protect and build their
 leading ideas
brands, automakers should focus on for new technology consider their pands, most vehicles will include
determining which kinds of digitally own safety to be paramount. Auto- wireless connections, the ability to
connected functionality to integrate trader’s survey found that 84 percent diagnose their own mechanical
into their vehicles and how to achieve of vehicle owners value safety fea- problems, and smart device connec-
that integration. They shouldn’t try tures over infotainment features. tions, all of which will generate and
to fully control the design process And lawmakers already have their house enormous amounts of data.
for infotainment features. Consum- eye on regulating these new features Some of these vehicles will be expen-
er device makers and app developers to cut down on driver distractions: sive and flashy, attracting thrill-
have the scale, product development In February 2014, Senator Jay Rock- seeking hackers. And they’re a vul-
speed, technical know-how, and in- efeller, chairman of the U.S. Senate nerable target for hackers with the
novation ecosystems in place to
quickly develop the features. But ve-
Cybersecurity can’t work with a design-it-once
hicle manufacturers must always
have the final word on what goes approach; it demands constant monitoring. 7
into their vehicles. They should gov-
ern and curate how a driver interacts Committee on Commerce, Science, malicious intent to damage property
with the machine, and they should and Transportation, warned car- and inflict harm.
design and own driver-assist and makers and technology companies Unfortunately, vehicle manu-
safety features. that they needed to make it a priori- facturers are lagging behind in this
2. Follow the dictates of safety ty to reduce driver distractions regard. They have to work harder to
in driving every aspect of the con- linked to new Internet-connected develop cybersecurity measures and
nected vehicle. Safety is king. Al- features. Vehicle makers should technology to address a level of risk
though consumers might relish the therefore prioritize safety in their higher than that facing most high-
idea of using more entertainment infotainment investment, by creat- tech companies. They will need to
apps in their cars, and some high- ing features that are fun to use with- build backups for critical systems, as
tech companies might want to out taking the driver’s attention off well as multiple firewalls that sepa-
simply plug their infotainment sys- the road. rate a car’s subsystems from one an-
tems into vehicles, vehicle manufac- 3. Build the capabilities to en- other. That way, if one fails or is
turers cannot compromise on safety. sure security. Aside from safety con- hacked, the others will stay func-
Stretching prudence to gain a cerns, automakers must be prepared tional and protected. And still, this
marketing advantage would put to defend connected vehicles against will not be enough.
their customers’ lives at risk, a mis- cyberattacks. Tesla has built wireless The way vehicles are currently
take from which it would be hard connection into its sticker price, and designed and engineered will also
to recover. BMW is not far behind. Soon, as have to evolve. Cybersecurity can’t
Even drivers who are clamoring costs decline and functionality ex- work with a design-it-once approach;
it demands constant monitoring for
new threats and the continuous ad-
aptation and updating of protection
systems. Further, when threats
emerge, automakers won’t have the
luxury of time. They must proac-
tively build highly evolved cyberse-
Illustration by John Hersey

curity skills and capabilities.

4. Revamp the traditional prod-
uct development cycle. The typical
automotive product development
cycle is currently three to five years,
with a mid-cycle facelift that
changes features such as electronics
leading ideas

or exterior design elements. Con- ready, consumers are insisting on tegrating connected vehicle activi-
nected vehicles will fundamentally more seamless integration of these ties into their existing structures.
disrupt that pattern. Automakers devices — according to a 2015 J.D. They should start by prioritizing
have to work swiftly to keep up with Power study, they’re dissatisfied connectivity initiatives, building a
the lightning-fast development and with the quality of offerings cur- truly cross-functional connected ve-
updating of the devices and apps rently on the market. To catch up, hicle team, making clear who has
that will populate their vehicles. automakers will need to continually governance and decision-making
Imagine how quickly a vehicle man- monitor market trends and react rights, and identifying and estab-
ufacturer could fall behind if it quickly, as well as tap into the vast lishing the new capabilities that
offered new electronic architectures ecosystem of app developers. such vehicles will require. Eventual-
and functionality only two or three 5. Adapt the vehicle manufac- ly, connected vehicle activities must
times a decade. And imagine the turing operating model to accommo- be as established and structurally
dissatisfaction of customers, who date connected vehicles. The nature integrated as other groups — such
8 have grown accustomed to instant and needs of automotive manufac- as those that design powertrains —
gratification when it comes to new turing have produced a complex and are today.
technology, finding themselves stuck highly specialized operating model The possibilities afforded to ve-
with generations-old features until in which functional silos coordinate hicle manufacturers by the accelerat-
they buy a new vehicle. with one another in unique ways. ing rate of technological progress are
A few automakers are begin- Although highly successful for thrilling. Indeed, they are limited
ning to update software-oriented many years, this model cannot only by human imagination, regula-
features more often. But they will withstand the addition of the myri- tory requirements, and customer
all need to rethink and reconcile ad requirements that come with demand. But as with any other op-
these conflicting development cy- connected vehicles. portunity of such magnitude, the
cles. They’ll have to build a more Developing and producing this unknowns can be nerve-racking for
modular electronics system — rath- technology will require firms to layer anyone whose future rides on get-
er than one that’s vehicle-specific — a broad set of considerations and ting it right. These five imperatives
and virtual updates will be needed constraints into design deliberations. will ensure a smooth start. +
to deliver electronics and software These vehicles will simultaneously Reprint No. 00329
content more quickly, along with engage multiple internal functional
Evan Hirsh
updated cybersecurity. organizations, product development evan.hirsh@strategyand.pwc.com
This will require a more seg- programs, and vehicle platforms. is a partner with Strategy& based in
Chicago. He leads the firm’s North
mented and nuanced approach to And they will require that the auto-
American automotive practice.
telematics offerings. Multiple gen- makers’ supplier ecosystem expand
erations of electronics architecture to include new and unfamiliar play- Marian H. Mueller
marian.mueller@strategyand.pwc.com
and content for driver-assist and ers, such as technology and app de- is a partner with Strategy&’s automotive
safety features will have to be de- velopers, who come from a very dif- practice, and is based in Florham Park,
signed using parallel and overlap- ferent operating environment. N.J.

ping design cycles, so that interim These challenges are incredibly Kumar Krishnamurthy
updates are possible. Automakers difficult to manage. In order to ad- kumar.krishnamurthy@
strategyand.pwc.com
will also need to invest in extra ve- dress them, most vehicle manufac-
is a partner with Strategy&’s digital
hicle networking and memory ca- turers are structuring their initia- business technology practice, and is based
pacity in anticipation of interim up- tives in one of two ways: by in Chicago.
grades, and provide the means of establishing one or more new silos Also contributing to this article were
delivering updates to their dealer or by appointing a connected car Strategy& senior associates Arjun Gupta
strategy+business issue 79

networks and customers. Even czar charged with coordinating the and Akshay Singh.

shorter cycles will be required for in- initiative across existing silos. Nei-
fotainment features, especially as ther strategy will be good enough.
consumers’ smart devices become Instead, these firms will need to
more powerful and ubiquitous. Al- take an evolutionary approach to in-
 leading ideas
task conflict emerges when team
Kristin Behfar on members have differences of opin-
ions about their work, and relation-
How We Fight at Work, ship conflict involves interpersonal
animosity and ego clashes. Research-

and Why It Matters ers would ask members of a team

how frequently they engaged in each
type of conflict, aggregate their
The Darden School of Business professor responses, and use that as a team
describes a new framework for predicting “score.” But this method
conflict outcomes. yields mixed results — the
empirical findings are not
by Laura W. Geller what we are fighting about always consistent with what
— is thought to be the best theory would predict. Why? 9

Y
ou know the types. There’s predictor of a conflict’s This approach doesn’t con-
the office yeller, intimidat- outcome. But Behfar and her co- sider that people can fight about the
ing others with vitriolic authors argue that we’re approach- same thing in different ways, which
rants. There’s the passive-aggressive ing it from the wrong angle. It’s how will provoke different kinds of emo-
underminer, nodding assent but we fight, she explains in an inter- tional responses.
then dragging her feet. There’s the view with strategy+business, that de- This distinction is important,
colleague who gets angry over a per- termines what happens next. Behfar because we know that people re-
ceived slight, but then quickly shifts also offers some guidance on best spond to threats in fairly predictable
tone. Conflict in the workplace is practices for arguing (in U.S. work- ways. Of course, over time, cowork-
pervasive and unavoidable. And it places, because cultural norms play ers get to know one another. They
isn’t always a bad thing. A healthy a role in each country): Be direct, come to understand that the col-
debate can ensure that diverse per- but not too intense. And when you league who always seems to be un-
spectives are considered, clarify a di- validate your venting colleague’s dermining others isn’t malicious,
lemma, or light the fire a team needs feelings of hurt and anger, know she’s just a terrible communicator.
to move from a stalemate to a cre- that you may be doing a disservice. But at many companies, teams are
ative solution. But when they turn fluid. Moreover, some teams will
ugly, conflicts are distressing and S+B: How are you trying to change have a great success on one project,
divisive. As they escalate, they strain the conversation about conflict? but can’t replicate the experience if
relationships and put teams at risk. BEHFAR: Previous studies catego- you put them on a project that re-
Academic research has long fo- rized conflict by type. For example, quires a different process.
cused on understanding conflict in My colleagues and I set out to
hopes of enabling faster resolution understand how people’s conflict ex-
— or better yet, avoiding conflict in pression [how they express opposi-
the first place. It’s been a recurring tion verbally and nonverbally] cre-
theme for Kristin J. Behfar, an as- ates or perpetuates these challenges.
sociate professor of business admin- In other fields, including research
Photograph by Susan Wormington

istration at the University of Virgin- on marriage, researchers have taken

ia’s Darden School of Business who a similar approach. For example, the
studies high-performance teamwork body of work by psychologist John
and effective leadership in organiza- Gottman and his colleagues in-
tions. Her most recent study, con- cludes years of observation and a
ducted with colleagues at several codified scheme to describe differ-
leading business schools, turns the ent ways that couples fight — all of
traditional thinking about conflict which enabled them to predict with
on its head. Typically, substance — Kristin Behfar great accuracy (94 percent in a 1999
leading ideas

Exhibit: Charting Conflict Expression ple shared the same blueprint for
how they perceive conflict expres-
ideas

HIGH sion. Even though many workplaces

Debating Arguing
Straightforward exchanges Fights in which parties are clearly are multicultural, people working in
between disputing parties — the angry and entrenched, and the U.S. become familiar with its
most likely scenario to lead to typically refuse to budge
behavioral norms.
Clarity of Expression

resolution
In conflicts where both direct-
Directness

ness and intensity are high, people

Disguising Undermining might be shouting, storming out of
Vague expressions that indicate a Passive-aggressive or dismissive the room, or rolling their eyes. Peo-
degree of opposition, but cover up behavior, such as teasing and
the reasons backstabbing ple tend to react with anger and
frustration. Little problem solving
LOW
happens, because both parties pay
LOW Intensity HIGH
10 Degree of Expression more attention to defending their
own arguments than they do to un-
Source: Adapted from Laurie Weingart, Kristin Behfar, et al., “The Directness and Oppositional Intensity of Conflict
Expression,” Academy of Management Review, Apr. 22, 2014
derstanding the other person’s point
of view. It’s worth noting that the
outcome might be different if the
study) which couples would split in At work, it’s more like the difference conflict pairs someone with high
the future. between an argument and a debate. status in the organization and some-
In the former, which has high inten- one with lower status. If the former
S+B: When observing conflicts, sity, people cling fiercely to their po- individual is being very direct and
what are you looking for? How do sitions. In the latter, someone is intense, the lower-status recipient
you measure expression? thinking about the other person’s might withdraw or just comply —
BEHFAR: We developed a frame- point of view and incorporating it but the source of the conflict will
work based on the idea that you can into her response. There’s still a line continue to fester.
measure how people express conflict drawn in the sand, but it shifts with When conflicts are expressed
using two dimensions: their “direct- every exchange. Intensity can also be with low directness and high inten-
ness” and their “oppositional inten- a matter of how subversive your in- sity, they typically involve dismissive
sity.” The first describes how direct- tentions are. High intensity involves or passive-aggressive behavior. For
ly, using words and body language, taking something from someone or example, actions such as teasing,
someone communicates informa- intentionally blocking their inter- backstabbing, or mobilizing a coali-
tion to the other party. A direct ex- ests. Low intensity is more about tion send a message that there is a
pression is literal and explicit. An protecting one’s own interests. problem — the existence of a threat
indirect expression often involves a is clear — but the receiver has to fig-
third party, like the proverbial game S+B: So, if you can determine how ure out why the person is doing
of telephone or office gossip, or oc- direct and intense people are, those things. Although there is no
curs when a problem is hinted at but you can predict how the conflict will overt hostility or open fighting, peo-
left to the listener to figure out. play out? ple tend to respond by feeling anxi-
To understand the other dimen- BEHFAR: Yes, when you cross the ety and contempt, even humiliation
sion, consider the difference between two dimensions, you get telling pat- or anger. These conflicts also tend to
a trench and a foxhole. In a high- terns, or spirals [see exhibit]. We be- escalate, because people are focused
intensity scenario, the person has re- lieve our categorizations of conflict on interpreting actions or protecting
ally dug in — he’s going to defend expression apply across cultures. their interests rather than problem
strategy+business issue 79

his trench or die trying. In a low- People everywhere use degrees of solving. Our anecdotal evidence and
intensity situation, the person can directness and intensity to commu- preliminary empirical evidence have
still see the enemy’s position from his nicate opposition. But for this study, shown that this type of conflict is the
foxhole, and can adjust his position we focused on U.S. organizations. most common in U.S. organizations.
according to what the enemy does. This enabled us to assume that peo- Also common are conflicts with
 leading ideas
low directness and low intensity, in work that direct expression is always are feeling anxious or insulted, turn-
which people avoid saying what they better — that everywhere in the ing to a trusted friend or coworker to
really mean and withhold critical in- world unambiguous words and ac- unload about what is bothering you
formation — often motivated by tion are the best way to get the other is a natural way to cope.
self-preservation. Here we often see party to understand your position. We were interested in under-
less overtly threatening, more pas- This is true in the U.S., where peo- standing whether listeners could
sive-aggressive behavior. For exam- ple appreciate directness, and where help venters better understand how
ple, someone purposely misses a most people are left confused and to prevent the type of negative esca-
deadline because he doesn’t want a frustrated by indirect confrontation. lation I discussed earlier. We found
proposal to go through, and sends But in some cultures, for example, that when the listener was able to
excuses to his colleagues. This leaves in Japan, people frown on direct give the venter new insight into or
it up to others to consider whether confrontation and perceive it as un- perspective on her problem or feel-
his error was intentional. People of- necessary or uncouth — perhaps ings, the venter was better able to
ten feel hurt or irritated, even guilty even insulting. And research has work through the issue with the 11
or confused, because they’re not re- demonstrated that for those cultur- other party. But the listener having
ally sure what the problem is, and ally conditioned to pick up on indi- knowledge of the problem (and thus
whether they caused it. Escalation rect communication, no meaning is the ability to give specific insight)
here might be less obvious than with lost in conflicts with low directness. was not necessary. Just helping peo-
the previous combinations, but the I said earlier that people re- ple reframe the annoyance into a
uncertainty involved typically re- spond to threats in predictable ways. bigger picture enabled them get
sults in negative outcomes. But we all interpret the degree of a back to work much faster.
When directness is high and in- threat differently, depending on our What was ineffective? Unfortu-
tensity is low, people are not en- expectations. And these expecta- nately, it was what many of us do
trenched, and they’re not being sub- tions aren’t just based on culture. when placed in the listener role:
versive. But they are communicating Other factors, such as gender and sympathizing and reaffirming the
unambiguously what they mean to race, also influence perception. For venter’s frustration. But if we can
the other party. The emotions asso- example, women are more likely control our reaction, we can encour-
ciated with this type of conflict ex- than men to become infuriated age better outcomes. This is one of
pression tend to be mixed. Someone when confronted with the same type the most common — and most im-
might think, I’m frustrated that this of conflict expression repeatedly, portant — themes in all of my re-
person is opposing me, but I’m also with no progress made toward a res- search. And it’s true across cultures,
excited because I see a potential for olution. We are hoping to expand in any context. If you understand
learning something. Because people our study to see how these differ- the patterns of how people respond
typically respond calmly and ratio- ences affect outcomes. to different deliveries, you can en-
nally, this scenario is the most likely sure that you don’t respond in kind,
of the four to lead to resolution. S+B: You’ve also done research on and can engage in a more proactive
venting. Can our reaction to people’s process of resolving conflict. This
S+B: What role do cultural differ- everyday complaints help encourage brings to mind the work of psychia-
ences play? conflict resolution? trist William Glasser, who said that
BEHFAR: Our framework outlines BEHFAR: Venting is a common way you can’t control other people, you
how to categorize expressions. But of making sense of frustrating events can only control what you give them
culture is an important context for — like conflict — in the workplace, to react to. I think a hallmark of ex-
predicting how those expressions because it’s not a formal or even an ecutive talent is understanding how
will be interpreted. It would be in- informal type of grievance. After a to recognize the problem, rather
correct to conclude based on our high-intensity conflict, when you than just reacting to the noise. +
Reprint No. 00314

: Meet the next generation of business thought leaders Laura W. Geller

at strategy-business.com/youngprofs. geller_laura@strategy-business.com
is senior editor of strategy+business.
leading ideas

ATMs all over New York City, and your competition — and maybe
Boost Your in a few years, they were everywhere. even redefine your industry.
ideas

In 1979, despite significant concern Understand what your custom-

Innovation from retailers that consumers
wouldn’t buy a portable music play-
ers want, and what they expect. Be-
fore developing a new product, get
Confidence back device that didn’t also record,
Sony introduced the Walkman. In
inside your customer’s head. Ask
yourself: Will this product make her
1995, according to a survey by the life easier? Virtually every innova-
Know your customers,
Pew Research Center, 97 percent of tion that has transformed human
understand new Americans had no online access, lives has reduced the time needed to
technologies, embrace and 42 percent had “never heard of” complete a task or the complexity of
failure, then take a leap the Internet. Yet that same year, Jeff that task. Consider the ATM. This
of faith. Bezos launched Amazon. And fi- innovation not only increased the
12 nally, an example from my own ca- available window of time in which a
by Catherine Palmieri reer at Citibank: In 2007, research consumer could complete her bank-
from Forrester and Ofcom showed ing tasks, but also made banking

C
onsumers are incredibly that 87 percent of mobile phone (and people’s cash) more accessible.
poor predictors of the next owners didn’t use their phones to ac- And remember that today, the con-
big thing. Their knee-jerk cess the Internet, and 72 percent of stant connectivity enabled by mo-
reaction to new technology is almost online consumers said they were not bile technology has created an even
always to say they don’t need it and
will never use it. For many company
leaders, this creates a significant
Technology that can deliver against core
business challenge: They know they consumer needs will trump consumers’ anxiety
must drive change to stay competi- or hesitation.
tive, yet they have no way to deter-
mine with confidence which moves at all interested in using their mobile higher expectation of instant gratifi-
will be successful. They bring in ex- device for banking. But we formally cation. Consumers want goods and
perts to provide vision, they do mar- launched CitiMobile, the first services to be delivered immediately.
ket research until they’ve exhausted downloadable mobile banking app, One of the best ways to find out
the deviations three sigmas from the early in that year. the locus of consumers’ pain points
mean, and they analyze and plan — The key to these and other suc- — and thus your opportunities — is
only to find themselves no more cer- cessful innovation leaps? Knowing to talk to your frontline people. Your
tain about which direction to pursue that technology that can deliver retail and call center people have
than when they started. against core consumer needs will heard it all; once every quarter,
The answer is often hiding in trump consumers’ anxiety or hesita- spend half a day asking them what
plain sight. Most executives know tion. Instead of looking outside for challenges your customers face, and
their customers better than they re- guidance, trust your own customer then focus your innovation invest-
alize, and in some cases better than insight, and combine it with a deep ments on finding ways to address
their customers know themselves. In understanding of what new tech- those issues.
the late 1970s, for example, many nologies can deliver. Perhaps most Beyond understanding what
people were still wary of ATMs. important, foster an internal culture your customers want, it’s also im-
They were used to having their of experimentation, giving people portant to understand the consumer
money handed to them from a teller the freedom to fail. On its own, each psychology of tech adoption. How
strategy+business issue 79

inside their bank; the idea of enter- imperative may seem simple. But to- significant is the perceived risk —
ing a code into a machine on the gether they provide a powerful ap- physical, social, economic, psycho-
street was impersonal and unnerv- proach to innovation, enabling you logical — of using the innovation?
ing. But in 1977, Citibank invested to improve your customer experi- (Will the neighbors laugh, or will
about US$160 million to install ence and differentiate yourself from they be envious?) This is a tricky
 leading ideas
question, depending on your target be able to download an application Internet of Things promises to sim-
market, as early adopters are also and perform a banking transaction plify our lives by providing connec-
greater risk takers. But for most con- on their device without a continuous tivity between us and the machines
sumers, the product’s perceived risk phone connection, providing better we use on a daily basis. The sharing
must not outweigh its benefits. Con- security and eliminating the nega- economy has leveraged technology
sumers also need a compelling rea- tive experience of failed transactions to create ride sharing, task outsourc-
son to change their behavior, and to due to dropped calls. We launched ing, peer-to-peer lending, and coop-
keep them from reverting to old the CitiMobile app before apps be- erative business management. The
habits. Making their lives easier is came common — and even before disruptions to traditional employ-
just the start. You’ll also need to en- the iPhone was released. ment, expertise, and pricing will
sure a smooth experience at the Today, several new technologies have a ripple effect for many years to
point of service. are emerging, and companies should come. We’ll also see the line between
Determine what new technolo- watch them closely — considering human and machine continue to
gies can (really) deliver. It is the cor- how they can use them, and whether blur: 3D printing is already being 13
porate leader’s responsibility to push they are prepared to do so. The used to create prosthetics and
the tech experts on how emerging
technologies can be applied to a spe-
cific purpose — tempering the ex-
citement that bubbles around new
technologies with a pragmatism
grounded in a firm understanding
of the consumer and the company’s
own capabilities. Remember, an in-
novator’s goal is not to react to events
or jump on a bandwagon. It’s to be
proactive in applying technology in
new ways that differentiate the com-
pany from competitors.
To illustrate, let me return to
my own experience with mobile at
Citibank. In 2001, wireless was in
the nascent stages of development,
and wireless carriers didn’t have a lot
of network coverage. As a result, al-
though mobile banking seemed to
offer promise and customers had ex-
pressed some interest, the technol-
ogy just wasn’t yet in place to deliver
a good customer experience. I de-
cided to shut down the mobile ini-
Illustration by Robert Neubecker

tiative. But by 2004, carriers were

expanding their networks and buy-
ing new cell towers to reduce the ir-
ritation of lost calls. What’s more,
the new 3G phones in the pipeline
were going to be Java-enabled and
have increased memory, which
would allow for a more robust cus-
tomer experience. Customers would
leading ideas

human tissue, and at an office park bonus is in jeopardy. Thus, there are
in Sweden, employees can have a extremely powerful incentives for
Brands and
ideas

tiny RFID chip implanted in their people to play it safe. Corporate

hand to gain access to their building.
Create an environment where
leaders must work especially hard to
counter these forces and give their Retailers
failure is acceptable. There can be
no innovation without experimenta-
teams the permission to fail and the
confidence to make their case and Should
tion, and there can be no experi-
mentation without failure. That
goes against the grain of many cor-
go out on a limb. Not only does this
encourage experimentation, but it
also encourages people to pull the
Team Up in
porate cultures. Nevertheless, I have
found that part of what gives corpo-
plug faster on projects that aren’t
working without fear of retribution.
Emerging
14
rate leaders confidence is the accu-
mulated wisdom of a lifetime of fail-
In other words, fail, but fail as fast as
possible — and take the lessons
Markets
ures — experiments that just didn’t learned to the next experiment. When companies
pan out. It gives them an ever-clearer New technologies offer many
“share the shelf,”
vision of what will work. opportunities to those who would
Again, I look to my own career. pursue them. It may seem like such everyone wins.
When I first joined Citi in 1997, I innovations are best left to Silicon
was part of a team that launched an Valley mavericks, but in reality, by Nikhil Bhandare, Pali Tripathi, and
Aparajita Kapoor

Fail, but fail as fast as possible — and take the

C
onsumer packaged goods
lessons learned to the next experiment. (CPG) companies and re-
tailers are natural allies.
Internet bank that failed rather these opportunities are within ev- They have many of the same objec-
spectacularly. It was embarrassing. eryone’s reach. You know your cus- tives — increased sales, cost savings,
We might have abandoned the In- tomers. And when you combine optimized processes and systems,
ternet right then. But we also had what they want with a new technol- and happy customers — and already
reason to be confident in this perva- ogy that can enable it, and encour- work together in many parts of the
sive technology’s ability to deliver age your employees to go all in, world. But in emerging economies,
more of what the customer was seek- you can cultivate the kind of judg- such collaboration has yet to take
ing: ease of access, greater control, ment that lets you make the right off. In a recent survey of 500 leading
and frictionless transactions. So my leaps. Remember that you are play- CPG firms and retailers in India,
team spent the next few years build- ing the long game — you may not Strategy& and the Federation of
ing all the capabilities that would see immediate results. Trust your Indian Chambers of Commerce and
enable us to create a superior cus- newfound confidence to pay off in Industry found that although 91
tomer experience. In 2006, we the end. + percent of respondents had partici-
launched Citibank Direct, an online Reprint No. 00320 pated in at least one collaboration
bank that gathered its first billion initiative, most of these ventures
dollars in 10 days. Catherine Palmieri were one-offs rather than sustained
cdpalmieri@gmail.com
Unfortunately, no matter how spent years launching online and mobile relationships. Only 15 to 20 percent
valuable the lessons learned from a business platforms for various corpora- of respondents reported that these
tions, and now speaks and writes on in- collaborative projects had met their
failed experiment, people worry —
strategy+business issue 79

novation and marketing in the digital world.

and sometimes rightfully so — that objectives.
they’ve lost political capital. They It’s a huge lost opportunity.
think their next idea won’t get back- Across Asia, Latin America, and,
ing, their path to the corporate suite increasingly, Africa, sales channels
has been derailed, or their year-end are proliferating, demographics are
shifting, and individuals are gaining
greater access to online information
EXECUTIVE
about companies and their products. EDUCATION
These trends have taken their toll on
revenue growth and profits. In India,
for example, sales growth has leveled
off since 2010; operating margins in
both the CPG and retail industries
are holding steady at best. Working
alone, frankly, is not really working.
Collaboration, however, could
yield quick wins and short-term
benefits — and could ultimately
transform the complex and frag-
mented consumer landscapes of
many emerging economies into
more sustainable, more efficient
business environments. Even limited
cases of collaboration between CPG
companies and retailers have led to
positive, enduring industry-level
changes. In 2007, consumer giant
Unilever joined forces with Migros,
one of Turkey’s largest retailers.
Through an in-store survey, the
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ceived hair conditioner as unneces-
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When collaboration expands to 2015 OPEN-ENROLLMENT PROGRAM
include the automated sharing of
point-of-sale (POS) data, the results The Leadership Journey  September 13–18, 2015
can be even more dramatic. In 2012, Executive Development Program  September 13–25, 2015
Godrej Consumer Products of India Integrating Finance and
set up electronic data interchange Strategy for Value Creation  September 14–18, 2015
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The company reported that reve-
nues earned through these trade
channels grew 28 percent during the Take the challenge that will lead to your success.
second half of that year.
Although the benefits may seem
execed.wharton.upenn.edu/READY
leading ideas

this data are those that enable direct

interaction with consumers: custom-
ideas

er relationship management systems,

Web 3.0 (which uses natural lan-
guage search, data mining, and arti-
ficial intelligence technologies), on-
line applications such as digital media
campaigns, and contests on social
networking sites such as Facebook.
Collaboration on demand plan-
ning enables CPG firms and retailers
to set realistic targets, meet market
demand, and minimize stockouts.
16 For example, when one U.K. retailer
and a global market leader in oral
care initiated a joint business plan-
ning pilot several years ago, they
obvious, setting up and sustaining outlets. It is designed to forestall took certain steps to foster their rela-
these partnerships is difficult in complaints, provide customer sup- tionship. The enterprises’ leadership
practice. To make the process more port, and promote Croma through teams met monthly to discuss short-
manageable, CPG companies and contests for Kobo merchandise. and long-term opportunities. They
retailers need to create the circum- The use of real-time POS data, reviewed the performance against
stances that will enable effective col- in particular, can reshape how CPG forecasts, planned the next month’s
laboration, and to establish robust and retail companies make deci- assignments and developed new
and transparent systems that allow sions. A company might use such forecasts, and agreed on changes
collaboration to endure. Of course, data to choose where to expand ac- such as promotions. The initiative
none of that will matter if both sides tivity, or to manage product avail- has led to improved delivery rates,
cannot see at the outset why they ability in a different way so that con- increased on-shelf availability, new
should be open with each other. sumers are more likely to find the targeted promotions, better mar-
This is no small matter: Lack of products they want in their local gins, reductions in inventory levels,
trust was the leading cause reported community. Better access to data and streamlined agreement on other
by our survey respondents of their from inventory tracking and de- collaborative initiatives.
firms’ avoiding or terminating col- mand planning can help remove Finally, co-branded advertise-
laborative initiatives. bottlenecks in the supply chain, di- ments enable CPG firms and retail-
That’s why the most significant rect R&D investment, improve ers to visibly market products
collaborations are deliberately de- marketing, and maximize supply together. For instance, Indian e-
signed to foster trust, often by tack- chain efficiency, all of which work commerce retailer Flipkart and
ling daunting challenges — and toward increasing profits for both Motorola recently splashed market-
demonstrating what each side can manufacturer and retailer. ing campaigns across television and
gain. For example, although retailers Data-driven collaboration often print media for the joint launch of
typically view e-commerce as a com- includes sharing insights on market the Moto G phone. Collaborative
peting channel, it can also boost in- trends and consumer buying behav- advertising may be extended to in-
Illustration by Benoit Tardif

store trade if it’s designed to do so. ior. Our survey respondents said clude distributors as well: Apple in
Consider the “bloggers club” collab- such sharing leads to better idea gen- India co-brands its iPhone advertise-
oration between Indian electronics eration involving products and trade ments with pan-India distributors
retailer Croma and Toronto-based promotions, savvier use of e-com- Redington and Ingram Micro. By
e-book publisher/tablet maker Kobo. merce platforms, and more effective outsourcing its advertising this way,
This club invites Indian bloggers to workplace management. The most Apple saves on costs and engages
post reviews of Croma products and useful technologies for gathering more actively with distributors. The
 leading ideas
distributors in turn benefit from as- Wherever possible, set up com- Through its Panasonic Partners pro-
sociation with Apple’s brand along mon processes and technologies, gram, the electronics company Pan-
with the higher margins they can with the goal of seamless integra- asonic introduces intermediaries to
earn on its smartphones. tion, the incorporation of mobile new products, business opportuni-
If your company is considering devices, and a shared view of data. ties, and special commercial offers.
a collaboration initiative, this may These can include common IT sys- These intermediaries use that knowl-
all seem daunting. But if both you tems and back-end processes such as edge to push sales independently
and your partner have the right robust inventory tracking systems, with retailers, enabling Panasonic to
mind-set and process, collaboration to streamline the order-flow process build its channel community.
can be successful. The foundation of and manage distribution informa- Finally, remember that trust in
any partnership has to be a shared tion. You may also wish to align your relationship is something you
vision of opportunities and challeng- other systems such as those dedicat- will need to continually maintain.
es. The CPG company and retailer ed to billing, labeling, and EDI to The importance of transparency
need to lock in specific agreements enable real-time updates, the shar- with your partner company and 17
and expectations about targets, re- ing of financial data, and the cross- adherence to agreed-on processes
sponsibilities, and accountabilities at management of logistics. should be clear to everyone involved.
the outset. A retailer, for instance, The collaboration can now be- Building trust should begin with
would likely be unwilling to share gin, but the work is far from over. It your own organization’s behavior,
category-level data with a CPG firm is critical that both companies be not just what you expect from others.
unless the firm promised something able to track and measure progress In fact, knowing yourself is a critical
in return, such as assistance in opti- as the project unfolds, using key per- part of this process. Many compa-
mizing the retailer’s product mix to formance indicators established by nies are tempted to use collaboration
increase category sales. a joint team. Link them to perfor- to make up for gaps in their own ca-
Both companies need to find mance of the joint account team pabilities. In practice, however, the
sponsors at the top leadership level. members, so they serve as incentives most successful partnerships build
CEO and chairman–level endorse- for variable pay. on strengths rather than compensat-
ment is a key element, positioning You’ll also need to ensure that ing for weaknesses. The best way to
you and your partner company to you have the right talent in place as view collaboration is as a joint
achieve common strategic goals and the partnership activities progress. growth opportunity — a chance to
establish accountability. Further In India, CPG manufacturing com- develop more distinctive, stronger
down the hierarchy, you’ll need to panies such as Coca-Cola, Dabur, capabilities together. +
set up cross-functional teams, led by Hindustan Unilever, ITC, and Reprint No. 00326
a key account manager. These teams Marico have heavily invested in de-
could be organization-specific or Nikhil Bhandare
veloping programs to help tradition-
nikhil.bhandare@strategyand.pwc.com
cross-organizational, depending on al retailers train their employees in is a principal at Strategy& in Mumbai, and
the depth of the collaborative rela- specialized skills, such as operating co-leads the firm’s consumer and retail
practice in India.
tionship. Members should come credit card machines, maintaining
from the supply chain, logistics, inventory logs, and creating attrac- Pali Tripathi
marketing, and IT functions. If you tive merchandise displays. The goal pali.tripathi@strategyand.pwc.com
is a senior engagement manager at
are pursuing multiple initiatives is to create a dialogue with tradition- Strategy& in Mumbai, and a member of the
with a target partner, to avoid am- al stores, which make up 90 percent consumer and retail practice in India.
biguous reporting lines or conflict- of India’s retail landscape. Thanks
Aparajita Kapoor
ing commitments, ensure that each to such initiatives, these CPG com- aparajita.kapoo@strategyand.pwc.com
initiative has a clear set of owners panies have reached thousands of is a senior consultant at Strategy& in
Delhi, and a member of the consumer and
and a governance body, such as a traditional retailers throughout the retail practice in India.
steering committee or a higher-level country. Intermediaries such as dis-
council comprising CEOs of the tributors, systems integrators, and This article is adapted from the authors’
Strategy& white paper, “CPG and Retail:
two partners plus key members from resellers can also play a role in train- Natural Allies in Emerging Economies,”
both sides. ing and overseeing the retail staff. Mar. 2015.
leading ideas

for all companies in all industries, on prerecorded music and publish-

Agility Is we’ve found that being agile depends
on developing two key attributes:
ing or digital fabrication’s effect
on conventional inventory manage-
Within strategic responsiveness and organiza-
tional flexibility. These two qualities
ment. The challenge is not just to
change quickly, but to change prof-
Reach are mutually reinforcing but are de-
veloped in different ways, and it is
itably: to know which products and
services should be switched out and
easy for a company to possess one which should remain intact. To ex-
With strategic respon-
without the other. Until you explic- ercise this judgment, top executives
siveness and organiza- itly develop proficiency in both, you must have a thorough understand-
tional flexibility, you won’t have the agility you need. ing of their industry and markets.
can move quickly when It’s an absence that will become There must be mechanisms in place
your industry changes. all the more glaring. In PwC’s 2015 — not just traditional strategic
18 survey of chief executives, more planning and market research, but
by Kayvan Shahabi, Antonia than half of CEOs surveyed said social media and even customer us-
Cusumano, and Sid Sohonie they believe they will be competing age data collected through the Inter-
in new sectors in the next three net of Things — to feed them infor-

M
any corporate leaders years, and 60 percent said they see mation about trends. Decisions
think their companies are more business opportunities now must be made quickly, and commu-
agile. Surely, they assume, than they did three years ago. But nicated rapidly to every function in
we possess that combination of almost three-quarters of respon- the company.
speed, flexibility, nimbleness, and dents expressed concern that their Organizational flexibility is the
responsiveness that will enable us to companies lack the skills needed to facility to shift execution rapidly. In
turn on a dime as circumstances meet future competitive threats. In many companies, such functional
warrant. It often comes as a surprise, these conditions, agility is critical. skills as product development, man-
then, when a significant opportu- Strategic responsiveness is the ufacturing, marketing and sales,
nity or challenge arises and the com- ability to sense new risks and new and customer intimacy are deeply
pany can’t deliver. opportunities in the business envi- entrenched, reinforced by IT sys-
What these leaders realize too ronment and to craft a response to tems and ingrained practice. But
late is that they are thinking about those pressures quickly. Consider when there is a change in strategic
agility in a counterproductive way. the disruptive effect of new technol- direction, the company needs to be
In their view, agility is an end in it- ogies, such as the Internet’s impact able to retool and rework the most
self, instead of a means to a more
important end: sustainable competi-
tive advantage.
At one extreme of the agility
spectrum are startups and other
high-growth companies. They can,
in effect, be too agile, chasing every
Illustration by Francesco Bongiorni

potential opportunity without clear

strategic goals. At the other end are
large, incumbent companies, slowed
by lethargic or timid corporate cul-
tures, combined with rigid business
processes and legacy information
technology systems. The sweet spot
lies somewhere in between.
The appropriate level of agility
won’t be the same for everyone, but
 leading ideas
necessary activities, often within a Exhibit: Agility Profiles and Prescriptions
few weeks or months. Doing so re-
HIGH
quires the capacity and the willing- The Faux-Agile Company The Agile Company
ness to innovate in every aspect of Focus on a few key strategic Continue to move in the most
imperatives, and develop the profitable and value-driven
the enterprise. Beyond developing cross-functional capabilities and directions, which means develop-

Strategic Responsiveness
new products in response to per- make the operational investments ing even more discipline to focus
needed to deliver on them. on the areas that will produce the
ceived consumer needs and market best results.
trends, companies must put in place
new organizational structures, busi-
The Fragile Company The Almost-Agile Company
ness processes, and technologies. Start with your existing strengths. Monitor the urgent issues and
Ask yourself, for example, whether What new value can you deliver by disruptions facing your company
making a few changes — for and its industry, and develop next
your supply chain is resilient enough example, implementing real-time steps that represent clear
to rapidly develop new sources for data analytics to improve imperatives for change.
senior-level decision making?
parts when the product portfolio LOW 19
changes, or to maintain the required
LOW Organizational Flexibility HIGH
flow of parts when natural disasters
or other external events lead to sud- Source: PwC analysis
den breakdowns in logistics. Does
human resources have the means to but not both. In what we call faux- pany leaders don’t easily recognize
find the right people when new tal- agile companies, where strategic re- when their needs and expectations
ents and expertise are needed? Are sponsiveness is high but organiza- change. As a result, they don’t de-
your various functions set up to re- tional flexibility is low, leadership is velop the breakthrough products
spond to one another’s changes and visibly committed to agility, and and services that their customers
help one another move forward? takes on ambitious initiatives. But might respond to. Many projects are
Agile companies have both the company does not have all the proposed at relatively local levels,
high strategic responsiveness and capabilities it needs to deliver re- and may get implemented on an ad
high organizational flexibility. Their sults, especially when the strategy hoc basis, but few receive company-
leaders accept the inevitability of changes. It may be that leaders are wide support.
change. They have mechanisms in detached enough from day-to-day The worst-case scenario occurs
place for sensing potentially disrup- operations that they perceive the when companies are weak in both
tive forces and taking advantage of company to be addressing customer dimensions. These fragile enterpris-
them before the competition. The needs more effectively than it actu- es are typically characterized by rig-
rest of the organization understands ally does. Functions and business id leadership, high cost structures,
the value of rapid action; people are units are siloed: They don’t commu- and slow decision making, all of
practiced and confident, with the nicate effectively, and they resist which have often evolved over many
skills and infrastructure support working together. Processes and IT years of growth. Top executives di-
they need. Although the company infrastructure are not aligned with vide the business among themselves,
encourages experimentation, it also strategy and may be out of date. each chasing a different group of op-
resists unnecessary complexity: At Those firms we refer to as al- portunities or serving different sets
any time, there are just a few new most-agile companies, in contrast, of customers, and often working at
initiatives, backed by everyone in have low strategic responsiveness cross-purposes. Several levels of ap-
the company. There is also a strong but high organizational flexibility. proval are needed for any significant
network effect — people share the These organizations are known for change. The culture reinforces stasis,
insights from experiments and cus- operational competence and skill rather than responsiveness, in a way
tomer engagement up and down the at continuous improvement. They that encourages business as usual.
hierarchy. make and sell everything well, but Once you know which type of
Unfortunately, that combina- don’t always make and sell the right company you are, you can under-
tion is rare. Most companies are things. Strategy is bound up with stand where you need to do the most
strong in one attribute or the other, existing customers. However, com- work (see exhibit). Consider the story
leading ideas

of one major magazine publisher, sponse. When a company learns to Kayvan Shahabi
with more than 25 distinct periodi- change itself this way, the funda- kayvan.shahabi@us.pwc.com
is the U.S. technology industry advisory
cals in print and digital formats. mental qualities that made it great leader at PwC, and is based in San Jose,
Company executives realized the or- in the first place — its view of how Calif.
ganization would have to adapt in value is created for its customers, its Antonia Cusumano
the face of disruptive competition capabilities in creating that value, antonia.m.cusumano@us.pwc.com
and rapidly changing circulation and its distinctive presence in the is the U.S. technology industry people and
change leader at PwC, and is based in San
prospects. They saw the writing on market — can remain the same. Be- Jose, Calif.
the wall — their strategic responsive- cause becoming agile doesn’t mean
ness was high. But they also knew changing who you are. It means Sid Sohonie
sid.a.sohonie@us.pwc.com
that their organizational flexibility gaining the ability to see both op- is a director in PwC’s technology industry
was low, with a siloed structure and portunities and threats and then ex- advisory practice, and is based in Seattle.
highly entrenched editorial culture. ecuting the strategies needed to ad- Also contributing to this article were
20 The company had to make dress them. + PwC principal Chris Curran and director
some big changes: All of its titles Reprint No. 00316 James Saliba.

needed to leverage technology and

processes more efficiently, create
new publications more quickly,
boost contact with readers through
better use of social media, and pro-
s+b Trend Watch
vide a single view for advertisers.
R&D Investment Pays Off in Oil and Gas
But the company also needed to The recent boom in oil and gas reserves in the U.S. and around
support and encourage each publi- the world has been due in large part to new technologies, such
cation’s independent personality. To as fracking, developed by oil-field services (OFS) companies.
accomplish these tasks, executives In fact, over the last decade, OFS companies have consistently
developed a single, flexible content invested much more in innovation than oil and gas producers
management architecture for creat- (see top chart). And as the bottom chart shows, this focus,
ing and editing content. A standard among other factors, has led to higher stock prices.
digital system enabled publications
to respond to opportunities — and 4.0%
R&D spending as a % of sales Oil-Field Services Companies
advertisers — more quickly and ef- Oil and Gas Producers
3.0%
ficiently. But each publication would
maintain its unique identity. Once
2.0%
fully installed, the system would
have the added benefit of enabling 1.0%
editors to see how other publications
contributed to the company’s overall 2006 2007 2008 2009 2010 2011 2012 2013 2014

performance, and to look for ways

$250
to collaborate and share content. Stock prices Bloomberg World OFS Index
Bloomberg World Oil and Gas Index
Regardless of your industry, in- 200

creasing both strategic responsive-

150
ness and organizational flexibility
can give your company the agility it 100
2005 2008 2011 2015
needs. Leaders must be able to dis- The U.S. Energy Policy Act Drilling activity Oil reaches Global oversupply
strategy+business issue 79

of 2005 exempts fracking surges in the US$110 per pushes oil prices
50
cuss the nature and extent of the dis- from certain regulations Marcellus Shale barrel below $50 per barrel

ruptions they see coming down the 2006 2007 2008 2009 2010 2011 2012 2013 2014

road, and to experiment with new

Note: R&D spending was calculated using a small but indicative sample of leading segment players.
types of products and services and Source: “Surviving the Worst: It’s Time for Oil Services to Address Shortcomings and Find Strategic Solutions,”
by Viren Doshi, John Corrigan, Shawn Maxson, and Adrian del Maestro, Strategy& white paper, Feb. 2015,
new organizational structures in re- strategyand.pwc.com/OFS; Bloomberg; University of Michigan Center for Local, State, and Urban Policy
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essay technology

TECHNOLOGY
larly deals involving headline-grab-
bing transactions such as Facebook’s
WhatsApp purchase and Microsoft’s
$8.5 billion acquisition of Skype in
2011, demands a closer look. How
should company leaders consider the
value creation potential inherent in
such deals? And how can they man-
age integration to ensure success
and avoid destroying value? To get a
handle on the megadeal universe, we
examined 131 technology deals of
at least $1 billion in size made over
22 the past five years, with a collective
value of $388 billion. The deals fell
into four discrete categories.

Let’s Megadeal Consolidation. These deals in-

volve competitors, value chain par-
ticipants, or companies with closely
Seven strategies for managing the unique adjacent products and overlapping
customers. The motivation in these
challenges of large technology acquisitions.
transactions is focused less on
growth and more on unlocking tre-
by Rob Fisher, Gregg Nahass, But for established technology mendous value by cutting costs and
and J. Neely firms, the only thing worse than improving efficiencies. These deals
paying too much for a promising tend to be highly successful because

T
o the outside world, deal tech startup is failing to pay enough the companies know each other well
making in the technology to acquire it. Generations of inno- and the synergy potential is signifi-
sector can often appear irra- vation gurus and consultants have cant and obvious. According to our
tional, exuberant, and even insane. lambasted IBM for missing the analysis, more than 60 percent (or
In what other industry would a five- significance of the personal com- just over $25 billion) of the value
year-old startup with reported rev- puter operating system and thereby of megadeals in the semiconductor
enues of US$10 million and fewer enabling Microsoft to grow from a subsector was related to consolida-
than 100 employees garner a $22 junior partner into a titan. Analysts tion (see Exhibit 1). Notable ex-
billion price tag? That’s how much have also criticized Microsoft for amples include Texas Instruments’
Facebook paid in February 2014 for failing to purchase Yahoo, dinged $6.5 billion acquisition of National
WhatsApp, a messaging service that Yahoo for missing the opportunity Semiconductor in 2011 and Avago
allows users to exchange text mes- to acquire Google in the late 1990s, Technologies’ $6.6 billion purchase
sages without paying for SMS. and chastised Google for not pursu- of LSI in 2013. Google’s 2012 acqui-
It’s easy to disparage the extrav- ing Facebook. To be sure, not every sition of the patent portfolio of Mo-
agance of such a megadeal. Indeed, technology deal is like WhatsApp. torola Mobility stands as an example
the tenor of the discussion within But in technology, an industry un- of value chain consolidation. Google
Illustration by Lars Leetaru

the business community and in the like any other, a handful of people held on to the patent assets after di-
media at the time of the announce- working in a garage can transform a vesting the set-top box and mobile
ment veered from disbelief to dis- market in the blink of an eye. device assets it received as part of the
may about tech valuation bubbles. $12.4 billion deal.
“Facebook Buying WhatsApp Is a A New Megadeal Taxonomy Capabilities extension. Deals
Desperate Move,” screamed a head- The unusual nature of deal making that fall into this category — the
line at Fox Business News. in the technology sector, particu- biggest of the four by value —
 essay technology
typically involve two large, mature represent the potential for the con- Exhibit 2: Motivating Factors
companies. In general, the buyer is vergence of existing markets. These Megadeal value share by type, 2010–14
seeking new products, new talent, deals tend to involve larger compa- Tech-Driven Market
Transformation
or new customers in a large, tangen- nies dishing out huge sums to buy 18.1%
tial market where it doesn’t already small upstarts whose technology Consolidation Capabilities
possess the capabilities to compete. has great disruptive potential. Not 18.3% Extension
40.1%
Capabilities extension transactions surprisingly, these deals are most Going Private
23.5%
accounted for 40 percent of the to- prevalent in the Internet subsector, $388 Billion
tal value of tech megadeals over the in which they accounted for more Total Value
Source: Strategy&
last five years (see Exhibit 2). Ex- than half of the total deal value from
amples include SAP’s $8.3 billion 2010 to 2014 (see Exhibit 1). Other is addressing the unique consider-
acquisition of travel-expense special- examples include Google’s 2014 pur- ations for strategic acquirers evaluat-
ist Concur Technologies in 2014, chase of smart home products maker ing megadeals, we will discuss only
Oracle’s $7.5 billion purchase of Sun Nest Labs ($3.2 billion), Facebook’s the first three categories. 23
Microsystems in 2010, and Micro- swoop for virtual reality company
soft’s 2014 $7.2 billion acquisition of Oculus ($2 billion), and Intel’s 2011 Avoiding the Megadeal Pitfalls
Nokia’s device and services business. acquisition of security software firm Corporate leaders experienced in
Technology-driven market McAfee for $7.6 billion. mergers and acquisitions are well
transformation. Facebook’s aggres- Going private. The fourth tech- aware of the risks that come with
sive move to buy WhatsApp typifies nology deal category consists of transactions of all sizes. Many have
this category. Although these trans- transactions in which private equity honed deal-related processes and
actions constitute only 18 percent firms take companies private. In our playbooks that serve them well
of tech megadeals, they tend to gar- analysis, these deals accounted for when executing relatively small to
ner significant headlines. Why? Be- 23.5 percent of the total technology midsized deals. However, we have
cause they involve a new technology megadeals, and included the single observed that megadeals in the tech-
that is driving customer behavior biggest transaction: the 2013 deal nology sector pose a unique set of
in ways that could rapidly threaten that took Dell private for $24.3 bil- challenges. They thus create barriers
established business models and lion. Such deals can occur for a va- to success that are often unfamiliar
transform existing markets, or that riety of reasons. Because this article even to executives with significant
acquisition and integration experience.
Exhibit 1: Coming Together Indeed, many of the large spin-
Megadeals by sector and type, 2010–14, in US$ billions
offs and divestitures occurring in
the technology sector today are the
$100
consequence of past megadeals that
Strategic acquisition type
Capabilities Extension either did not pan out or no longer
$80 Tech-Driven Market fit strategically. From the outset,
Transformation
Consolidation
these deals faced challenges in cap-
turing expected synergies and mov-
$60
ing the parties seamlessly toward
becoming a single company. Today,
faced with the need to focus on core
$40
capabilities or invest in new technol-
ogies — such as cloud computing,
$20 social media, and mobile technolo-
gies — many leaders are shedding
prior investments.
$0
Hardware Software Internet Semiconductor IT Services
Not all megadeals fail, of
course. Indeed, when executed cor-
Note: Does not include “going private” type of megadeals.
Source: Strategy& rectly, these transactions can propel
essay technology

purchasers ahead of their competi- lenges to evaluating the business the company is buying large oper-
tion by creating formidable capabil- logic and post-close execution. ating units and needs experienced
ity platforms, realizing significant We have seen CEOs take a managers in place from Day One
operational efficiencies, and open- number of approaches to these deals to ensure that these operating units
ing up new avenues for growth. To and have generally observed that the continue to run smoothly.
succeed, experienced leaders need to more effective deals tend to involve a This reliance on acquired man-
make adjustments and address cer- combination of the following: agement poses a dilemma because
tain challenges. • Imposing enhanced functional most of the senior team from an
We’ve identified seven critical accountability. C-suite leaders in acquired company can afford to
challenges to megadeals, and have technology, sales and marketing, leave after the deal closes and will
developed strategies to cope with manufacturing and distribution, have other opportunities. They
them. All seven apply to the three and corporate functions are empow- may also simply dislike the idea of
technology deal types under consid- ered with acquisition ownership. running a business unit in the new
24 eration — consolidation, capabilities And it is made clear that they are company after having run the ac-
extension, and technology-driven accountable for the quantification, quired company.
market transformation — although execution, and delivery of synergies. Given this reality, the acquiring
the degree of the challenge varies by • Increasing board governance. company needs to assess how much
deal type. Risks arise in transactions that are it will rely on these senior manag-
1. Assigning accountability. In championed or led directly by the ers and for how long. Retaining
a best-case acquisition scenario, a CEO. That warrants greater involve- people contractually is often just a
business unit (BU) leader is charged ment by the board. Either a board short-term solution; it’s important to
with driving the transaction because member assumes a co-leadership be mindful that retention does not
the acquired operations fall within role or the board more actively par- always correlate with performance.
his or her current scope. The BU ticipates throughout the acquisition Leaders need to judge whether
leader evaluates the technology, the process. This may also require a newly acquired talent will keep their
customers, the marketplace, and greater use of external experts during heads in the game, and put a suc-
core business functions. What’s the evaluation and execution phase. cession plan in place for when they
do leave. This process will involve
significant relationship building,
A strong conclusion emerges that particularly with deputies and other
sub-line leaders at the acquired com-
cost synergies are much more pany who might be able to step in
achievable than revenue synergies. and run the business unit over a lon-
ger term.
3. Valuing cost and revenue
more, the BU leader may take own- In general, each of these ap- synergies. A strong conclusion that
ership of the integration and the proaches distributes focus and ac- emerges from our study is that cost
combined performance plan. Con- countability, augments capabilities, synergies are much more achievable
solidation-oriented deals tend natu- or provides for greater objectivity than revenue synergies. So when
rally to include strong BU account- and transparency to guard against evaluating targets, it is essential to
ability because of the high degree of deal biases. assign more weight to cost opportu-
operational overlap. 2. Relying on acquired manage- nities and less weight to revenue op-
However, in capabilities exten- ment. This is particularly important portunities. This is particularly true
strategy+business issue 79

sion megadeals, almost by definition, for technology-driven market trans- for consolidation plays, in which two
BU accountability doesn’t exist. In formation deals in which knowledge mature companies come together
this vacuum, the chief executive of- about the new technology is held by and the cost synergies are apparent,
ficer often becomes solely account- a small group of creative or technol- quantifiable, and attainable. For ex-
able for the deal’s business success. ogy leaders. It’s also important for ample, when NXP Semiconductors
And that presents significant chal- capabilities extension deals in which announced in March 2015 its ac-
 essay technology
quisition of Freescale Semiconduc-
tor, industry consolidation was the
rationale. NXP CEO Rick Clemmer
stated that the company anticipated
$200 million in cost synergies in the
first year, and $500 million to follow.
It is particularly difficult to
achieve revenue synergies tied to a
big new strategic vision, or to long-
term assumptions that require inte-
grating technology or changing cus-
tomer behavior over many months
or years. Such assumptions, which
many times are baked into capabili-
ties extension deals, don’t often ma-
terialize, or materialize more slowly
than expected, or materialize on a
smaller scale than was envisioned.
If the acquisition thesis is depen-
dent on revenue, leaders must push
for truly granular detail during due
diligence, design a separate process
within the integration to carefully
manage revenue goals, and focus in-
tently on driving revenue synergies Short Courses,
Big Impact
as quickly as possible.
That said, revenue synergies
cannot be completely discounted,
especially when it comes to technol-
ogy-driven market transformation
deals. In 2006, when Google paid
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the price seemed high. However,
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lion in 2013. Buyers of today’s hot- technology, and learn from world-renowned faculty.
test startups, such as Instagram,
must take revenue synergies into
account or they can never arrive
at a competitive valuation. We have
observed companies failing to get
the most from capabilities extension
transactions because they are reluc-
tant to prioritize revenue synergies.
And that can prevent the product or Enroll today in one of our many short courses and learn to solve
solution transformation needed to the challenges most critical to you and your organization.
address converging technologies or executive.mit.edu/sb
shifting customer propositions.
essay technology

4. Tailoring the playbook. Most diligence, and leaders can be uncer- ings; and reviewing pre-announce-
acquisitive technology companies tain about the depth of due diligence ment integration plans and budgets.
have developed extensive M&A that is legally permitted. 6. Communicating effectively.
playbooks and invested in internal The net result is that compa- Good communication is critical for
capabilities to execute and integrate nies involved in megadeals may all categories of tech deals from the
smaller “tuck-in” deals. But these know surprisingly little about each moment a deal is announced. Inves-
playbooks may not be useful for other. A lack of due diligence may tors, employees, and customers must
megadeals. In particular, technol- not matter too much in the case of all understand the goals, the integra-
ogy-driven market transformation a technology-driven market trans- tion activities necessary to achieve
deals, with their huge valuations, formation deal, because the target those goals, the metrics used to
narrow focus, tiny revenues, and company is small and the potential measure whether those goals are be-
entrepreneurial management, may for due diligence is limited. But a ing met, and who is responsible for
force an acquirer to toss out its play- lack of due diligence can be quite delivering on those goals.
26 book. Nothing in its recent corpo- damaging for capabilities extension However, the emphasis of that
rate history would have prepared deals if cost and revenue assump- communication may vary by type
Facebook to pencil out a $22 billion tions are not properly vetted. of deal. For example, consolidation
purchase of an app. Not every deal Indeed, many of the megadeals deals tend to create a lot of anxiety
will require such a leap of faith, but completed over the past several and dysfunction among employees
some will; it’s the nature of the tech- years are unraveling today for the worried that cost synergies translates
nology industry. simple reason that the original due into lost jobs. Since they’re not en-
For consolidation and technol- diligence did not uncover the bar- tirely wrong, the senior executives
ogy-driven market transformation riers to success it should have. As a need to have laid out the integration
deals, companies need to put their
standard M&A playbook on ste-
roids. Given the size and complexity Companies involved in megadeals
of these deals, their unpredictability,
and the higher volume of require-
may know surprisingly little about
ments across the enterprise neces- each other.
sary to execute them successfully,
leaders need to step back, start with
a clean sheet of paper, and tailor the result, the hoped-for synergies never strategy for themselves in a detailed
integration approach to the specif- materialized. Before signing on the way so they can communicate con-
ics of the deal at hand. They must dotted line, CEOs and their teams fidently to employees — especially
ensure that sufficient resources have should always consider what they key employees whose jobs are secure.
been devoted to the undertaking. didn’t validate, and be sure they can An inability to clearly communicate
5. Doing more diligence. De- live with the risk. intentions inevitably creates uncer-
spite the size and complexity of The adequacy of pre-acquisition tainty. Instead of focusing on deal
megadeals, companies sometimes due diligence should naturally be a execution, people begin to focus on
feel pressure to skimp on due dili- critical focus area for the board. In personal survival.
gence. An attitude often prevails other surveys and board seminars, By comparison, employees in
that big public companies, with their we have noted a number of lead- technology-driven market trans-
sophisticated institutional investors, ing practices for boards approving formation deals are often less con-
legions of regulators, and audited large transactions, such as approving cerned about job security; after all,
diligence priorities and “non-nego- they hold the critical intellectual
strategy+business issue 79

books, have less to hide than small

companies and thus require less due tiables”; reviewing detailed (versus capital the acquiring company needs
diligence. Or senior leaders worry highly summarized) diligence find- to retain. In these deals, a greater
about losing momentum by digging ings; interacting with third-party emphasis may be placed on com-
too deeply. Confidentiality issues are due diligence advisors on topics in- municating with investors and Wall
also cited as a reason to curtail due cluding scope, access, and key find- Street, which may be confused and
 essay technology
upset by a very high price tag. Face- relentlessly focus on quantifying, so, we believe that megadeals are
book CEO Mark Zuckerberg used reporting, and executing on value worth doing as long as the acquirer
a statement to explain the Whats- capture opportunities. What’s more, acknowledges these challenges and
App deal to investors. “WhatsApp the process must empower leaders tackles them head-on. When ex-
is a simple, fast, and reliable mobile to keep the integration on track by ecuted correctly, these transactions
messaging service that is used by giving them latitude to make quick can boost efficiencies, increase rev-
over 450 million people on every decisions regarding organization, enues, and propel a company ahead
major mobile platform,” he noted. people, customers, and priorities — of competitors. They can even re-
“More than 1 million people sign and hold these leaders responsible shape an industry. +
up for WhatsApp every day and it for communicating those decisions Reprint No. 00330
is on its way to connecting 1 billion to customers, employees, sharehold-
Rob Fisher
people. More and more people rely ers, and partners.
rob.fisher@us.pwc.com
on WhatsApp to communicate with However, in the case of a tech- is a partner and U.S. and global technology
all of their contacts every day.” nology-driven market transforma- industry deals leader at PwC. He is based 27
in Silicon Valley.
7. Managing the transaction tion deal, the integration should be
as a business process. The larger handled more like a relationship and Gregg Nahass
the transaction, the more challeng- less like a business process. That’s gnahass@us.pwc.com
is a partner and U.S. and global leader of
ing the integration and the greater because the smaller, more entrepre- the M&A integration practice at PwC. He is
the need for a well-defined business neurial team from the target com- based in Los Angeles.
process to focus resources and capi- pany usually needs a more personal
J. Neely
tal on the right activities at the right touch to stay engaged post-close. j.neely@strategyand.pwc.com
times and to capture cost and rev- The challenges associated with is a partner with Strategy& based in
Cleveland. He is the global leader of the
enue synergies as quickly as possible. technology megadeals are significant firm’s deals platform and part of the
This is especially true for both con- and vary with the type of deal. Even consumer and retail practice.
solidation and capabilities extension
deals wherein two big companies are
coming together with a large num-
These whiteboard walls
ber of employees and customers.
It’s helpful to remember that the WhiteWalls ®
give you and your team an
unlimited blank slate that
deal process has an inherent flaw that Magnetic Whiteboard encourages original ideas
a fit-for-purpose business process can
mitigate. The original valuation is Steel Wall Panels and fosters out of the box
solutions.
by necessity based on many assump-
tions. After the deal is announced,
those assumptions cannot be auto-
matically accepted as fact. Once the
company gains access to people and
additional information at the target
company, the acquirer must put a
tailored business process in place
with the requisite accountability and
transparency to get data and test as-
sumptions with fact-based analyses,
and then make further decisions.
The business process for these
types of deals must include a clear set
of guiding principles and goals con-
nected to sustaining everyday opera-
tions and capturing synergies, and WhiteWalls.com 800 624 4154
essay organizations & people

ORGANIZATIONS & PEOPLE

One such trend, cited by 61 percent
of the respondents, was heightened
competition. The same proportion
of respondents foresaw changes in
customer behavior creating disrup-
tion. Fifty percent said they expect-
ed changes in distribution channels.
As CEOs look to stay ahead of these
trends, they recognize the need to
change their organization’s design.
But for that redesign to succeed, a
company must make its changes as
effectively and painlessly as possible,
28 in a way that aligns with its strategy,
invigorates employees, builds dis-
tinctive capabilities, and makes it

10 Principles of easier to attract customers.

Today, the average tenure for the
CEO of a global company is about
Organization Design five years. Therefore, a major re-
organization is likely to happen only
once during that leader’s term. The
These fundamental guidelines can help chief executive has to get the reorg
you reshape your organization to fit your right the first time; he or she won’t
business strategy. get a second chance.
Although every company is dif-
by Gary L. Neilson, Jaime Estupiñán, That meant yet another reorganiza- ferent, and there is no set formula
and Bhushan Sethi tion, but this one would be differ- for determining the appropriate de-
ent. It had to go beyond shifting the sign for your organization, we have

A
global electronics manu- lines and boxes in an org chart. It identified 10 guiding principles that
facturer seemed to live would have to change the company’s apply to every company. These have
in a perpetual state of re- most fundamental building blocks: been developed through years of
organization. Introducing a new how people in the company made research and practice at PwC and
line of communication devices for decisions, adopted new behaviors, Strategy&, using changes in orga-
the Asian market required reorient- rewarded performance, agreed on nization design to improve perfor-
ing its sales, marketing, and sup- commitments, managed informa- mance in more than 400 companies
port functions. Migrating to cloud- tion, made sense of that informa- across industries and geographies.
based business applications called tion, allocated responsibility, and These fundamental principles point
for changes to the IT organization. connected with one another. Not the way for leaders whose strategies
Altogether, it had reorganized six only did the leadership team lack a require a different kind of organiza-
times in 10 years. full-fledged blueprint — they didn’t tion than the one they have today.
Suddenly, however, the com- know where to begin. 1. Declare amnesty for the
Illustration by Lars Leetaru

pany found itself facing a different This situation is becoming more past. Organization design should
challenge. Because of the new tech- typical. In the 18th annual PwC start with corporate self-reflection:
nologies that had entered its cat- survey of chief executive officers, What is your sense of purpose? How
egory, and a sea change in customer conducted in 2014, many CEOs will you make a difference for your
expectations, the CEO decided to anticipated significant disruptions clients, employees, and investors?
shift from a product-based business to their businesses during the next What will set you apart from others,
model to a customer-centric one. five years as a result of global trends. now and in the future? What differ-
 essay organizations & people
entiating capabilities will allow you tify the design in place today or any made up of one tangible (or formal)
to deliver your value proposition organization designs of the past. It’s and one intangible (or informal)
over the next two to five years? time to move on. This type of pro- element. Decisions are paired with
For many business leaders, an- nouncement may sound simple, but norms (governing how people act),
swering those questions means go- it’s surprisingly effective for keeping motivators with commitments (gov-
ing beyond your comfort zone. You the focus on the new strategy. erning factors that affect people’s
have to set a bold direction, marshal 2. Design with “DNA.” Organi- feelings about their work), informa-
the organization toward that goal, zation design can seem unnecessar- tion with mind-sets (governing how
and prioritize everything you do ily complex; the right framework, they process knowledge and mean-
accordingly. Sustaining a forward- however, can help you decode and ing), and structure with networks
looking view is crucial. prioritize the necessary elements. (governing how they connect). By
We’ve seen a fair number of We have identified eight universal using these elements and consid-
organization design initiatives fail building blocks that are relevant to ering changes needed across each
to make a difference because senior any company, regardless of industry, complementary pair, you can cre- 29
executives got caught up in discuss- geography, or business model. These ate a design that will integrate your
ing the pros and cons of the old or- building blocks will be the elements whole enterprise, instead of pulling
ganization. Avoid this situation by you put together for your design (see it apart.
declaring “amnesty for the past.” Exhibit 1). You may be tempted to make
Collectively, explicitly decide that The blocks naturally fall into changes with all eight building
you will neither blame nor try to jus- four complementary pairs, each blocks simultaneously. But too

Exhibit 1: The Eight Elements of Organization Design

Grouped into complementary pairs (the four rungs),
these components can be combined into a design
relevant to any company. When initiating the redesign
of an organization, start with just four or five
changes.

FORMAL INFORMAL
Decisions Norms
How decisions are made How people instinctively act or take action
on
• Governance forums • Values and standards
• Decision rights • Expectations and “unwritten rules”
• Decision processes • Behaviors
• Decision analytics
Motivators Commitments
How people are compelled to perform How people are inspired to contribute
• Monetary rewards • Shared vision and objectives
• Career models • Individual goals and aspirations
• Talent processes • Sources of pride

Information Mind-Sets
How the organization formally processes data and knowledge How people make sense of their work
• Key performance indicators and metrics • Identity, shared language, and beliefs
• Information flows • Assumptions and biases
• Knowledge management systems • Mental models

Structure Networks
How work and responsibilities get divided How people connect beyond the lines and boxes
• Hierarchy and reporting relationships • Conversations and collaboration
Role and responsibilities
• Roles • Teams and other working g units
• Business processes
pro • Organizational influence
uence

Source: Strategy&
essay organizations & people

many interventions at once could In an org redesign, you’re not 4. Make the most of top tal-
interact in unexpected ways, lead- setting up a new form for the or- ent. Talent is a critical but often
ing to unfortunate side effects. Pick ganization all at once. You’re laying overlooked factor when it comes to
a small number of changes — five out a sequence of interventions that org design. You might assume that
at most — that you believe will will lead the company from the past the personalities and capabilities of
deliver the greatest initial impact. to the future. Structure should be existing executive team members
Even a few changes could involve the last thing you change: the cap- won’t affect the design much. But in
many variations. For example, the stone, not the cornerstone, of that reality, you need to design positions
design of motivators might need to sequence. Otherwise, the change to make the most of the strengths of
vary from one function to the next. won’t sustain itself. the people who will occupy them. In
People in sales might be more heav- We saw the value of this ap- other words, consider the technical
ily influenced by monetary rewards, proach recently with an industrial skills and managerial acumen of key
whereas R&D staffers might favor a goods manufacturer. In the past, it people, and make sure those leaders
30 career model with opportunities for had undertaken reorganizations that are equipped to foster the collabora-
self-directed projects and external focused almost solely on structure, tion and empowerment needed from
collaboration and education. without ever achieving the execu- people below them.
3. Fix the structure last, not tion improvement its leaders expect- You must ensure that there is a
first. Company leaders know that ed. Then the stakes grew higher: connection between the capabilities
their current org chart doesn’t nec- Fast-growing competitors emerged you need and the leadership talent
essarily capture the way things get from Asia, technological advances you have. For example, if you’re or-
ganizing the business on the basis of
innovation and the ability to respond
Too many interventions at once quickly to changes in the market,
the person chosen as chief market-
could interact in unexpected ways, ing officer will need a diverse back-
leading to unfortunate side effects. ground. Someone with a conven-
tional marketing background whose
core skills center on low-cost pricing
done — it’s at best a vague approxi- compressed product cycles, and and extensive distribution might
mation. Yet they still may fall into a new business models appeared that not be comfortable in that role. You
common trap: thinking that chang- bypassed distributors. This time, can sometimes compensate for a gap
ing their organization’s structure will instead of redrawing the lines and in proficiency through other team
address their business’s problems. boxes, the company sought to un- members. If the chief financial of-
We can’t blame them — after derstand the organizational factors ficer is an excellent technician but
all, the org chart is seemingly the that had slowed down its responses has little leadership charisma, you
most powerful communications in the past. There were problems may balance him or her with a chief
vehicle around. It also carries emo- in the way decisions were made operating officer who excels at the
tional weight, because it defines and carried out, and in how infor- public-facing aspects of the role,
reporting relationships that people mation flowed. Therefore, the first such as speaking with analysts.
might love or hate. But a com- changes in the sequence concerned As you assemble the leadership
pany hierarchy, particularly when these building blocks: eliminating team for your strategy, look for an
changes in the org chart are made in non-productive meetings (informa- optimal span of control — the num-
isolation from other changes, tends tion), clarifying accountabilities in ber of direct reports — for your se-
nior executive positions. A Harvard
strategy+business issue 79

to revert to its earlier equilibrium. the matrix structure (decisions and

You can significantly remove man- norms), and changing how people Business School study conducted
agement layers and temporarily re- were rewarded (motivators). By the by associate professor Julie Wulf
duce costs, but all too soon, the lay- time the company was ready to ad- found that CEOs have doubled
ers creep back in and the short-term just the org chart, most of the prob- their span of control over the past
gains disappear. lem factors had been addressed. two decades. Although many ex-
 essay organizations & people
ecutives have seven direct reports, — may be out of your control. But Exhibit 2: The Importance of
there’s no universal magic number. don’t get bogged down in trying to Accountability
For CEOs, the optimal span of con- change something you can’t change; Survey responses suggest that changes in
information flows and decision rights are twice
trol depends on four factors: the instead, focus on changing what you as powerful as changes in an organization’s
motivators or structure.
CEO’s tenure thus far, the degree can. For example, if your company
of cross-collaboration among busi- is a global consumer packaged goods Average Strength Index Score (out of 100)
ness units, the level of CEO activ- manufacturer, you might first favor
Information 54
ity devoted to something other than a single structure with clear decision
working with direct reports, and rights on branding, policies, and Decision rights 50
whether the CEO is also chairman usage guidelines because it is more
of the board. (We’ve created a C- efficient in global branding. But if Motivators 26
level span-of-control diagnostic to consumer tastes for your product
help determine your target span, at are different around the world, you Structure 25
strategyand.pwc.com/spanofcontrol.) might be better off with a structure 31
Source: Strategy& analysis of Org DNA Profiler survey
5. Focus on what you can con- that delegates decision rights to the
trol. Make a list of the things that local business leader.
hold your organization back: the 6. Promote accountability. De- of those dealers. This encouraged
scarcities (things you consistently sign your organization so that it’s ownership and high performance
find in short supply) and constraints easy for people to be accountable on both sides, and drew in critically
(things that consistently slow you for their part of the work without important but previously isolated
down). Taking stock of real-world being micromanaged. Make sure groups, like the manufacturer’s war-
limitations helps ensure that you can that decision rights are clear and ranty function. The company opera-
execute and sustain the new organi- that information flows rapidly and tionalized these new decision rights
zation design. clearly from the executive commit- by establishing the necessary budget
For example, consider the im- tee to business units, functions, and authorities, decision-making forums,
pact you might face if 20 percent departments. Our research under- and communications.
of the people who had the most scores the importance of this factor: When decision rights and moti-
knowledge and expertise in mak- We analyzed dozens of companies vators are established, accountability
ing and marketing your core prod- with strong execution and found can take hold. Gradually, people get
ucts — your product launch talent that among the formal building in the habit of following through on
— were drawn away for three years blocks, information and decision commitments without experiencing
on a regulatory project. How would rights had the strongest effect on formal enforcement. Even after it
that talent shortage affect your prod- improving the execution of strategy. becomes part of the company’s cul-
uct launch capability, especially if They are about twice as powerful ture, this new accountability must
it involved identifying and acting as an organization’s structure or its be continually nurtured and pro-
on customer insights? How might motivators (see Exhibit 2). moted. It won’t endure if, for exam-
you compensate for this scarcity? A global electronics manufac- ple, new additions to the firm don’t
Doubling down on addressing typi- turer was struggling with slow ex- honor commitments or incentives
cal scarcities, or what is “not good ecution and lack of accountability. change in a way that undermines
enough,” helps prioritize the changes To address these issues, it created a the desired behavior.
to your organization model. For matrix that could identify those who 7. Benchmark sparingly, if at
example, you may build a product had made important decisions in the all. One common misstep is looking
launch center of excellence to address past few years. It then used the ma- for best practices. In theory, it can
the typical scarcity of never having trix to establish clear decision rights be helpful to track what competitors
enough of the people who know how and motivators more in tune with the are doing, if only to help you opti-
to execute effective launches. company’s desired goals. Sales direc- mize your own design or uncover
Constraints on your business — tors were made accountable for deal- issues requiring attention. But in
such as regulations, supply shortag- ers in their region and were evaluated practice, this approach has a couple
es, and changes in customer demand in terms of the sales performance of problems.
essay organizations & people

First, it ignores your organiza- to follow, and of the indicators to cause the work is routine and heav-
tion’s unique capabilities system track and analyze, should line up ily automated. An enterprise soft-
— the strengths that only your exactly with the capabilities you ware implementation team, made
organization has, which produces prioritized in setting your future up of specialized knowledge work-
results that others can’t match. You course. For example, if you are ex- ers, would require a narrower span
and your competitor aren’t likely panding into emerging markets, of control, such as six to eight em-
to need the same distinctive capa- you might benchmark the extent to ployees. If people regularly take on
bilities, even if you’re in the same which leading companies in that re- stretch assignments and broadly
industry. For example, two banks gion give local offices decision rights participate in decision making, you
might look similar on the surface; on sourcing or distribution. might have a narrower hierarchy —
they might have branches next door 8. Let the “lines and boxes” fit more managers directing only a few
to each other in several locales. But your company’s purpose. For ev- people each — instead of setting up
the first could be a national bank ery company, there is an optimal managers with a large number of di-
32 catering to millennials, who are pattern of hierarchical relationship rect reports.
drawn to low costs and innovative — a golden mean. It isn’t the same 9. Accentuate the informal.
online banking features. The other for every company; it should reflect Formal elements like structure and
could be regionally oriented, serv- the strategy you have chosen, and it information are attractive to compa-
ing an older customer base and em- should support the critical capabili- nies because they’re tangible. They
phasizing community ties and per- ties that distinguish your company. can be easily defined and measured.
sonalized customer service. Those That means that the right struc- But they’re only half the story.
different value propositions would ture for one company will not be Many companies reassign decision
require different capabilities and the same as the right structure for rights, rework the org chart, or set
translate into different organization another, even if they’re in the same up knowledge-sharing systems —
designs. The national bank might industry. yet don’t see the results they expect.
be organized primarily by customer In particular, think through That’s because they’ve ignored
segment, making it easy to invest your purpose when designing the the more informal, intangible build-
in a single leading-edge technology spans of control and layers in your ing blocks. Norms, commitments,
that covers all regions and all mar- org chart. These should be fairly mind-sets, and networks are essen-
kets. The regional bank might be consistent across the organization. tial in getting things done. They
organized primarily by geography, You can often hasten the flow represent (and influence) the ways
setting up managers to build bet- of information and create greater people think, feel, communicate,
ter relationships with local leaders accountability by reducing layers. and behave. When these intangibles
and enterprises. If you benchmark But if the structure gets too flat, are not in sync with one another or
the wrong example, the copied your leaders have to supervise an the more tangible building blocks,
organizational model will only set overwhelming number of people. the organization falters.
you back. You can free up management time At one technology company, it
Second, even if you share the by adding staff, but if the pyramid was common practice to have mul-
same strategy as a competitor, who’s becomes too steep, it will be hard tiple “meetings before the meeting”
to say that its organization is a good to get clear messages from the bot- and “meetings after the meeting.” In
fit with its strategy? If your competi- tom to the top. So take the nature of other words, the constructive debate
tor has a different value proposition your enterprise into account. Does and planning took place outside
or capabilities system than you do, the work at your company require the formal presentations that were
using it as a comparison for your close supervision? What role does known as the “official meetings.”
own performance will be a mistake. technology play? How much collab- The company had long relied on its
strategy+business issue 79

If you feel you must bench- oration is involved? How far-flung informal networks because people
mark, focus on a few select ele- are people geographically, and what needed workarounds to many offi-
ments, rather than trying to be best is their preferred management style? cial rules. Now, as part of the rede-
in class in everything related to your In a call center, 15 or 20 people sign, the leaders of the company em-
industry. Your choice of companies might report to a single manager be- braced its informal nature, adopting
 essay organizations & people
new decision rights and norms that bilities and supports your strategy
allowed the company to move more more effectively. New from University
fluidly, and abandoning official Remaking your organization of Toronto Press
channels as much as possible. to align with your strategy is a proj-
10. Build on your strengths. ect that only the top executive of a
Overhauling the organization is one company, division, or enterprise can
of the hardest things for a chief ex- lead. Although it’s not practical for
ecutive or division leader to do, es- a CEO to manage the day-to-day
pecially if he or she is charged with details, the top leader of a company
turning around a poorly perform- must be consistently present to work
ing company. But there are always through the major issues and alter-
strengths to build on in existing natives, focus the design team on the
practices and in the culture. Sup- future, and be accountable for the
pose, for example, that your compa- transition to the new organization.
ny has a norm of customer-oriented The chief executive will also set the
commitment. Employees are willing tone for future updates: Changes
to go the extra mile for customers in technology, customer preferences, Leadership is Half the Story
A Fresh Look at Followership, Leadership,
when called upon to do so. They and other disruptors will continu- and Collaboration
deliver work out of scope or ahead ally test your business model. by Marc Hurwitz and Samantha Hurwitz
of schedule, often because they em- These 10 fundamental princi- This book introduces the first model to
seamlessly integrate leadership,
pathize with the problems custom- ples can serve as your guideposts for followership, and partnerships and
ers face. You can draw attention to any reorganization, large or small. provides new ideas and practical advice
for anyone working in an organization.
that behavior by setting up groups Armed with these collective lessons,
to talk about it, and reinforce the you can avoid common missteps
behavior by rewarding it with more and home in on the right blueprint
formal incentives. That will help for your business. +
spread it throughout the company. Reprint No. 00318
Perhaps your company has
Gary L. Neilson
well-defined decision rights, where- gary.neilson@strategyand.pwc.com
in each person has a good idea of is a senior partner with Strategy& based in
Chicago. He focuses on operating models
the decisions and actions for which and organizational transformation.
he or she is responsible. Yet in your
current org design, they may not be Jaime Estupiñán
jaime.estupinan@strategyand.pwc.com
focused on the right things. You can is a partner with Strategy& based in New
use this strong accountability and York. He focuses on consumer strategic
redirect people to the right decisions transformation and organization for the Small Business and the City
healthcare industry. The Transformative Potential of Small
to support the new strategy. Scale Entrepreneurship
Bhushan Sethi by Rafael Gomez, Andre Isakov, and
bhushan.sethi@us.pwc.com Matthew Semansky
Conclusion is a partner with PwC Advisory Services. An inspiring account of the dynamism
A 2014 Strategy& survey found that Based in New York, he leads the PwC of urban life, Small Business and the City
42 percent of executives felt that network’s financial-services people and introduces a new “main street agenda”
change practice. for the twenty-first century city.
their organization was not aligned
with the strategy, and that parts of
the organization resisted it or didn’t
understand it. If that’s a familiar
problem in your company, the prin-
ciples in this article can help you
develop an organization design that
supports your most distinctive capa- utppublishing.com
essay global perspective

GLOBAL PERSPECTIVE
journey, during which the rest of the
world will catch up with the devel-
oped economies of the West. By the
time what Spence dubs “the great
convergence” is over, around 2050,
he says, as much as 75 percent of the
world’s population will live in devel-
oped economies — in contrast to a
mere 15 percent today.
But it’s not clear that Spence’s
optimistic prophecy will come to
pass. In reality, developing countries
almost invariably get caught in vari-
34 ous types of growth traps that make
it difficult to reach high-income
status. Since the 1950s, at least 80

How Emerging Markets countries, in every major region of

the world, have achieved an increase
in annual per capita income of at
Can Finally Arrive least 2 percentage points for at least
eight consecutive years. Yet dur-
ing that same period, only a hand-
Building world-class domestic firms is the ful managed to escape the dreaded
overlooked key to economic development. middle-income trap (classified by
the World Bank as having a me-
by John Jullens years. Today, the global economy dian gross national income [GNI]
still consists of only 30 or so high- of US$6,750 in 2011 dollars). The

T
hroughout much of human income countries, roughly the same few favored exceptions are largely in
history, economic output number of middle-income countries, East Asia: Hong Kong, Japan, Sin-
was firmly yoked to the size and a very long tail of 140 or so low- gapore, South Korea, and Taiwan.
of a country’s labor force. Because income countries. This last group is What’s more, the rate of progress
productivity growth was negligible, still finding it difficult to industrial- recently slowed down again after
the countries with the largest pop- ize, and at least 34 of these countries an unparalleled growth spurt in the
ulations, such as China and India, remain fragile and vulnerable to out- early 21st century. (Between 2000
could put the most people to work. right collapse. and 2014, annual growth rates in
They reigned as the world’s largest This circumstance doesn’t really emerging markets had outpaced
economies. Things changed sud- jibe with orthodox economic theory. those in developed ones by almost 5
denly during the late 1700s. A num- As access to new technologies and percentage points, as reported in the
ber of economic, institutional, and other know-how opens up, and as Economist). It’s no wonder Morgan
other factors coalesced in England domestic savings and investment are Stanley strategist Ruchir Sharma,
to unleash the Industrial Revolu- complemented with external financ- writing in Foreign Affairs, coined
tion, which was transformational ing, theory predicts that growth in the term ever-emerging markets to
Illustration by Lars Leetaru

— at least in the handful of Western low-income countries should ac- describe the all-too-common cycle
countries that rose to dominance celerate and the gap with wealthier of promise and excitement when a
through their economic prowess counterparts should narrow. In fact, country appears to take off — and
and resulting military and political many pundits, including the Nobel the bitter disappointment when its
power. Everyone else fell behind. Prize–winning economist Michael growth stalls long before anything
Incredibly, this great divergence Spence, believe we are currently liv- close to economic parity is achieved.
has persisted for more than 250 ing in the middle of a century-long Several interrelated issues ex-
 essay global perspective
plain why emerging economies Getting Growth Wrong production of simple, low-margin
have found it so difficult to achieve Many economists and policymak- manufactured goods, agriculture,
convergence. But ultimately, the ers still believe that developing and the extraction of finite natural
root cause is the lack of integration countries should simply open up resources.
among the three primary disci- domestic markets to foreign direct Similarly, the conventional wis-
plines that must inform any coher- investment, liberalize their financial dom holds that economic develop-
ent catch-up strategy: development systems and exchange rate regimes, ment is a function of democratic
economics to guide a country from remove all barriers to competition, political institutions that ensure
low- to high-income status, political and specialize in those activities in arm’s-length government–business
science to design the enabling insti- which they have inherited a compar- relationships, deregulated labor
tutional environment, and strategic ative advantage. These analysts are markets, and private ownership and
management to create competitive influenced by a near-religious belief shareholder control. At first blush,
world-class firms over time. Perhaps
most alarming, the third discipline, 35
strategic management of domestic Without capable firms, emerging
firms, is often not even part of the
conversation. The result is a series of
markets will inevitably get stuck
growth fallacies that have led many somewhere along the way.
policymakers astray.
Emerging markets need a fun-
damental reversal in approach. The in free markets, trade, and com- that makes sense — the vast major-
conventional wisdom advocates petition that goes all the way back ity of today’s high-income countries
implementing large-scale economic to Adam Smith’s invisible hand are democracies. However, here
and institutional reforms that shape and David Ricardo’s subsequent too, the evidence shows that major
the overall business and political musings on British cloth and Portu- institutional reform, and indeed
environment. But it would be more guese wine. democracy, is not a prerequisite
effective to selectively use reform But the positive relationship for economic growth, at least ini-
initiatives tailored to each country’s between trade liberalization, com- tially. Some of the most successful
unique mix of business dynamics petition, and economic develop- development cases in history, in-
and industries, to improve domestic ment is ambiguous at best. For cluding China today and South
firms’ resources and capabilities at instance, trade restrictions can actu- Korea in the postwar years, took
each stage of a country’s economic ally benefit a country depending on place under unambiguously auto-
development. whether it is already developed or cratic governments.
Think about it like a profes- still developing, whether it is big or A related growth fallacy is the
sional sports team. For years, we’ve small, and whether it has a compara- assumption that the best theoreti-
been focusing on the playing field tive advantage in those sectors that cal solution is also implementable
— making sure the grass is cut, and are receiving protection. Conversely, in practice. In reality, emerging
the lines are clear. But if the indi- premature trade liberalization can markets are characterized by numer-
vidual players don’t have the capa- hurt a developing country, as the ous institutional voids, as Harvard
bilities they need to compete, none entry of much more experienced Business School professors Tarun
of that really matters. Those players and better-resourced foreign multi- Khanna and Krishna Palepu have
are an emerging country’s domestic nationals can drive fledgling indig- written extensively about, such as
firms. They need the right training enous firms out of business. This shoddy infrastructure, nascent capi-
(and nurturing) to compete to win can force the developing country to tal markets, and endemic corrup-
against world-class “teams” from de-industrialize and revert to activi- tion, which make pursuing “first-
more mature countries. Without ties with lower added value. In other best” solutions virtually impossible.
such capable firms, emerging mar- words, slavish adherence to the free In addition, these institutional voids
kets will inevitably get stuck some- market orthodoxy may inadvertent- vary from country to country, mak-
where along the way. ly doom a developing country to the ing effective economic development
essay global perspective

policies highly situation-specific. In seldom designed to address and im- ity of the workforce is employed in
other words, each country’s develop- prove individual firm performance. farming-related activities, the agri-
ment journey will have to be unique, cultural sector is typically controlled
due to initial differences in factor Rethinking Development by a wealthy, landed elite with little
endowments (land, labor, capital, Given the complexity and ever- incentive to upset the status quo —
technology), institutional environ- changing nature of the interven- and enough power to block or stall
ments (political system, property tion required, it is not surprising reforms. As a result, land reform
rights, financial system, labor mar- that so few countries have been able programs specifically designed to
kets), domestic firm capabilities to transition successfully from one break the stranglehold of the landed
(technology, processes and systems, economic development stage to an- elite are often a prerequisite to long-
brand, management), and culture. other. Although a comprehensive term economic development. As de-
The conventional wisdom also theoretical framework has yet to be scribed by journalist Joe Studwell in
falters because it implicitly assumes developed, examples of successful How Asia Works: Success and Failure
36 that economic development is a lin- initiatives from various emerging in the World’s Most Dynamic Region
ear process, through which higher markets — most recently those in (Grove Press, 2013), Japan, Taiwan,
and higher income levels are reached East Asia — suggest a preliminary South Korea, and China all imple-
in a progressive and gradual fashion. set of guiding principles for each of mented meaningful land reform
In reality, a poor country’s long and the four major phases of an emerg- programs early in their economic
difficult journey from low- to high- ing market’s economic development development journeys — in contrast
income status runs through distinct journey. A country can evolve this to their less successful counterparts
development stages. Each stage is way from relying primarily on coun- in Southeast Asia, India, and South
characterized by different challeng- try-based comparative advantages America.
es, policy objectives, and tasks at the (for example, ultra-low labor costs) Phase 2: Catching up. Once
political, economic, and firm levels. to developing a sufficient number the initial set of growth barriers has
Policymakers will encounter new of domestic companies that possess been broken, policymakers must
growth traps at every step along the world-class differentiated capabili- focus more broadly on the indus-
way. What is needed to lift a coun- ties of their own. trialization process. It is difficult
try out of poverty may be quite dif- Phase 1: Breaking free. Many to become a high-income country
ferent from what is needed to navi- emerging countries remain poor (a solely by producing and exporting
gate across the middle-income trap, GNI of $1,025 or lower) indefinitely agricultural products and other nat-
which, in turn, may be entirely dif- not because local policymakers don’t ural resources while importing most
ferent from what is required to sus- understand the basics, but rather be- manufactured goods. Industrializa-
tain a successful high-income coun- cause their economies are stuck in tion directly raises productivity and
try (a GNI of $12,476 or higher). subsistence growth traps. In these income levels. It also prevents the
Policymakers thus face a for- traps, market forces alone are insuf- inevitable deterioration of a coun-
midable challenge, as they have to ficient catalysts for the industrializa- try’s terms of trade, which otherwise
change course several times along tion and development process. Such occurs when the country must pay
the way — each time having to growth traps result from structural for importing increasingly sophisti-
overcome stiff resistance from those impediments that differ from coun- cated and expensive manufactured
with a vested interest in maintain- try to country, but typically include goods with its own exports of much
ing the status quo. To add further some combination of economic con- cheaper primary products (which
complexity, economic development straints (such as inadequate access to often have far less stable demand).
discussions normally take place at affordable financing), political con- Several East Asian countries
the relatively abstract policy level,
strategy+business issue 79

straints (such as excessive bureau- have demonstrated that leveraging

as opposed to the firm-level trenches cracy), and firm strategy constraints land reform and other rural produc-
where the battle is ultimately won or (such as the absence of a skilled tivity initiatives (for example, in-
lost. As a result, government policy workforce). vestments in fertilization, irrigation,
is typically focused on advancing the For example, in emerging and infrastructure) and migrating
overall business environment, and is economies where the vast major- the resulting surplus farm labor into
 strategy+business
turns 20!
Celebrate with us by
showcasing your message in
our special Autumn 2015
20th anniversary issue.
For more details on how to advertise in
this collector’s issue, contact Judith Russo,
russo_judy@strategy-business.com.

ELP OR HINDER? GRIT S TRUE VALUE IN PRAISE OF EXCESS CAPACITY LEAN, MEAN, AND EUROPEAN LITTLE DATA THE TRUST AGENDA THE NEXT MILLION INNOVATORS LENOVO S BIG PLANS ROBERT SUTTON ON SCALE PERFORMANCE WITHOUT RANKINGS KINGS OF THE CLOUD HAIER S ZHANG RUIMIN THE SHARING COMPANY SELF-MADE BILLIONAIRES STOP WASTING TIME WHEN MEGATRENDS COLLIDE
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RETAIL BANKING
THE RISE OF DIGITAL FABRICATION
essay global perspective

more productive activities, such as or a large domestic market. Country dry, and costs begin to rise — all of
manufacturing goods that are cur- leaders should also consider the tar- which make local firms steadily less
rently imported, can be an effective get industry’s specific technological competitive.
strategy for jump-starting the indus- and other spillover potential that At this point, domestic firms
trialization process. Doing so will can be deployed in other industries. must enter into more value-added
typically require some form of direct For most emerging markets, the ini- activities and engage in head-to-
government intervention, as few lo- tial focus will likely be on simple, head competition with rivals from
cal firms will have the capabilities nondurable consumer goods, such developed markets. The govern-
or scale to compete with their more as clothing, that are labor intensive, ment will need to help homegrown
experienced foreign competitors. are relatively simple to produce, and firms move from relying primarily
Of course, such interventions may do not require advanced technical on country-based comparative ad-
have some initial downsides, such and managerial skills. vantages and copying basic pro-
duction capabilities to developing
38 firm-specific competitive advantages
Growth rates will eventually come and acquiring advanced innovation,
operations, and go-to-market capa-
down again, as the number of bilities. Instead of passively relying
on whatever static set of resource en-
imported goods suitable for dowments (natural resources, a large
domestic production dwindles. labor force, and so on) their country
may have inherited, emerging mar-
ket governments must play an active
as higher prices for consumers, but The type of intervention can role in dynamically creating new
they should be seen as an investment take various forms, and will need to sources of competitive advantage.
in the country’s future economic de- be adapted to the requirements of This is a difficult and time-
velopment. They are therefore every the target industry and the specific consuming process, because the dif-
bit as important as similar invest- economic, institutional, and cul- ference between merely good and
ments in infrastructure and edu- tural environment in each country. world-class firms is often embed-
cation. From an emerging market Tariffs are an obvious choice, at least ded in capabilities that may have
policymaker’s perspective, the real initially, as they directly protect local been honed for decades. In addition,
question is not whether to intervene, firms from premature foreign com- world-class firms naturally have
but what form the intervention petition. Importantly, they don’t little interest in sharing their trade
should take and which industries require funding through public secrets with anyone, let alone with
should be targeted. resources — which are likely still emerging market firms that could,
Some of these initiatives will quite limited. Other options include over time, become formidable glob-
be horizontal, such as providing fi- low-cost financing, favorable tax al competitors themselves. And cut-
nancing and reducing bureaucratic rates, below-market land and utili- ting-edge innovation in high-poten-
red tape to unlock entrepreneurial ties prices, and direct subsidies to tial industries, such as green energy
activities. But policymakers should selected industries. and nanotechnology, increasingly
also introduce complementary verti- Phase 3: Moving out and up. requires massive investments that
cal initiatives to facilitate the flow of Using the strategies described in are far beyond the means of all but
surplus farm labor into high-poten- the previous phase, a low-income the largest firms.
tial target industries. Given the lack country can experience a period of Therefore, it is important to
of capable domestic companies at adopt a deliberate approach to up-
strategy+business issue 79

economic development that can last

this early stage, the focus should be several years. But growth rates will grading the domestic industrial
on whatever comparative advantag- eventually come down again, as the base over time, perhaps starting, as
es happen to be available locally, be number of imported goods suitable James Cypher and James Dietz rec-
they ultra-cheap labor, access to nat- for domestic production dwindles, ommend in The Process of Economic
ural resources, a favorable location, the supply of surplus farm labor runs Development (Routledge, 1997; rev.
 essay global perspective
2007), with simply exporting the vision to selected industries. More jointly achieve ever-higher levels of
goods that were previously imported controversially, they may want to economic and societal development
but are now produced locally, and maintain some combination of capi- while avoiding excessive degrees of
then expanding internationally into tal controls, active currency man- corruption and bribery. However,
more advanced countries and chal- agement, close supervision over the these attributes are more a func-
lenging categories, such as capital banking system, and mild financial tion of the domestic political system
goods (for example, factory equip- repression to ensure that scarce capi- — and especially whether certain
ment), intermediate products (such tal is disproportionately directed groups enjoy privileged access to
as batteries), and, eventually, du- toward investment, and that domes- key government decision makers —
rable consumer goods (such as cars). tic firms can meet economic and so- than they are a particular economic
This step-by-step process would ex- cial developmental goals in a more development approach, as South
pose domestic producers to foreign stable business environment. Korea, Taiwan, and others have
competitors early and encourage Of course, there are strong ar- demonstrated.
them to reach global performance guments against such active govern- Phase 4: Staying sharp. As the 39
standards themselves — initially, ment intervention. These include economy matures and domestic
just for a few relatively simple goods, not only the social costs, such as companies become more capable,
but over time, also in more complex higher retail prices, lower interest the government’s role must change
and knowledge-intensive product rates on deposits, and fewer indi- again from active intervention dur-
categories. This is precisely the eco- vidual investment opportunities. ing the initial three catch-up phases
nomic development path followed There is also the potential for wide- to a more passive enabling stance.
by Japan, South Korea, and Taiwan. spread corruption, and for domestic However, that doesn’t mean the
But simply exposing domestic firms to become dependent on gov- government’s job is over once the
players to ever-tougher foreign com- ernment protection. But the risk of country has achieved high-income
petition is not enough by itself. If failure doesn’t negate the necessity status. The ever-accelerating pace of
domestic firms are ever to catch up of trying, as no country has ever innovation continually pushes out
with their far more experienced for- caught up without significant, albeit the global productivity frontier to
eign competitors or, in some cases, temporary, direct government sup- higher performance standards, re-
to take advantage of latecomer ad- port. To mitigate the risks of active quiring ongoing investments. Coun-
vantages in sunrise industries where intervention, governments should tries whose companies fall behind in
firms from developed markets can focus on enabling, even forcing, do- this process of industrial upgrading
be burdened by their installed cus- mestic firms to continually upgrade and knowledge acquisition will be-
tomer base and older technology their capabilities and competitive- come steadily less competitive and
standards, emerging market govern- ness, helping to cull the losers rather ultimately face lower growth rates.
ments will need to take an active than pick the winners, and setting Governments need to help local
role. They must engage in a process clear and credible timetables for companies stay sharp through such
of incremental capability building phasing out support initiatives. For means as sponsoring research in ad-
and innovation by encouraging the example, in the 1960s and ’70s, vanced new technologies, investing
transfer of technology and know- South Korea’s government enforced in complementary upstream and
how from developed markets and a strong export regime, specific downstream industries, creating a
the insertion of local companies into performance standards, and sunset supportive regulatory environment,
global value chains and innovation clauses to expose domestic firms to and providing financial incentives
networks (for example, through lo- world-class performance standards to reduce up-front investment re-
cal investment and partnering re- early and weed out those that ulti- quirements and mitigate startup risk
quirements). They must also make mately couldn’t compete. for local entrepreneurs.
substantial investments in areas To be sure, a more interven- In addition, structural change
such as education, training, and ap- tionist stance demands a highly inevitably produces winners and los-
plied research. In addition, they will capable government sector that is ers (even when society on the whole
need to create an enabling financial fully independent, yet sufficiently benefits). That hands governments
environment, including credit pro- connected with the private sector to an important related role in smooth-
essay global perspective

ing the transition process that goes and location of their business activi- The result of such efforts is
well beyond simply ensuring free ties with the highest added value. a winning team: a crop of highly
market competition, low tax rates, productive homegrown companies
and vigorously enforced intellectual Timing Is Everything that have the capabilities to compete
property laws. For example, many The number of countries that re- on the global stage, and that can
governments of developed coun- main mired in poverty today makes create an economic base at home
tries face serious policy challenges as all too clear the need to think dif- that is broad and resilient enough
manufacturing activity migrates to ferently about development — both to provide plentiful high-paying
lower-cost countries. Their econo- to improve human welfare and to jobs, encourage a thriving services
mies become increasingly reliant on reduce the global impact of related sector, spawn advanced technologies
the tertiary sector: service industries.
As a result, many workers are forced
into subsistence service jobs unless Government leaders need to
40 they have the education, experience,
and aptitude required for high-end apply the right remedies at the
professional services sectors such as
healthcare, finance, or management
right time, with interventions
consulting. When few workers are directed at specific bottlenecks.
able to make this difficult transi-
tion, individual poverty can become
surprisingly common in otherwise challenges, including pandemics, and innovation, and invest in local
highly developed countries. terrorism, and military conflict. In communities.
Finally, even developed coun- addition, emerging markets will Of course, all this is not to im-
tries may simply lack enough firms remain the best potential source of ply that capitalist free market eco-
with world-class capabilities to sus- the economic growth many devel- nomics and liberal democracies are
tain their economy as a whole. For oped countries will need to meet suddenly passé. Indeed, they will
example, Italy remains overreliant their rising social and public debt probably still be the endgame in
on its many small, family-owned obligations. most, perhaps even all, cases. But
businesses. They are capable of high For emerging markets to avoid the likelihood of getting there may
levels of craftsmanship but often the growth traps that have long actually be much higher if govern-
don’t have the resources and scale held them back, government lead- ments and multilateral institutions
to compete with low-cost competi- ers need to apply the right remedies do not insist on them early on —
tors from countries such as China. at the right time, with interventions and instead give countries the tools
Unless these companies can become directed at the specific bottlenecks and time they need to catch up. +
more capable (and larger), Italy will that prevent domestic firms from Reprint No. 00331
be effectively forced to turn to old- steadily improving their capabili-
fashioned protectionism, which ties relative to world-class competi- John Jullens
john.jullens@strategyand.pwc.com
in the long term only undermines tors. Such policies should focus on is a partner with Strategy& based in
its economic competitiveness. The integrating tailored economic, in- Shanghai. He co-leads the firm’s
engineered products and services
orthodox economist’s solution of stitutional, and firm policies at each practice in Greater China.
simply letting noncompetitive local development stage, and engaging
firms be replaced by more efficient in a continual process of industrial
foreign competitors not only is chal- upgrading and rebalancing. The key
lenging politically, but also fails to is to craft a national development
strategy+business issue 79

recognize that local firm ownership strategy from the bottom up, rather
still matters to a region’s prosperity. than starting with a general set of
Most multinationals remain over- policies and principles and trying
whelmingly local in, for example, to deduce specific recommendations
the makeup of their executive teams and initiatives from the top down.
 Effective
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 strategy+business issue 79
42
feature strategy & leadership
 The
$112 Billion
CEO Succession
Problem
Poor planning for changes in leadership

feature strategy & leadership

costs companies dearly. Getting it right is
worth more than you might think.
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson

Costs can mount quickly when the chief executive officer of a

large company is fired or departs suddenly without an obvious
internal replacement. The typical seven-figure severance
package and six-figure retainer for an executive search firm
are just the beginning. Board members might have to fly in
on short notice for an emergency meeting. A small army of 43
professionals — all of whom charge by the hour — begins
to mobilize: communications consultants and employment
lawyers, movers and relocation experts. The longer the clock
ticks, the higher the figure on the meter.
And those are just the hard, easily quantifiable impacts.
They pale in comparison to the less visible costs. Turmoil
Illustration by Martin Leon Barreto

and uncertainty at the top filter quickly down through the

organization, slamming the brakes on growth initiatives,
hindering the closing of vital deals, and causing some valued
employees to start looking for new positions elsewhere.
Because unexpected successions can paralyze even the best-
functioning companies, they can wreak a harsh toll on
revenues, earnings, and stock prices.
 Ken Favaro Per-Ola Karlsson Gary L. Neilson Also contributing to this article
ken.favaro@ per-ola.karlsson@ gary.neilson@ were s+b contributing editor
strategyand.pwc.com strategyand.pwc.com strategyand.pwc.com Rob Norton and, at Strategy&,
is a senior partner with is a senior partner with is a senior partner with senior manager Josselyn
Strategy& based in New York. Strategy& based in Dubai. He Strategy& based in Simpson, associate Veronica
He leads the firm’s work in serves clients across Europe Chicago. He focuses on Pirola, and senior analyst
enterprise strategy and and the Middle East on operating models and Spencer Herbst.
finance. issues related to organization, organizational transformation.
change, and leadership.

This year, in the 15th Strategy& annual study of Fortunately, substantial progress has been made
CEOs, Governance, and Success, we focused on CEO in recent years. Overall, boards of directors and senior
feature strategy & leadership

succession as a business issue: How much is it worth to executives have become significantly more practiced
get it right, and what is the cost of getting it wrong? The at planning smooth successions during the 15 years
answer to both questions: a lot. Large companies that we have tracked CEO turnover. In the early 2000s,
underwent forced successions in recent years would have about half of all CEO successions were planned, and
generated an average US$112 billion more in market the percentage remained around that rate, with some
value in the year before and the year after their turnover variation, through most of the decade. But from 2009
if their CEO succession had been the result of planning. onward, the percentage of planned successions has
That’s a lot of money. Even in cases where successions steadily increased, to a record 78 percent in 2014 (see
are planned, financial performance suffers in the year Exhibit 2). Forced turnovers have become much less
before and the year after the change (see Exhibit 1). In common. In 2000, 26 percent of departing CEOs
other words, there’s always a cost to changing leader- were forced out, but in 2014, that figure was only 13
ship at the top, but companies pay a much bigger price percent — a new low. (Each year, mergers and acqui-
when they get into situations that can be resolved only sitions account for a small minority of CEO changes;
by forcing out their CEO. the figure was about 9 percent in 2014.) The data also
We also looked at the correlation between total
44
shareholder returns and succession characteristics over
Exhibit 1: Lagging Performance
our entire data set from 2000 through 2014, and found Stocks suffer when companies change CEOs, especially when the
that underperforming companies tend to have more transition is forced.
forced turnovers, outsider appointments, and multiple
Median return to shareholders for the two-year period from
successions. (See “Succession Planning and Financial one year before to one year after the succession, compared with
Performance,” page 46.) relevant regional stock index

The upshot? Although firing the CEO and hir-

ing an outsider is the right call for a board of directors
–4.0%
in some circumstances, it can be enormously costly Planned
to shareholders. Companies that have to fire their
CEO forgo an average of $1.8 billion in shareholder
value compared with companies that plan, regardless
strategy+business issue 79

of whether the replacement is an insider or outsider.

There is a far greater payoff to getting CEO succession –13.5%

right than current succession practices and investments Forced

would imply. The $112 billion price tag also raises the
question of CEO succession to a core strategic issue. Source: Strategy&
 VIDEO FEATURE

CEO Succession: Why It Pays to Have a Plan

Large companies can lose billions of dollars when they
don’t plan for changes in leadership.

shows that incoming CEOs include a growing number tention to developing future generations of CEOs at all
of women, and incoming chief executives are also in- levels. We’ve also observed that boards tend to rely too

features title
feature
creasingly better educated than in the past. We believe much on the candidates’ track records, thus effectively
these trends reflect an overall improvement in corpo- making their choices based on what has worked in the
rate governance — but there is still plenty of room for past rather than on what will work in the future.

strategy
growth. (See “The Incoming Class of 2014: No Sur- To avoid the penalty for getting the transition
prises,” page 50.) wrong, we recommend that companies undertake a

of the
review to test whether their succession practices are as
Getting Succession Right good as they should be. This review should consist of

& article
leadership
Failed CEO successions are usually a result of boards four key questions.
having allowed succession planning to fall off their
regular agenda. This happens a lot, because many
boards treat succession as a discrete event, not as a pro-
cess, leading them to overdelegate succession planning,
1.
Does your board really “own” the succession process?
usually assigning it to the CEO. Moreover, neither the At many companies, the succession narrative largely
board nor senior management typically pays enough at- revolves around the sitting CEO. When will the boss
leave? And who is being groomed by the CEO as heir
45
apparent? But this way of thinking ignores the require-
Exhibit 2: Sustained Improvement
In 2014, the percentage of planned turnovers reached an all-time high,
ments of corporate governance, in which the board is
while the percentage of forced tunovers reached an all-time low. theoretically the paramount governing body. The board
Succession reason, as a percentage of global turnover events needs to have the responsibility — and the accountabil-
100% ity — for choosing the next leader.
Although the incumbent CEO’s judgment will
80% naturally be an important factor in the board’s decision
Planned
making, simply delegating the choice of the next boss to
60% the current one is a mistake. Why? Incumbent CEOs
have an inherent conflict of interest in identifying and
40% grooming potential successors. Most CEOs are not look-
Forced ing to be replaced, and the stronger the bench of poten-
20% tial successors, the more evident it may become to the
M&A board and the CEO that he or she is not irreplaceable.
0% This conflict can also affect the CEO’s decisions about
2000 2005 2010 2014
which of the company’s senior leaders should be identi-
Source: Strategy& fied as potential future CEOs, and should thus be given
 SUCCESSION as companies in the higher quartiles:
Forced turnovers accounted for 45
PLANNING AND percent of all successions at compa-
nies in the bottom quartile, compared
FINANCIAL with 21 percent for companies in the
feature strategy & leadership

PERFORMANCE top quartile (see Exhibit A). Companies

Exhibit A: Walking Papers

CEOs of companies with the poorest-
performing stocks are often forced out.

H
ow do we know that In the latter case, the need to hire
good succession plan- an outsider suggests an inability to Percentage of CEO turnovers in each
performance quartile that were forced,
ning is good business? develop senior leaders with the right 2000–14
We reviewed the char- mix of talent and experience to run the 45%
acteristics of successions over our company. Although there are instanc-
15-year data set, slotting all compa- es in which hiring an outsider makes
nies that had a succession event into sense (for example, when an industry
quartiles ranked by their total return is undergoing disruption and new
to shareholders over each depart- capabilities are required to compete), 26%
ing CEO’s tenure — a total of 4,498 insiders delivered higher median total 21%
46 19%
succession events.* We then used two shareholder returns annualized over
indicators as proxies for poor succes- their entire tenure in 10 of the 15 years
sion planning: forced successions, we have tracked.
wherein the board found it necessary We found that companies in the
Lowest
to unseat an incumbent CEO; and the lowest performance quartile exhibited quartile Second Third Highest

choice of an outsider as the new CEO. characteristics of poor succession Annualized shareholder returns
over outgoing CEOs’ tenure
In the former case, as noted in the practices at a greater rate than other
main story, forced turnovers suggest companies. They forced out current Note: Excludes turnover events resulting from M&A,
interims, and events with incomplete turnover information.
problems with succession planning. CEOs more than twice as frequently Source: Strategy&

the kinds of assignments and responsibilities that will ate awkwardness or raise sensitivities. Indeed, circulat-
strategy+business issue 79

better prepare them for the top job. What’s best for the ing an agenda for a board meeting with a new item
CEO may not always be best for the potential succes- labeled “CEO Succession” might set off alarm bells
sors’ development. throughout the company. For that reason, the board
One difficulty in effectively controlling the suc- should find ways to make CEO succession planning
cession process is that simply raising the issue can cre- a routine, recurring, and candid topic of discussion.
Over a 10-year period,
top-performing companies
had planned successions
79 percent of the time.

in the lowest quartile also appoint out- Exhibit B: Second Time Around companies share one succession
siders or interim CEOs to replace the Companies in the top quartile of stock characteristic with those in the bottom
performance replace one insider with another
outgoing CEO more often than other more often than those in the lowest quartile. quartile — both of which are distinct
companies — in 40 percent of all suc- from the companies in the middle
cessions, compared with 31 percent quartiles. Like the low performers,

features title
feature
Insiders hired in planned turnovers, 2005–14
for the highest-performing companies companies in the top quartile tend
100%
over the 10-year period from 2005 to change CEOs somewhat more
High-performing
through 2014. Companies in the low- frequently than average perform-

strategy
companies
est quartile also turn over their CEOs 80% ers. (Median tenure was 4.8 years

of the
more quickly. CEOs in these compa- Low-performing compared with median tenure of just
companies
nies have a median tenure of 3.4 years, 60%
over six years for companies in the

& article
compared with a median of 4.8 years middle quartiles.) We hypothesize

leadership
for companies in the highest perfor- two possible explanations for this.
40%
mance quartile. These characteristics First, it could be that CEOs of high-
suggest that companies in the bottom performing companies are poached
quartile are frequently surprised by 20% more frequently by other companies.
the need to find a replacement and Second, the increased frequency with
lack good internal CEO candidates. which top-quartile companies change
By contrast, companies in the top 1st 2nd CEOs may reflect a proactive drive
TURNOVER TURNOVER
performance quartiles showed signs for excellence, whereas in the lowest 47
Note: Excludes turnover events resulting from M&A,
of good succession practices. Top- interims, and events with incomplete turnover information. quartile, it suggests a reactive need
Source: Strategy&
performing companies had planned for survival.
successions 79 percent of the time,
and, coincidentally, hired 79 percent companies — an indication that high
* We measure total shareholder return (TSR) as
of their CEOs from inside. And in performers have more robust pipe- TSR relative to the indexes on which companies
planned successions, they were able to lines of senior executives prepared to trade, annualized for outgoing CEOs’ total tenure as
CEO. The quartiles of performance were created by
replace one insider with another more fill the CEO position (see Exhibit B). dividing all companies having a turnover in a given
frequently than were low-performing Interestingly, the best-performing year into four groups.

Board practices vary, but one simple way to ensure that roles of CEO and chairman of the board is a basic rule
succession planning never falls off the table is to list it of good governance.
as a standing item on the board’s strategic agenda. It is common for boards to request that senior lead-
The best approach is to include a CEO-free session ers who are potential successors present to the directors
during each board meeting, presided over by the lead on their businesses and other routine matters. The idea
outside director. This is one reason that separating the is to give board directors regular, face-to-face interac-
 The board should make
succession planning a
routine, recurring, and
candid topic of discussion.

tions so they can get a firsthand understanding of the practice has become steadily less common. (See “The
strengths and weaknesses of the company’s CEO bench. Decline of the COO,” by Gary L. Neilson, page 54.)
feature strategy & leadership

Unfortunately, this practice can easily devolve into a se- In our view, this type of “on deck” promotion can be
ries of highly rehearsed dog-and-pony shows that never counterproductive, and the better practice is to make a
shine a true light on the senior leaders in action. As a clean break.
better alternative, some boards have an “issues agenda” Keeping the succession plan private is difficult.
on top of their strategy process, in which they review Companies don’t keep secrets well. Shareholders and
specific threats or opportunities that may affect the other stakeholders may feel they have a right to know,
company. Board members can request that the leading and the financial media is always looking for a good
potential successors take charge of these issues and pres- succession story. At Berkshire Hathaway, for example,
ent on them. This has the great benefit of killing two media speculation surrounding which executive might
birds with one stone: seeing the candidates in action succeed the now 84-year-old Warren Buffett has been
while making progress on the issues and opportunities raging for more than a decade. Some large companies
that are important to the company’s future. have invited public attention by creating a “horse race”
in which several senior leaders are told, in advance of a

48
2.
Does your board really have a plan, and is it private? Life
planned succession, that they are finalists, and invited to
compete for the job. Although some exceptional leaders
have emerged from this kind of process, it is disruptive
can be cruel and uncertain, even for the world’s top and divisive, and likely to result in an exodus of talent.
corporate leaders. A CEO can become debilitated by a The interests of the company would be better served if
stroke, or die in a plane crash, decide to run for office, the board acted decisively and minimized uncertainty
or simply decide he or she would like to retire imme- about the future leadership.
diately. The board members should always have — in Not having a plan makes it more likely that when
effect, if not in fact — a “secret envelope” summarizing a change is needed, the board will be forced to act
the succession plan and the names of the senior leaders precipitously. The result, all too often, is the choice of
they believe are capable of leading the company at any the wrong person, or the appointment of an interim
given moment. CEO, which suggests indecisiveness and creates un-
The board should take care to keep the names certainty. When Yahoo fired CEO Carol Bartz in the
on the list private to minimize the risk of key leaders fall of 2011, it named then-CFO Tim Morse as interim
strategy+business issue 79

departing (should they learn they’re not on the list) CEO while engaging in a secretive search for a new
and also of undercutting the authority of the incum- chief executive. After four uncertain months, as the
bent CEO. In some successions, companies have tele- future prospects of internal candidates were left
graphed the coming change by elevating the heir ap- dangling, the board hired a new CEO from outside
parent to the chief operating officer position. But this — former PayPal executive Scott Thompson. Thomp-
son, in turn, was let go within weeks as activist inves- ment. In its 117 years, GE has had fewer than a dozen
tors questioned his academic credentials and his suit- top leaders. And it has had only two CEOs in the past
ability for the job. In this instance, the failure to plan 34 years. In 2001, when Jeff Immelt succeeded Jack

features title
feature
adequately led to apparent chaos. When a board of di- Welch as chief executive officer, the change represented
rectors announces the departure of a CEO and the hir- the final promotion for an executive who had joined
ing of an executive search firm to identify a successor, the company 19 years earlier and had risen through

strategy
the board members are also announcing that they have the ranks. Immelt was replacing a CEO who had spent

of the
failed at succession planning. 21 years being gradually promoted at GE before being
named to the post in 1981. GE’s continued effort to de-

& article
3.

leadership
velop executive talent has qualified many top-tier alum-
ni for chief executive positions at other companies — a
Is your company truly proactive about developing future fact that helps attract high achievers to GE.
generations of CEOs? Perhaps the best way to avoid the Too often, development of the CEO talent pipe-
disruption of having to bring in an outside leader is to line becomes perfunctory — a box-checking exercise in
do a better job at developing talent internally. Boards which each manager lists who should take over if some-
would be well served to treat CEO succession as a pro- thing happens, tagged on at the end of a performance
cess that will be years in the making, not as a decision appraisal. Instead, the process should be proactive, with
49
made over the course of a week or two. The board, the care taken that the company is consistently developing
CEO, the chief human resources officer, and the senior people for bigger jobs. Leadership development models
leadership team need to work together to ensure that are frequently too concerned with vertical and function-
the company’s leadership development process is pre- al roles, neglecting lateral moves, such as international
paring successors for the CEO position, and that other assignments, that can round out future leaders’ expe-
executives are rising from further down on the manage- rience. Our data shows that CEOs at the highest-per-
ment pyramid to fill other vacancies. The board is di- forming companies more often have had international
rectly concerned with the names at the top: the two or experience. Indeed, although only 33 percent of this
three executives who are candidates for a succession in year’s incoming CEO class members have international
the short term, and the dozen or so senior leaders who experience, it is reasonable to think that international
are on track to become CEO two to three successions posts may soon become a sine qua non for promotion to
out. Responsibility for the career development of the the corner office. Stephen Easterbrook, who was named
next-tier leaders — 50 to 100 executives, at most large CEO of McDonald’s in early 2015, joined the company
companies — rests with the CEO and the senior team. in the U.K. in 1993 and held important executive posts
General Electric, one of the most successful com- in the U.K. and Europe before being named chief brand
panies in U.S. business history, stands as an example of officer in 2013.
orderly succession planning through internal develop- (continued on page 52)
 THE CEO–chairman appointments each
year ranged from 25 to 50 percent.
INCOMING CLASS Companies that forced out their CEO

OF 2014: awarded joint titles to the incom-

ing CEO 14 percent of the time over

NO SURPRISES the last decade, compared with 10

percent for companies with planned
feature strategy & leadership

successions.
As noted above, women made

T
he ways the 330 executives 71 percent in 2013, and up markedly up 5 percent of the 2014 incoming
who became CEO in 2014 from 44 percent in 2006. The percent- class, up from 3 percent in 2013. This
ascended to their job show age of incoming CEOs who were pro- continues a trend we observed in last
continued improvement in moted from inside the company was year’s study of slow but consistent
corporate governance at the world’s also 78 percent, up from a recent low growth in the share of women CEOs
2,500 largest companies. Forced of 71 percent in 2012. At the 78 com- (see Exhibit C). Our data continues to
turnovers, which are generally indica- panies with planned successions that show that women CEOs can expect to
tive of poor succession practices, are followed the “apprenticeship model,” face stiffer headwinds than their male
becoming less and less common. whereby the outgoing CEO becomes colleagues: Women CEOs were more
And the fact that 17 members of the board chairman to mentor the new often outsiders (33 percent over the
Class of 2014 (about 5 percent) were CEO, the share of incoming CEOs who 11 years from 2004 to 2014, compared
women continues the trend toward were insiders was particularly high: with 22 percent for men), and were
50 greater diversity — albeit from a 92 percent. more likely to be forced out (32 per-
very low level — that we noted in last As we have noted (see “Succes- cent versus 25 percent for men).
year’s study. The demographics of the sion Planning and Financial Per-
incoming class indicate that compa- formance,” page 46), these trends Regions, Industries, and Education
nies continue to hire CEOs who are point to improving CEO succession Although the share of CEOs coming
otherwise familiar to them: Most are practices and should presage better from the same country as their com-
from the country where their com- financial results. pany headquarters in 2014 remained
pany is headquartered (85 percent), Another sign of progress: The near its 82 percent average of the
most have worked in only one region percentage of incoming CEOs who last five years, there were signifi-
(67 percent), and most joined their also hold the chairman of the board cant variations by region. Western
company from another in the same position, which we consider to be a European companies most commonly
industry (57 percent). poor corporate governance practice, appointed CEOs from other countries
strategy+business issue 79

Overall, the percentage of in- was near its all-time low in 2014, at 10 over the last five years, making up
coming CEOs appointed in a planned percent. This continues a major shift nearly a third of all cases. Japan and
succession rose to a record high of 78 in corporate governance since the China did so least often, appointing
percent in 2014, up noticeably from early 2000s, when the number of joint foreigners only 2 percent and 1 per-
Women CEOs were
more often outsiders
and were more likely than
men to be forced out.

cent of the time, respectively. Western 2014, with 89 percent and 84 percent ing CEOs who hold an MBA reached
European countries also had the high- of CEOs, respectively, coming from a new high of 34 percent in 2014, a
est share, at 53 percent, of incoming their own industries. Utilities com- 75 percent increase from the rate 11
CEOs in 2014 with experience working panies, which face deregulation and years ago. Additionally, 10.5 percent
in another region, compared with 24 are in need of new capabilities, looked of incoming CEOs in 2014 held Ph.D.
percent in the U.S. and Canada, and furthest afield, with only 17 percent degrees. And they’re getting a bit
none in China (see Exhibit D). of new CEOs joining the company younger. The median age for incom-

features title
feature
The proportion of incoming from within the utilities industry (see ing CEOs in 2014 was 52, one year
CEOs who joined their company from Exhibit E). Overall, just 20 percent of younger than that of those appointed
another in the same industry — 57 incoming CEOs in 2014 had worked in the previous two years.

strategy
percent — has been about the same in only one company throughout their

of the
for the last three years, but varies careers.
greatly among industries. Energy and New CEOs are also becoming

& article
leadership
financials stayed closest to home in more educated. The number of incom-

Exhibit C: More Women Exhibit D: Global Experience Exhibit E: Outsider Hires

Though still low, the share of female incoming More than half of 2014’s incoming Western
The utilities industry had the highest share of
CEOs in 2014 rose noticeably from 2013. European CEOs had punched a career ticket
incoming CEOs in 2014 who were recruited
elsewhere.
from a different industry.
Share of incoming women CEOs Incoming CEOs who had experience working in Incoming CEOs who joined company
a global region other than where the company from a different industry
is headquartered
51
5.2% HAVE HAVE
NOT Utilities 83%

Western Europe 53% 47% Consumer staples 67%

4.3%
4.0% Consumer discretionary 56%
Brazil, Russia, India 50% 50%

Materials 52%
3.1% Other mature economies 47% 53%
Information technology 50%
2.6%
Other emerging economies 38% 62% Industrials 47%

Telecommunications 43%
U.S., Canada 24% 76% services

Healthcare 27%
Japan 17% 83%
Financials
16%
China 100% Energy
2010 2011 2012 2013 2014
11%

Source: Strategy& Note: Excludes turnover events resulting from M&A, Note: Excludes turnover events resulting from M&A,
interims, and events with incomplete turnover information. interims, and events with incomplete turnover information.
Source: Strategy& Source: Strategy&
 Methodology Each company that appeared to event as part of the effort to learn the
feature strategy & leadership

have changed its CEO was investigat- reason for specific CEO changes in
ed for confirmation that a change oc- their region.

S trategy&’s 2014 Chief Execu-

tive Study identified the world’s
2,500 largest public companies,
curred in 2014, and additional details
— title, tenure, gender, chairmanship,
nationality, professional experience,
To distinguish between mature
and emerging economies, Strategy&
followed the United Nations Develop-
defined by their market capitaliza- and so on — were sought on both the ment Programme 2013 ranking.
tion (from Bloomberg) on Janu- outgoing and incoming chief execu- Total shareholder return data
ary 1, 2014. We then identified the tives (as well as on any interim chief for a CEO’s tenure was sourced from
companies among the top 2,500 that executives). Bloomberg and includes reinvest-
had experienced a chief executive Company-provided informa- ment of dividends (if any). Total share-
succession event between January tion was acceptable for most data holder return data was then region-
1, 2014, and December 31, 2014, and elements except the reason for the ally market-adjusted (measured as
cross-checked data using a wide vari- succession. Outside press reports the difference between the company’s
ety of printed and electronic sources and other independent sources return and the return of the main
in many languages. For a listing of were used to confirm the reason for regional index over the same time
52
companies that had been acquired an executive’s departure. Finally, period) and annualized.
or merged in 2014, we also used Strategy& consultants worldwide
Bloomberg. separately validated each succession

Identifying the best candidates can be difficult ment lineup. The board may conclude that no senior
because there is frequently a bias within companies — a leader is the right candidate to lead the company if a
bias, in fact, in human nature — toward relying on fa- change becomes necessary, or that they have an insuf-
miliar faces. The board should resist this tendency. Most ficient number of candidates with development tracks
boards have a grandfather principle whereby the CEO that will eventually make them the right choice. In such
suggests senior appointments, but the board must ap- cases, it is imperative to move early and proactively to
prove them. The board can in such cases have a large in- fill the void before the need to make a change arises.
strategy+business issue 79

fluence on these appointments by asking the right ques- This action enables the incoming leaders to get to know
tions and challenging the CEO about specific choices. the company, show their abilities, and become potential
Oversight of the future-CEOs development pro- CEOs over an appropriate time frame. The same prac-
gram will also enable the board and the senior team to tices should be used by the company leadership to fill
spot current or emerging weaknesses in the manage- emerging gaps in the second tier of managers.
The way companies
manage CEO succession
is a reflection of the
way they manage their
enterprise in general.

4. ficient to guide their companies through the changes

necessary to secure their future.

features title
feature
Is your succession planning backward-looking or for- Even if it is discussed openly and frequently at the
ward-looking? The board’s overall approach to choos- board level, the topic of succession will always raise
ing the CEO’s potential successors should start with some discomfort. And good succession planning re-
quires meaningful investments of time and resources.

strategy
what the company will need in the future and how that
is different from what it has needed in the past. Instead, But those investments are worth it — the cost of do-

of the
many companies start with executives’ track records. ing things poorly is in the billions. Moreover, the way
Track records are always more tangible than the companies manage CEO succession is a reflection of

& article
leadership
facts about executives’ capabilities, and boards of pub- the way they manage their enterprise in general. Get-
lic companies understandably find it easier to promote ting CEO succession right is one area where companies
people on the basis of tangible facts. But such facts are can control their own fate. +
backward-looking. As a result, boards tend to choose Reprint No. 00327

candidates who have thrived under the business model

the company has pursued in the past. These candidates
may have been standouts in that context, but changes in
Resources
the industry, in markets, or in technologies may suggest
53
different competencies are required for success in the Strategy&’s 2014 Chief Executive Study (strategyand.pwc.com/
future. When Ford Motor Company was seeking a new chiefexecutivestudy): The full report and data analysis of this year’s study.

CEO in 2006, it proved willing to look outside the tra- PwC’s 18th Annual Global CEO Survey: “The Marketplace without
Boundaries,” Jan. 2015: The latest PwC Annual Global CEO Survey
ditionally insular auto industry and hired Alan Mulally, shows that the changes CEOs are making within their organizations now
the former CEO of Boeing’s commercial airplanes di- have less to do with sheltering from economic headwinds and more to do
vision. During his eight-year run, Mulally steered Ford with preparing for the future.

through difficult shoals and engineered an impressive Jon Katzenbach and DeAnne Aguirre, “Culture and the Chief
turnaround. There were surely many highly competent Executive,” s+b, Summer 2013: CEOs are stepping up to a new role, as
leaders of their company’s thinking and behavior.
executives within Ford who had superb track records of
Matt Palmquist, “The Value of the CEO Variety Pack,” s+b, Jan. 15,
delivering results. But Ford’s board rightly judged that 2015: A chief executive with a diverse background usually brings
those executives did not necessarily have the skills the innovation and new ideas to a company, but the shake-up doesn’t
company needed for this crucial juncture. necessarily pay off.

Many companies today are facing significant Matt Palmquist, “The Right Time to Separate the CEO and Chairman
Roles,” s+b, Apr. 12, 2013: When performance is flagging, splitting the
threats to their established business models. Indeed,
top jobs could well make sense — otherwise, don’t rock the boat.
sooner or later, all companies do. Senior leaders in those
More thought leadership on this topic:
companies will have excellent operating experience strategy-business.com/strategy_and_leadership
within those business models. But that may not be suf-
 In a world where succession planning is increasingly

The important, it’s good to be the COO — right? The chief

feature strategy & leadership

operating officer has traditionally been the number

two person in the C-suite — the senior executive

Decline charged with overseeing all of the company’s business

operations. As such, the COO has long been viewed
as the heir apparent, the leading insider candidate to
succeed the chief executive officer. Yet, according to the

of the senior executive search firm Crist Kolder Associates, the

percentage of Fortune 500 and S&P 500 companies
with a COO has declined steadily from 48 percent in

COO 2000 to 36 percent in 2014.

The position is still valid and valuable at more than
a third of the Fortune 500 and S&P 500 companies.
Indeed, 44 percent of current CEOs were chief oper-
Is it time to add chief ating officers before ascending to the top spot. But the
decline is unmistakable: COOs are fading from view
54 operating officers to the list throughout the business world. At many high-profile
of endangered species? companies, such as McDonald’s and Twitter, compa-
nies deleted the position from the organizational chart
by Gary L. Neilson when their COO retired or resigned. At others, COOs
chose not to replace themselves in that role when they
were elevated to CEO.
Why are so many major corporations eliminating
the role? Why are COOs-turned-CEOs doing away
with their own former position and, in effect, pulling
up the ladder behind them? And when does it still make
sense to retain or even add the position of chief operat-
ing officer?
strategy+business issue 79

Based on our firm’s decades of experience advising

CEOs and other senior executives on organizational
leadership and change, we see three major reasons for
the decline of the COO: improvements in CEO man-
agement capacity, an overall trend toward flatter orga-
 past two decades, CEOs have been able to double the
number of their direct reports (from five to 10, on av-

feature strategy & leadership

erage), because of a pronounced increase in their own
leadership productivity.
The advancing sophistication and reach of new in-
formation and communications technology extends the
CEO’s ability to be everywhere at once. Digital commu-
nications technologies such as email, voice mail, video-
conferencing, and (to a growing extent) social media
enable CEOs to be more hands-on in more of the com-
pany’s operations. At the same time, enhanced access to
timely and customized financial and operating infor-
mation, often in the form of management dashboards,
brings key performance metrics to the CEO’s attention
on a virtually instantaneous basis.
Another factor is a trend we have observed each
year in our studies of CEO succession and tenure: the
55
increasingly common split of the chairman and CEO
roles. In more companies every year, the chairman and
CEO are different individuals. According to our re-
search, the percentage of incoming CEOs who are also
named chairman by their board has declined precipi-
tously, particularly in North America — from 52 per-
cent in 2001 to 11 percent in 2014. (See “The $112 Bil-
nizations, and a shift in the nature of succession plan- lion CEO Succession Problem,” by Ken Favaro, Per-Ola
Illustration by Martin Leon Barreto

ning. Although we expect these factors to remain in Karlsson, and Gary L. Neilson, page 42.) This division
place and even to grow stronger, we shouldn’t count the of labor enables CEOs to spend more time running the
COO out just yet. There are still circumstances when business and less time managing the board. Thus, as the
having a COO contributes real value. number of dual CEO–chairman roles drops, we can ex-
pect a corresponding decrease in the number of COOs.
The Increasingly Effective CEO Meanwhile, boards have become more accountable,
CEOs today have greater management capacity than especially in the aftermath of the financial crisis. They
ever before, and they are expected by their boards to cannot afford to be seen as rubber-stamping the CEO’s
be closer to the business than they used to be. Over the decisions. They are thus more likely to want CEOs
 Gary L. Neilson
gary.neilson@
strategyand.pwc.com
is a senior partner with
Strategy& based in
Chicago. He focuses on
operating models and
organizational transformation.

to stay closer to the business. Many boards have be- insights and expertise to bear in a more distributed and
gun to demand confirmation that CEOs are on top of collective approach to information sharing and deci-
feature strategy & leadership

the company’s operations and have firsthand knowledge sion making. This allows CEOs to manage the business
of their inner workings. The CEO can no longer del- more horizontally, which often leads them to remove
egate that sort of detailed insight and responsibility to the COO position from the hierarchy.
the COO.
No More Pre-Anointed Successors
Flatter, More Focused Companies The third reason we see fewer COOs in major corpo-
The second factor contributing to the disappearance of rations relates to succession planning. As the perceived
the COO is the general trend toward flatter organiza- “CEO-in-waiting,” the chief operating officer position
tions and more focused portfolios. (See “How Many can inhibit executive recruiting and development.
Direct Reports?” by Gary L. Neilson and Julie Wulf, For companies looking to cultivate a broad and
Harvard Business Review, Apr. 2012.) As companies deep bench of executive talent, the presence of a COO
de-layer and concentrate more on their core capabilities, can be demotivating. Crist Kolder Associates president
there is less need for a COO to corral and quarterback Tom Kolder puts it this way: “We don’t see many one-
diverse operations. over-one situations anymore — where you have a COO
This trend has long been on vivid display in the between the CEO and the rest of the executive team.
56
consumer packaged goods industry. Companies such It’s hard to attract a world-class chief financial officer,
as Unilever and Procter & Gamble expanded into giant for example, who is not going to report directly to the
multisector enterprises in the 1980s and ’90s. But since CEO. The same holds true for the general counsel, the
2000, they have generally shed businesses that don’t fit head of HR, and most staff functions.”
their distinctive capabilities. The more focused they are, Like organizations themselves, executive develop-
the more effectively they can compete. (See “The New ment is becoming more horizontal. When firms set up
Supercompetitors,” by Thomas N. Hubbard, Paul Lein- lateral executive development opportunities and rotate
wand, and Cesare Mainardi, s+b, Autumn 2014.) As a promising talent through operational and functional
company’s businesses become more related and more assignments around the world, they develop a robust
concentrated, the COO’s role naturally diminishes. cadre of executives who can handle the integration role
In most industries, chief executives are moving previously relegated to the COO. This approach works
from a hub-and-spoke model of engagement with their well for companies that compete with distinctive capa-
strategy+business issue 79

top team to a more collaborative approach. The CEO bilities. These companies, which often span the globe
and COO no longer sit in the center, receiving informa- with their products, services, and capabilities, need
tion and issuing directives to satellite units and func- many executives with integration skills. They can’t rely
tions. Instead, the CEO’s direct reports work with one on just a COO.
another as well as with the CEO, bringing their own To extend their reach without a COO, CEOs are
The advancing
sophistication of IT extends
the CEO’s ability to be
everywhere at once.

setting up enterprise-wide governance committees and the comprehensive organizational, operational, and
forums. These committees are given a mandate to prose- cultural changes required at that moment, or simply to

feature strategy & leadership

cute the business of the organization — make decisions, keep the company on track.
convey information, and deliberate about the company’s Third, the COO can be a useful counterbalance
prospects. They also serve as powerful executive devel- in the C-suite. The CEO may be a strong leader but
opment bodies, ensuring that horizontal — often global lack operational experience. He or she may be new to
— teaming works to knit the organization together and the enterprise. “There are also instances where there are
bring collective perspectives to bear on emerging issues. a number of candidates vying for the CEO chair, and
In short, the COO role is becoming less relevant as there is significant value in keeping the runner-up in-
organizations foster a deeper, broader, and richer execu- volved in the company,” notes Kolder.
tive bench. In these situations, the board may wish to comple-
ment the CEO’s experiences, abilities, and skills with
When to Keep the COO those of a strong COO, thus creating a more complete
To be sure, there are several situations in which the chief set of competencies at the top. When they work, these
operating officer role is not only relevant, but critical to combinations stimulate the performance of both the
the effective governance of a company. CEO and the COO (and sometimes the CFO as well),
The first is when companies wish to be transparent by creating a dynamic in which each challenges the
57
about their succession plan. Our research confirms that other to excel. +
planned succession events have been on the rise since Reprint No. 00328
2000, significantly so since 2009. Appointing a COO
Resources
can be one way to advertise that a company has suc-
cession planning well in hand. The sitting CEO may Crist Kolder Associates, Volatility Report 2014: Trends in CEO recruiting
have made clear that he or she will retire or resign in six and succession, based on a survey of 669 Fortune 500 and S&P 500
companies.
months to two years, providing the board with a win-
dow to groom a single candidate for the role. Naming Matthew Daneman, “Companies Do Away with Chief Operating Offi-
cers,” USA Today, Aug. 26, 2014: One source of references to McDonald’s
a COO helps make that handoff as seamless as possible and Twitter eliminating the COO role.
and enables the “road testing” of external hires. Thomas N. Hubbard, Paul Leinwand, and Cesare Mainardi, “The New
Second, sometimes the CEO needs to step away Supercompetitors,” s+b, Autumn 2014: Explains the trend toward greater
from the day-to-day and focus on more strategic con- focus by leading companies in each industry.

cerns. The company may have a significant restructur- Gary L. Neilson and Julie Wulf, “How Many Direct Reports?” Harvard
Business Review, Apr. 2012: Research-based guide to the appropriate span
ing agenda that requires the CEO’s dedicated attention,
of control for CEOs, COOs, and other top executives.
or it may be undergoing a transformational shift. The
More thought leadership on this topic:
CEO needs a senior operational executive — one with strategy-business.com/strategy_and_leadership
an enterprise-wide perspective — to be on point to drive
 strategy+business issue 79
Strategic
CEMEX’s
Mix 58
feature global perspective
 This Mexican cement

feature global perspective

company redefined itself
as a global solutions
provider with the critical
capabilities to match.
AN S+B ROUNDTABLE
Moderated by Thomas A. Stewart

59
Illustration by Javier Jaen
 Thomas A. Stewart This article was developed as Also contributing were PREVIOUS PAGES: CEMEX participated in
the 2006 restoration of Centennial Hall
stewart.1490@osu.edu part of the Strategy& Capable Strategy& global campaigns in Wroclaw, Poland, a UNESCO world
is the executive director Company Research Project, director Nadia Kubis and heritage site.
of the National Center for aligned with the forthcoming senior manager Josselyn BELOW LEFT: The original CEMEX plant
the Middle Market at Ohio book Strategy That Works: How Simpson, and contributing opened in Monterrey, Mexico, in 1906,
State University, and the Winning Companies Close the writer Rob Hertzberg. with an annual production capacity of
20,000 tons.
former chief marketing Strategy-to-Execution Gap, by
and knowledge officer of Paul Leinwand and Cesare BELOW MIDDLE: CEMEX concrete was
used in the construction of the Coral
Booz & Company (now Mainardi with Art Kleiner Highway in Dominican Republic. Com-
Strategy&). (Harvard Business Review pleted in 2012, the road has cut travel
Press). times in half and increased tourism.

BELOW RIGHT: The new Town Hall in

Bagnolet, France, opened in 2013, was
built with a high-performance white
concrete developed by CEMEX.
feature global perspective

60

C
onsider the challenges of selling cement and vide them at the lowest price in any particular location
concrete. These are the most widely used would seem to have an unbeatable edge. Yet since the
building materials in the world. They are an- early 1990s, the Mexican company CEMEX, whose
cient (dating back to at least 3,000 B.C., they form primary businesses are cement and concrete, has pur-
the literal foundation of civilization), energy-efficient, sued a strategy of differentiation. It defines itself as a
durable, versatile, and inexpensive. Three tons of con- provider of solutions for builders and local govern-
crete are poured each year for every person on earth. In ments, particularly in emerging economies and for
most places, the business of providing these materials those seeking environmental sustainability. As part of
is capital-intensive and cyclical. Cement is bulky and is this evolution, CEMEX rebounded from a near bank-
strategy+business issue 79

delivered to construction sites in giant bags. Concrete ruptcy during the 2008 economic crisis to regain its po-
must be used soon after it is mixed, because of the way sition as a leading company in the global construction
it hardens. materials industry.
For all these reasons, concrete and cement are gen- This roundtable with CEMEX senior executives
erally seen as commodities. The company that can pro- recounts how the company used its distinctive capa-
 PARTICIPANTS

Jaime Elizondo Luis Farias Luis Hernandez Ignacio Madridejos Juan Pablo Karl Watson Jr.
is president of is CEMEX’s senior is CEMEX’s is president of San Agustin is the president of
CEMEX South, vice president executive vice CEMEX Northern is the executive CEMEX USA.
Central America, of energy and president of Europe. vice president of
and the Caribbean. sustainability. organization and strategic planning
human resources. and new business
development.

features title
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of the
perspective
article
61

bilities — and developed some new ones — to bring an to capital markets. There was no choice but to build
international business strategy to life. (See “CEMEX’s new capabilities — both to defend its home turf and to
Coherence Profile,” page 63.) CEMEX’s global expan- grow abroad.
sion represented a 180-degree turn for a company whose Under Lorenzo Zambrano — who took the helm as
All photographs courtesy of CEMEX

very name is an abbreviation of Cementos Mexicanos. CEO in 1985 and remained in office until his death in
Founded in 1906, the company did business nearly ex- May 2014 at age 70 — CEMEX embraced information
clusively in its home country until the early 1980s; even technology and inorganic growth. Zambrano’s succes-
then, it moved past the national boundaries very tenta- sor as CEO, Fernando A. Gonzalez, was previously the
tively. But in the early 1990s, when the company’s lead- firm’s executive vice president of finance and adminis-
ers saw that the North American Free Trade Agreement tration, and its CFO. Building on its long track record
(NAFTA) would be signed in some form (it became law in lean operations (“ruthless operating efficiency” is a
in 1994), the vulnerabilities of the company’s position catchphrase within the company) and its pride in being
became evident. If CEMEX stood still, it would be up one of the most successful companies from an emerging
against competitors with greater scale and more access market, CEMEX developed a high level of customer
 responsiveness. It delivers cement within 20 minutes sis. It lost major revenues overnight when the global
of receiving an order in many locales. Its international construction industry imploded, and it suffered from
business strategy enabled CEMEX to grow rapidly dur- having paid $14 billion to acquire the Australia-
ing the 1990s and early 2000s, when it became one of headquartered materials company Rinker Group just
the biggest cement companies in the world. before the crisis struck. During 2008 and 2009, the
It did this while maintaining, as New York Univer- company staved off bankruptcy through a series of ma-
sity and IESE professor Pankaj Ghemawat has noted, jor cuts and refinancing efforts. CEMEX recovered only
consistently high profitability levels. (In 2014, the com- when the economy in its markets began to rebound. By
pany reported US$2.7 billion EBITDA on revenues of 2012, the distinctive capabilities it had been developing
feature global perspective

$15.7 billion.) CEMEX’s growing global presence al- — in sustainability and in providing services to govern-
lowed it to raise capital at low rates and to gain leverage ments and business customers — were inherent to the
through its overseas presence and relationships. As it company’s identity.
moved more aggressively into mergers and acquisitions In this roundtable discussion, six CEMEX leaders,
— first in Mexico, then Spain, then Latin America, and all interviewed at company headquarters in Monterrey,
then more broadly — its leaders discovered the lever- Mexico, talk about the company’s capabilities system,
age of postmerger integration. Incoming companies how it developed, and the value that it has provided.
were inducted into the CEMEX Way (the company’s
name for its distinctive practices), and in parallel CE- M&A and Operational Efficiency: 1992–2000
MEX took unusual pains to capture and make use of JAIME ELIZONDO: I joined CEMEX in 1985, shortly be-
acquired companies’ knowledge. (See “The Very Model fore Lorenzo Zambrano became our chief executive
of an Emerging Market Multinational,” by Pankaj Ghe- officer. Mexico was basically our sole market in those
mawat, page 68.) days, and we were the biggest cement company in the
In the 2000s, to take full advantage of its emerg- country. I remember that trucks used to line up outside
ing global nature, CEMEX entered new businesses in our plants to get cement, and it wasn’t unusual for them
62
ready-mix concrete and aggregates — materials whose to wait for several days to pick up an order.
supply chain and financial dynamics were very differ- When Mr. Zambrano took office, we initiated a lot
ent from those of cement. CEMEX also developed a of changes to reduce cost and improve our processes and
sophisticated trading arm that has protected it against our quality. Then we started buying up cement compa-
much of the volatility that threatens cyclical commod- nies throughout Mexico.
ity businesses. At the same time, to evolve into a more This all happened right before NAFTA, which
premium business, CEMEX began providing guidance opened up Mexico [to global competition]. Mr. Zam-
in construction methods — not just to individuals and brano recognized NAFTA for the huge strategic threat
private-sector customers such as building companies, it was. There was a real chance a larger global company
but also to municipalities and national governments. would come into the market and underprice us.
Over time, CEMEX’s leaders developed a capability for
promoting environmental sustainability: decreasing the JUAN PABLO SAN AGUSTIN: In 1992, two years before
strategy+business issue 79

company’s own fuel use, removing or mitigating pollut- NAFTA went into effect, we made our first internation-
ants in materials, and looking for ways its products and al acquisitions, buying two cement companies in Spain.
services could lead to sustainable practices for all the in- At the time, the biggest cement companies were con-
dustries CEMEX serves. centrated in Europe. We reasoned that we could achieve
CEMEX was hit hard during the financial cri- some balance by being on their home turf.
 INTERACTIVE FEATURE

The Foundation of CEMEX’s Success—In Pictures

How the Mexican company developed the global capabili-
ties needed to support its international business strategy.

In the early 1990s, Mexico had very high inflation. CEMEX’s Coherence Profile
The peso crisis had hit, and Mexican companies had a Headquartered in Monterrey, Mexico, CEMEX is a global leader in the
building materials industry.
hard time accessing the financial markets. Because we had

features title
feature
such a high cost of capital, the only way to keep on grow- Way to Play
ing through M&A was to extract a lot of value quickly.
CEMEX is a global solutions provider, drawing on strengths in customer

global
knowledge and innovation and on resources generated by its industry-
ELIZONDO: We became quite adept at that. We would do leading efficiency.

of the
an acquisition, optimize it, take value out of it, and then

perspective
Capabilities System
go do another one. Having that speed and efficiency al-

article
lowed us to be an acquirer as opposed to being one of CEMEX delivers its way to play by excelling at five differentiating
capabilities:
the companies that got acquired. • Industry-leading operational effectiveness, continuously improving
its manufacturing, logistics, and financial effectiveness — a critical
SAN AGUSTIN: To get good at postmerger integration capability in managing and moving building materials.
• Sophisticated knowledge sharing and tracking across a well-
[PMI], we did a lot of postmortems. After each trans- established, well-used information technology network. This capabil-
action, we would ask ourselves, “What was successful? ity gives CEMEX the information it needs to bring acquired companies
on board rapidly and continue increasing its knowledge base.
Where did we fail?” That helped us figure out what
• Long-term customer and community relationship development
to replicate and what not to replicate. Early on, for in- through in-depth consultation, giving CEMEX unique insights into
63
stance, we realized we should use the same team of peo- customer needs and the capacity to erect entry barriers for
competitors.
ple, from planning, accounting, IT, and operations, for • Construction-oriented innovation in products and services
each acquisition. PMI became second nature to them. that address the evolving needs of builders, homeowners, and
An acquisition is inherently very motivating. municipalities.
• The development of sustainability initiatives that create new uses for
There’s this feeling of “let’s prove it to ourselves, our environmentally conscious building materials and lower the costs of
competitors, and the whole world that we can really producing them.

extract more value out of those assets than the former

Portfolio of Products and Services
owners.” But you typically need the people of the ac-
quired company to behave differently, and they don’t do CEMEX provides cement, aggregates, ready-mix concrete, specialty
concrete products, and building and infrastructure solutions to individ-
that automatically the day an acquisition goes through. ual customers, institutions, governments, and communities worldwide.
You have to train them. With most acquisitions, we
found that for at least the first two years, we needed
to have 20 or 25 CEMEX people working in different
parts of the acquired company, making sure the new are key. That’s when you have your best chance — and
people understood our systems. I mean this in the most positive sense — of getting into
This intensive collaboration is one of the key ingre- people’s heads. That’s your window to make them real-
dients of a successful integration. The first three months ize they should change how they think.
 The CEMEX Way Emerges: 2000–2005
SAN AGUSTIN: By 1999, having done acquisitions in Asia,
Latin America, Europe, and the U.S., we had become
very decentralized. That was making us less efficient.
Mr. Zambrano said, basically, that going forward,
CEMEX would have company-wide common processes
for basic activities. These included the closing of the
books, accounts payable, and most technology-related
activities. We could then transfer people without their
having to learn entirely new systems. And our common
technology platform would make us more productive.

LUIS HERNANDEZ: The CEMEX Way, which we devel-

oped to address all this, was a collaborative effort. It was
all about finding what worked best and then enforcing
those standards. IGNACIO MADRIDEJOS: Patrimonio Hoy, which we start-
ed in Mexico in 1998, was one of our first moves in
SAN AGUSTIN: Enforcing is really the right word. A good this direction. It was a program we set up to help low-
feature global perspective

example is the emphasis we put on closing the books on income families overcome the obstacles that made it dif-
the first or second day of every month. A lot of man- ficult for them to build their homes. We provided them
agers initially wondered why it was so important to do with access to building materials such as cement, con-
this. They thought nothing would be lost if they did crete blocks, and steel; we also provided access to credit
their closings on the seventh or eighth day. But we be- through microfinance; and we offered technical and ar-
lieved that having that information readily available chitectural guidance. This was a way for us to grow the
would increase the likelihood that managers would pie and create more value for CEMEX at the same time
make the right decisions. And the practice had a very that we were doing something beneficial for society.
high-level overseer: Mr. Zambrano himself, into whose
email inbox all of these reports flowed. This was not ELIZONDO: Construrama, our retail distribution brand,
subject to negotiation. was another solution-oriented approach. When we in-
troduced it in 2001, about 70 percent of CEMEX’s
HERNANDEZ: At the same time, the CEMEX Way has bagged cement sales in Mexico went through individ-
always been retrofitted to include the best practices of ual distributors. With other competitors coming into
64
companies we acquired. We would identify people in the country, we had to do something to strengthen our
their field operations who had exceptionally smart ap- distribution channel. In addition to bagged cement, we
proaches to doing things. The role of an acquisitions sold them rebar [steel reinforcing bars used to frame
leader included incorporating those practices back into concrete structures] and other products. We set up
the CEMEX Way. That was the beginning of recogni- Construrama as a franchise, and then helped the dis-
tion on CEMEX’s part of the importance of global col- tributors with their business practices. Although the ini-
laboration and knowledge sharing. tial goal of Construrama was to hold on to the loyalty
of our distributors, in the end it became a vehicle for
Solutions and Service: 2001–present providing them with solutions to their problems.
ELIZONDO: Until the 1990s, we offered a single product:
cement. Thanks to our operational efficiency and to the HERNANDEZ: In developed markets [such as France and
discipline we were starting to drive with the CEMEX the U.S.], our opportunities to differentiate CEMEX
strategy+business issue 79

Way, we still had some headroom. But [any] product relied more on product innovation. For example, we in-
has a disadvantage in that a customer can find a substi- troduced Insularis in 2012: It is a ready-mix brand that
tute for it. A solution, by contrast, cannot be that easily improves the energy efficiency of buildings. Another
replaced. So we started to develop offerings that more example is Fortium ICF, a concrete product that is espe-
closely resembled solutions. cially useful in putting up vertical walls.
“The CEMEX Way has always
been retrofitted to include
the best practices of
companies we acquired.”

In developing markets [such as Mexico, South and to local communities and their leaders. The opera-
America, and the Caribbean], we have a bigger oppor- tional guys had to recognize that it wasn’t enough to

features title
feature
tunity. Our capabilities can help us orchestrate infra- lower costs; they also had to connect with local people
structural offerings in a way that others cannot. For and address their concerns — for example, about the
example, you might have a municipality with good dust generated by trucks picking up materials. The

global
tax revenue, but [leaders] don’t know how to structure sales guys had to learn not to wait for people to come
a project, get the permits, or make a good decision about in with orders; if markets were soft, they had to go out

of the
where to put in a road, a bridge, or a public housing proj- and propose solutions to problems that had not yet been

perspective
ect. If we can help orchestrate all this, we can also pro- brought to public attention. “We don’t just mend holes

article
vide value beyond supplying any of the main products. in your street — we can prevent those holes from recur-
ring for the next 30 years.”
ELIZONDO: We redefined our vision for CEMEX Mex- Partly it’s a matter of how we talk about these
ico. We would create innovative solutions for the con- things with customers. We’re not just selling cement or
struction industry that improve the well-being of the ready-mix; we’re helping you build a street. We’re help-
people. We began to say we want a country with the ing you build a home. We aren’t selling a product to
kind of infrastructure that makes it competitive: high- you; we’re working with you on a solution.
ways, ports, airports, anything that reduces the costs of
65
transport and production. We had a lot of experience A World of Shared Knowledge: 2005–present
transporting materials over long distances in trucks, MADRIDEJOS: By the end of 2004, we were an $8 bil-
railroads, and ships, so we knew the problems of hav- lion company. To keep growing, we needed some larg-
ing poor infrastructure, and we had years of experience er transactions. Thus, in 2005, we bought the RMC
helping to build ready-mix concrete roads. We knew Group [a British company; RMC originally stood for
that, compared with building asphalt roads, the initial “ready-mix concrete”]. In 2007, we bought the Rinker
investment was almost the same and the cost of mainte- Group, an Australian building-materials company.
nance was much lower.
For CEMEX to play that kind of role, the company SAN AGUSTIN: RMC was one of our first acquisitions
needed new capabilities. We needed a new kind of ex- of a company with businesses in multiple countries.
ecutive, connected with the environment, who under- It required far greater PMI resources — 200 to 300
stood the real needs of any given locality. We changed CEMEX managers were involved, about 10 times the
old habits; for instance, in the past our people were not number needed for our single-country acquisitions.
prepared to interact with our communities or with the Naturally, we had to come up with new ways of man-
media. We had become an efficient company with an aging the process and new coordinating mechanisms,
inward-looking culture. But our operational guys real- including designating individuals as country leaders.
ized that they needed to be able to talk to the media, That led to weekly updates on issues and problems, and
 “We’re shifting now from global
standards to global principles,
out of the realm of a recipe and
into the realm of a playbook.”
feature global perspective

66

a steady effort to learn from them. This was especially ital-intensive plants involving sophisticated technology.
important because RMC was in 18 countries, and its Ready-mix concrete is a downstream product. You don’t
people didn’t talk to each other. The French managers need capital-intensive plants or sophisticated facilities;
didn’t talk to the German managers, who didn’t talk to the plant is like a blending station, and the main pro-
the British managers, and so on, down the line. duction work is done away from it, in a truck with a
rotating cylinder that mixes the product as it carries it
MADRIDEJOS: These acquisitions also brought us into to work sites. The magic is thus in the market, not in
new territory in our product portfolio. Ready-mix and the production. How do you interact with customers?
aggregates might seem like they are natural extensions If volumes decrease, how do you maintain your price?
strategy+business issue 79

of cement, but there are some significant differences. If volumes level off, how do you gain share? If volumes
pick up, how do you extract value?
KARL WATSON JR.: Cement is a powder made from lime-
stone and other ingredients, used in the production of MADRIDEJOS: Cement is a global business — there are
concrete and masonry. It is produced in enormous, cap- standards you can apply everywhere. It lends itself to
BELOW LEFT: The Amazon Arena soccer
stadium was completed in time for
the 2014 FIFA World Cup. Located
in Manaus, in southern Brazil, the
stadium was built with ecological
construction methods.

BELOW MIDDLE : Another view of the

restored Centennial Hall in Wroclaw,
Poland.

BELOW RIGHT: Terminal 2 (the “Queen’s

Terminal”) at Heathrow Airport in
London, was built in 2014 with a low-
heat ready-mix concrete developed by
CEMEX to prevent premature thermal
cracking.

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of the
perspective
article
67

recipes like the CEMEX Way, which can be dissemi- cluded transportation as part of the unit price. A truck
nated by a corporate center. By contrast, ready-mix and with a capacity of 10 units, priced at $60 a unit, if full,
aggregates are hyperlocal businesses, and a best practice would generate $600. But if we sent out the same truck
in one place might not be a best practice in another. We to fill an order of six units, we’d only generate $360.
needed to figure out what the best practices were in dif- Obviously, that doesn’t make a lot of business sense.
ferent regions, see how broadly they applied, document Ready-mix is probably the only transport sector in the
them, and implement them where appropriate. world that charges the same per-unit price whether a
truck is full or half full.
WATSON: We’re shifting now from global standards Then we learned that France wasn’t doing this.
to global principles. We’re moving out of the realm They decoupled charging freight from charging for the
of a recipe into the realm of a playbook or guide. In product. To use the same example, they would sell the
other words, we are building the capability of sharing product for $60 but charge freight of $250 per load (this
knowledge. I’ll give you an example involving the ready- would increase based on distance from the originating
mix business. Like everyone else in ready-mix, RMC in- plant) no matter how full the truck was.
 The Very tionals, and it had also expanded into
other Latin American countries and
fostering and maintaining the CEMEX
culture. Lorenzo Zambrano, for
Model of an into Europe. example, checked kiln statistics and
CEMEX accomplished all of this sales data on a daily basis. This type
Emerging Market while maintaining consistently high of direct engagement translated
profitability levels and fending off into an intensive, highly motivated,
Multinational hostile takeover attempts from its extremely competitive work ethic for
leading global competitors, Holcim the entire company. Another example

W hen a company moves from

a national to a global role,
success is not guaranteed. Many
and Lafarge. (Those two companies
announced their intentions to merge
in 2014 and are, as of this writing, still
is CEMEX’s postmerger integra-
tion (PMI) practice. Many companies
make acquisitions and quite a few are
companies expand into areas where proceeding with that deal.) CEMEX serial acquirers. But very few have
they are unlikely to thrive, because also survived through the immense the laserlike focus on making acquisi-
feature global perspective

they lack the capabilities needed in pressures of the Great Recession. tions work — and work quickly — that
their new locales and because the The company’s ability to sustain CEMEX has. A PMI manual covering
parameters of their home country its business around the world is only human resources is as thick
constrain them. The CEMEX story closely tied to the capabilities that it as a dictionary, reflecting a level of
offers lessons about how to grow in a has built over time. How did CEMEX detailed attention one might expect
coherent, effective way. develop and manage that prowess? from an investment banking firm, but
I first came to know CEMEX in When Lorenzo Zambrano took over not from a cement manufacturer.
2000, when I wrote a Harvard Busi- CEMEX as CEO in 1985, it was a rela- CEMEX continues to generate
ness School case study on it. I have tively diversified group of companies. a large portion of its profits from its
continued to track the company and Zambrano deliberately sought to operations in Mexico. But given the
its progress ever since. CEMEX, un- have the entire enterprise create val- company’s high market share there,
like its top competitors, was an early ue. He narrowed the horizontal scope the expansion possibilities within
example of a multinational from an of business (the lines of products Mexico are clearly limited. As a
emerging market. Mexico, like many and services) to focus on broadening result, CEMEX continues to add
other developing economies, still geographic scope. Over the years, value by investing heavily in — and
68
hadn’t generated much outbound for- CEMEX’s management has demon- then revamping — operations in
eign direct investment. And the bulk strated continuous commitment to its foreign markets.
of its investment was concentrated in identity as a high-value, knowledge-
the United States — the destination intensive solutions provider, even as Pankaj Ghemawat
pghemawa@stern.nyu.edu
for more than 80 percent of Mexican it shifted to meet changing market is a professor at New York University’s
exports. But CEMEX bucked this pat- demands and conditions. Stern School of Business and the Anselmo
Rubiralta Professor of Global Strategy at
tern: By the 2000s, it derived more of A critical factor is the “CEMEX
IESE Business School.
its sales from its foreign operations Way.” The senior leaders of the
than (the few) other Mexican multina- company dedicate themselves to

That is a global best practice. Admittedly, to intro- HERNANDEZ: Knowledge sharing wasn’t new at CEMEX;
strategy+business issue 79

duce it in a market unaccustomed to it is difficult be- it had been in place for years. But when the financial
cause we stand out. So we have said each business must crisis struck, and our expenses proved too high, it forced
recapture transport dollars. We won’t dictate how you us to become much more focused on knowledge sharing
do it, but we require that you recapture all your freight to remain effective. This response to the crisis enabled
somehow. us to continue to evolve.
WATSON: In 2009, we launched an internal social net- uct of refining petroleum that ordinarily emits a lot of
work called Shift, like a walled-off version of Facebook. carbon dioxide. There were not many companies that
It allows people in different communities of interest at could use pet coke. But we could, since cement kilns
CEMEX to see detailed information about operations burn at such a high temperature — 1,600 degrees Cel-
around the world. sius [3,000 degrees Fahrenheit] — that they mitigate
For example, within ready-mix, Shift has a track most of the negative atmospheric effects. That gave us
for value-added products. You can see how much we sell some big advantages. We have become experts in using
in value-added products every month, and how much pet coke. Today, it accounts for about 45 percent of the
more revenue they generate versus standard products. fuel we use around the world.
Each month, we do an hour-long presentation on the

features title
feature
countries that have advanced this sort of product: what SAN AGUSTIN: Knowledge sharing also helped us with
they did, why they did it, how much money they made, another alternative-fuel innovation that came to us
and why others might follow the example. We call it through the RMC acquisition: the use of fuel derived
from household waste as a substitute for fossil fuels in

global
“Concrete Talks.”
For most of our products, Shift shows the specifica- our cement manufacturing facilities. Today, CEMEX is

of the
tions and a video of what the product does. There’s a tu- one of the leaders in this technology.

perspective
torial in Spanish, German, French, Polish, English, and

article
Chinese about how it’s sold, how it’s positioned, what its MADRIDEJOS: We didn’t buy RMC because of its un-
value proposition is, where it should be used, and then derstanding of alternative fuels and waste-to-energy
maybe one or two customer testimonials. You could do systems. But we quickly saw RMC’s energy strategy
all that stuff manually, with an email to a colleague. But as a capability we could adopt. The part of RMC that
that would require generating a separate internal cam- was in Germany was particularly advanced; approxi-
paign for each new product. mately 50 percent of its fuel use came from alterna-
Mr. Zambrano talked about going from being an tive sources. Despite the experience with pet coke,
elephant to being a greyhound. Left to their own de- CEMEX was far behind.
69
vices, big companies will continue to act big. They’ll As a first step, we extended what RMC was do-
put in more rules, procedures, and standardization. ing in Germany to the rest of Europe. That took some
When you’re running a hyperlocal business like ready- doing. The German part of RMC was using refuse-
mix concrete and aggregates, you can’t allow that to derived fuel — a fraction of municipal waste — which
happen. You have to fight all the time to be small. Shift is not widely understood. There is often a “not in my
allows us to make the company feel small. backyard” mentality on the part of government of-
ficials. It takes time for people to become comfortable
Sustainability and Alternative Fuels: 2005–present with the idea. In addition, using refuse-derived fuel is
LUIS FARIAS: We had been thinking about the potential pretty complicated technically because of variations in
of alternative energy sources since 1990 or so. At the calorific power and other factors. Finally, we wanted to
time, we were burning fuel oil and natural gas — two move quickly to structure long-term contracts for the
of the most volatile commodities in terms of price. Since energy sources. We knew from our experience with pet
about 40 percent of the direct cost of cement is wrapped coke that it was only a matter of time before waste-re-
up in [energy use], you need to watch the expense of cycling companies would start to peg the price of this
fuel and electricity carefully. energy source to the price of oil, eroding our advantage.
We acquired a Spanish cement company that had Today, we’re at over 28 percent alternative energy use,
begun to use petroleum coke (or pet coke), a by-prod- the highest among our competitors.
 “Capabilities don’t exist in a
vacuum. They’re the result
of things that you do either
consciously or unconsciously.”
feature global perspective

70

When we treat sustainability as a capability, it know that concrete pavements, compared with asphalt
changes what we do about it. It is not just a license to roads, are far more energy efficient; they reduce vehicle
operate in countries where regulations are becoming fuel consumption and carbon dioxide emissions.
stricter, or just a way to reduce cost. We can make a dif-
ference for our customers in terms of green buildings, WATSON: For now, the environmental regulations are far
greener roads, and environmentally friendly housing. more advanced in the U.S. and Europe than they are
We are developing new products that will help in the in, say, South America. But in the long run, we’re head-
reduction of emissions in buildings. ed for the same global standards. That will not just
create a requirement for CEMEX; it will also create
strategy+business issue 79

FARIAS: Fifty years from now, the world will be low- opportunities.
carbon. This will require a lot of cement. Windmills are
a good example. You don’t see them, but offshore wind- How to Build Capabilities
mills have huge cement pilings underneath. High-speed HERNANDEZ: Capabilities don’t exist in a vacuum.
railway systems also require a lot of cement. We also They’re the result of things that you do either con-
BELOW LEFT: CEMEX has donated funds
to support the excavation, restoration,
conservation, and site management of
this ancient Egyptian site, the Mortuary
Temple of Thutmosis III in Luxor.

BELOW RIGHT: The unusual paving sur-

face used in the renovation of this town
center in Gardanne, France, in 2012,
was created with “disabled concrete,” a
special technique developed by CEMEX
with the project’s architect. CEMEX
won an industry innovation award for
the project.

sciously or unconsciously. In human resources, for ex- CEMEX. This company is much better because of
ample, the first thing we design is the organizational how we have integrated people and companies from Co-
structure. How is work organized? Who has decision lombia, Germany, the U.S., and France, among other

features title
feature
rights over what, and how is the work done? The sec- geographies, into the way we think.
ond thing has to do with people — individual skills,
individual balance, and individual knowledge. And the FARIAS: In a lot of ways, capabilities development fol-

global
third one is incentives: what you measure, what you pay, lows a natural evolution. It’s just what happens when

of the
and so forth. Over time, together, those things build a you have the right people in the right positions. Our

perspective
culture that produces the behaviors that reinforce the pursuit of efficiency is a good example. It has followed

article
capabilities that will make you successful. a different arc at different times, but we’ve never sat still
You can change organizational structures relatively or been complacent about it. And we never will. We’re
easily. You just send out an email that says, “Joe, you constantly moving, constantly looking to be better. +
now report to Regina, and here are the new guidelines Reprint No. 00325
on decision rights.” Likewise, incentives are relatively
easy to deal with. “Tomorrow we’re going to start using
cash value added as a measure of performance, and if
you achieve this level of cash value added, you get this
71
bonus, and that will set you up to be promoted.”
The middle one, which is people, is the most dif-
ficult. Especially when you’re shifting to a distributed
organization, and asking people to make decisions —
material ones — that they haven’t been asked to make
Resources
before, it can take a while to get that right.
Donald R. Lessard and Cate Reavis, CEMEX: Globalization “The
SAN AGUSTIN: When we acquire a company, we listen. Cemex Way,” Case Study 09-039, Mar. 5, 2009, MIT Sloan
Learning Edge: Describes the capabilities improvement encompassed
We say, “We want to learn from you.” But we also by the CEMEX Way.
teach. We invest in training new people, talking them Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World
through our practices, and helping them assimilate. Where Differences Still Matter (Harvard Business Review Press, 2007):
In the old days, it was: “This is it. New name, let’s Describes CEMEX’s profitable expansion in a “semiglobal” economy.

move on.” Cesare Mainardi and Paul Leinwand, Soundbite: The Secret to Strategy
That Works, Strategy& video series, 2015: Concepts underlying the
Today, one of the major differences is all the time
Capable Company research project.
and effort we dedicate to change management. It’s criti-
More thought leadership on this topic:
cal that we retain the talent and the way they think. strategy-business.com/global_perspective
Because in the end, that’s what will make CEMEX,
 72
feature organizations & people
 feature organizations & people
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Photographs by Peter Gregoire

7KHIRUPHU&(2RIWKH*LUO6FRXWVKDV
VSHQWGHFDGHVEULQJLQJSURIHVVLRQDO
PDQDJHPHQWWRQRQSURILWV
by Sally Helgesen
 Sally Helgesen
sally@sallyhelgesen.com
is an author, speaker, and
leadership development
consultant, whose most
recent book is The Female
Vision: Women’s Real Power
at Work (with Julie Johnson;
Berrett-Koehler, 2010). She’s
@SallyHelgesen on Twitter.

Hesselbein with Girl Scouts, 1980

One of the most significant encounters in the his- Then I heard a deep voice behind me saying, ‘I am Peter
tory of not-for-profit enterprise could well have been Drucker.’ Apparently 5:30 means 5:30 in Vienna too.
feature organizations & people

the first meeting between Frances Hesselbein and Peter We were the only ones there.”
Drucker. It took place at New York City’s Union Club She was so surprised, she recalled recently, that “I
in 1981. Hesselbein was in her fifth year as CEO of the forgot my manners and just blurted out, ‘Do you know
Girl Scouts of the USA, a national organization with how important you are to the Girl Scouts?’ I said that if
more than 3 million members and volunteers. Founded he read any of our planning or strategy papers or looked
in 1912, it was a venerable but relatively staid institu- at our management structure, he would find we reflect-
tion in which girls drawn almost entirely from the white ed his philosophy.”
middle class aspired to win homemaker and storytell- “And tell me, does my philosophy work for the Girl
ing badges. Hesselbein had become CEO at a difficult Scouts?” Drucker asked. Hesselbein invited him to see
time for the organization; it had had a declining mem- for himself, whereupon he volunteered to spend a day at
bership, a dearth of volunteers, a growing reputation Girl Scout headquarters on his next trip to New York.
for irrelevance, and a governance system that allowed She also invited the entire national board and staff to a
many of the 335 councils to operate as separate fiefs. luncheon that day to hear him speak. From his opening
But she had begun to lead the organization through a remarks, it was clear Drucker had studied the organiza-
turnaround. Under her guidance, it was becoming a co- tion thoroughly; he began by observing that the Girl
74
hesive and growing enterprise, focused on helping girls Scouts were doing wonderful things. “However, you
from diverse backgrounds achieve their highest poten- have one big problem,” he said. “You do not see your-
tial, through a contemporary program that emphasized selves as life-sized. You do not fully appreciate the im-
leadership, science, technology, and math. portance of the work you do. For we live in a society
Hesselbein’s strenuous commitment to making that pretends to care about its children, and it does not.”
operations more professional and updating the educa- In essence, he was telling the almost entirely fe-
tional side of the Girl Scouts had been inspired in part male gathering that every member of the board and
by Drucker’s writing. Although he had mostly written staff — and by extension every one of the organization’s
about business organizations, she believed his advocacy 775,000 volunteers — was contributing something so
of clear mission focus, active board governance, and vital to the larger society and to the future that they
demographics-driven customer service had great reso- should view themselves as having the same worth, as-
nance for nonprofits. So she eagerly accepted an invita- piration, and level of professionalism as the most high-
strategy+business issue 79

tion to hear Drucker, who was Viennese, speak at the profile corporate leader. “For us,” says Hesselbein,
Union Club. “I arrived at exactly 5:30,” she recalls, “be- “those words were transformative.”
cause that was the time on the invitation. I grew up in That was the beginning of a conversation that
Johnstown, Pennsylvania, where 5:30 means 5:30. But lasted 24 years, until Drucker’s death in 2005 — years
when I walked in, it was just me and two bartenders. during which Drucker turned his attention and intel-
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lectual passion from corporations to the “social sector,” Hesselbein’s high-profile advocacy of the need to judge
his preferred name for nonprofits, while Hesselbein efficacy by results rather than good intentions was a

feature organizations & people

made her mark as a leader and innovator. Fired up by radical shift. Her longtime approach has been a major
a vision of world-class excellence, the Girl Scouts over factor in the sector’s managerial capabilities — and its
the next decade would become widely recognized as an good reputation.
early adopter of nonhierarchical leadership. Hesselbein In 1990, Hesselbein retired, just a month before
urged affiliates and regional councils, along with vol- General Motors CEO Roger Smith did the same. Pe-
unteers and girls, to “see the total organization as one ter Drucker told Businessweek that if asked to choose a
great movement, mobilized around mission and around successor at GM, “I would pick Frances.” But she did
changing lives.” She encouraged the development of not become the carmaker’s CEO. Instead, she became
a contemporary scouting curriculum that gave girls the founding president of the Peter F. Drucker Foun-
hands-on experience in addressing challenges in their dation for Nonprofit Management. This small founda-
communities. A passionate advocate for inclusion, she tion is dedicated to fostering innovation and excellence
tripled the number of racial and ethnic minorities in the among nonprofits by exposing their leaders to world-
Girl Scouts. Her innovations make up a legacy that the class thinkers, educators, and consultants from around
organization has carried into the new century. A typical the globe, and helping them strengthen connections
troop project today might be helping a remote Mexican with their business, public, and military counterparts.
75
village gain access to pasteurized milk — a far cry from (It was renamed the Leader to Leader Institute after
the woven potholders and roller skates that were staples Drucker’s death in 2005 and became the Frances Hes-
of 1960s-era scouting. selbein Leadership Institute in 2012.) The complexities
As she brought visibility and management innova- of global society have made these links between busi-
tion to the Girl Scouts, Hesselbein garnered acceptance ness, government, and nonprofits essential. Leaders, in
for the idea that because nonprofits play an essential particular, have a lot to learn from their counterparts in
and powerful role in shaping society and culture, they other sectors: For example, nonprofits can get help in
require the utmost professionalism in their leaders. being more innovative in response to shifting technol-
Management skill is particularly vital for nonprofits, as ogy and demographics, and businesses can get better at
Drucker has noted, because leaders who rely primarily engaging the passions of people seeking to make a dif-
on volunteers have a tougher job than for-profit execu- ference in the world.
tives, who can use financial incentives to attract talent Hesselbein has continued to lead her institute for
and drive performance. In the social sector at this time, the past 25 years, drawing upon an extraordinary global
when degrees in nonprofit management were nonexis- network of supporters, admirers, and students. Noting
tent, management training rare, assessments sporadic, the outsized influence of the tiny organization, author
finances often addressed in crisis mode, and passion for Jim Collins notes, “I have never met a single person who
the cause viewed as the prime qualification for leaders, has had a larger multiplicative effect than Frances.”
 Encountering Frances Hesselbein New York about a year ago and I called Frances and
Hesselbein must have taken Drucker’s words at that Girl said, ‘I’m free at the end of the day; let’s meet for coffee.’
Scout luncheon to heart; she sees her impact as more And she said, ‘I’d love to meet you, but I think cham-
than life-sized. Always petite physically, she has grown pagne and caviar at Peacock Alley at the Waldorf would
tiny with the passing years. But her polished elegance, be appropriate to the occasion.’ That’s Frances. Where
along with her spritely humor, give her an outsized pres- you meet needs to reflect what you aspire to.”
ence in any gathering. Like Jacqueline Kennedy Onas- Influence and impact have historically been dif-
sis, she tends to speak softly and deliberately, her eyes ficult for nonprofits, which often labor on shoestring
never straying from the person she is speaking with, budgets for narrowly focused causes. The role of an
which creates an effect of intimacy. Her air of unruffled influencer can be particularly challenging for women,
self-respect and her skill at developing projects with im- who tend to manage smaller and less well funded en-
pact have gained her the regard of leaders of major cor- terprises in the sector and may struggle to make them-
porate, education, and military organizations as well as selves heard among male colleagues.
those in the social sector. Hesselbein has no such problems, despite having
feature organizations & people

76

“You don’t meet Frances; you encounter her,” says made her initial mark in an almost entirely female or-
John Alexander, former president of the Center for Cre- ganization whose mission is to serve girls. Through her
ative Leadership (CCL), a training and development work on leadership, she has formed close associations
nonprofit that runs executive courses and conducts with major military and corporate leaders, such as Alan
research around the world. “You have to step up to be Mulally, the former CEO of Ford Motor Company,
with her; you have to act the part, be a grown-up. You and General Eric Shinseki. Her emphasis on purpose,
have to commit to things that make a difference and values, and ethics; her pioneering advocacy of diversity
then you have to follow through. She has the highest and inclusion; and her focus on serving the changing
expectations of the people around her, so being in her needs of the customer are core principles that she has
strategy+business issue 79

presence requires you to lift your game.” expressed and embodied for many decades.
Her longtime friend and professional collaborator Hesselbein does not discuss her age, but it is
Regina Herzlinger, who holds a chair at Harvard Busi- known to be around 100 years. Yet she shows up at her
ness School (HBS), observes that Hesselbein’s high ex- Park Avenue office every morning, and until 2013 kept
pectations are manifest even in small details. “I was in up a punishing schedule of world travel. More im-
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portantly, she sets an example and serves as a mentor The Road from Johnstown
for people who are seeking to play a larger role in the In her autobiography, My Life in Leadership: The Journey

feature organizations & people

world. As Marshall Goldsmith, author and executive and Lessons Learned Along the Way (Jossey-Bass, 2011),
coach, and a member of the institute board since its Hesselbein attributes her self-assurance to growing up in
founding, observes, “Frances understands how power Johnstown, Penn., a steelmaking town about 60 miles
works. She’s adept at trading favors. If you do some- east of Pittsburgh. The town was known for its role in
thing for her, you will benefit in terms of the people establishing one of the earliest modern nonprofits, the
and the circles of influence you get exposed to. This is American Red Cross, which brought doctors and set up
something women often struggle with, even women at tent hospitals across the region following the disastrous
higher levels.” 1889 Johnstown Flood. Hard work and patriotism were
Hesselbein models her approach to power by con- valued, immigrant communities formed an integral
tinually drawing her associates into activities and as- part of the social fabric, and Hesselbein, whose original
sociations that they would otherwise miss. Collins, name was Frances Willard Richards, grew up in a fam-
who has accompanied her on trips and joined her for ily with a long tradition of military and public service
fireside chats at the United States Military Academy and independent thinking.
at West Point, in New York, notes in his foreword to Her father, Burgess Harmon Richards, after a long
Hesselbein on Leadership, a collection of her essays, that stint in the army, became one of Pennsylvania’s first
77
she is not shy about asking people to donate time or in- state troopers. Her grandmother was a gifted storyteller,
tellectual resources to her projects. “The phone rings, I and Hesselbein grew up hearing stories of family mem-
pick up, and I hear Frances on the other end of the line. bers who fought for the Union in the Civil War. She
‘Jim, I was hoping that you might consider.…’ And was particularly partial to her Aunt Carrie, a regent of
before I even hear the end of the sentence, I know that the Daughters of the American Revolution, with whom
I will very likely say yes. I also know that I’m going to she used to pay yearly visits to England. Her mother’s
like it.” Cornish ancestors were Methodist preachers, and sitting
Alexander (the former CCL president) echoes Col- in the chapel they helped found in the 18th century,
lins, noting that Hesselbein has taught him to say yes Hesselbein would say to herself, “I’m the sixth genera-
before she even asks a question. “It’s become kind of a tion of dissidents to sit in this pew, and I’m not going to
joke with us — ‘yes is the answer, now what is the ques- change.” Hesselbein notes in her autobiography that her
tion?’ — but she also means it. She is always inviting aunt died at 96, “still…bright, charming, impeccably
you to help her do something: plan a conference, bring groomed, tastefully dressed” — clearly an inspiration.
people together, visit a country, publish a book. And Hesselbein’s father died when she was 17 and, as
you say yes because you know it will be worth doing, the oldest in her family, she had to go to work. After
you will meet great people, it will be an adventure — holding a variety of jobs and attending the University
and because it’s Frances who asked you.” of Pittsburgh part time, she married John Hesselbein,
 ´3HRSOHIORXULVKZKHQWKH\
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whose family owned the Johnstown Tribune. He also The scope of Hesselbein’s ambition was appar-
served on the governor’s Civil Rights Commission, and ent from the start. On the first day of her board job,
feature organizations & people

worked as a photographer and filmmaker. As a young she brought a copy of Drucker’s The Effective Executive
wife, Hesselbein helped him run the studio, later noting (Harper & Row, 1967) for each staff member, hav-
that doing so helped her build the marketing, commu- ing decided that “his philosophy was exactly what we
nications, and customer relationship skills that would needed for our governance and management.” She rap-
serve her well as an organizational leader. They had idly introduced herself to business leaders throughout
one son, also named John. She lived on base with her the region. She persuaded the president of the area’s
husband when he served in the armed services in the biggest bank to personally sponsor her first fund drive,
1930s and became active in the community when they doubling the previous year’s result. She also engaged the
returned to Johnstown. support of union leaders in the area and enlisted local
When Hesselbein’s son was young, she was asked congressman John Murtha to chair her first fundrais-
to assume leadership of a local Girl Scout troop whose ing dinner; he continued to do so for the next 35 years.
leader was leaving to become a missionary. She had Invited as the first woman to chair the regional Unit-
no daughters, but there were no other candidates, so ed Way campaign, she recruited a leading executive of
she agreed to take the troop for six months. She pre- Bethlehem Steel to host the kickoff luncheon and the
pared herself by reading Girl Scout history and found United Steelworkers to host the dinner. Bringing leaders
78
inspiration in founder Juliette Lowe, who told girls with contrasting interests together in pursuit of a com-
in 1912 that they could “be anything they wanted to mon cause was the kind of audacious, inclusive, results-
be,” including an aviator. Because Hesselbein had been oriented networking that would become her hallmark.
mocked as a child at school for declaring her desire to
become a pilot, the statement inspired her. “Imagine a Only the Best
woman saying that in 1912!” Her innovations in Pennsylvania attracted attention
Upon meeting her troop of 10-year-olds, she intro- from the national board, and in 1976 she applied for
duced herself as their leader — “the first and last time I the position of national executive director of the Girl
ever announced myself that way.” As an inexperienced Scouts of the USA. Because this position had never
newcomer, she let the girls choose what projects to pur- been filled by an internal candidate, she did not expect
sue, what badges to work on, even how to handle the to be selected. “I figured they only [interviewed] me
proceeds from their cookie sale. While the more expe- because they wanted to prove they were casting a wide
strategy+business issue 79

rienced scouts led others in small groups, Hesselbein net,” she recalls. “So I was completely relaxed during
positioned herself as a resource and source of support. my interviews. When they asked what I would like to
The troop flourished, and she stayed with them until achieve if I were chosen, I described a revolution. This
they graduated from high school. She then accepted an was a time of great social change — people weren’t sure
appointment to chair the board of the regional council. how scouting could be relevant to girls’ lives, especially
girls from the inner city. We needed to change with own decisions. “People flourish when they take respon-
the times by questioning everything except the mis- sibility,” Hesselbein observes. “Have you ever met a
sion of serving girls by helping them reach their high- young person who couldn’t wait to be a subordinate?”
est potential. And we needed a less siloed structure to Convinced that high-level training was required
achieve our goals.” to sustain the kind of transformation she was putting
Hesselbein took the job on July 4, 1976, when the in place, she approached learning and development as
organization was losing membership and struggling if the Girl Scouts were IBM or General Electric, often
with how to attract volunteers now that stay-at-home persuading people at the top of their field to donate
mothers were no longer the norm. She started with their services to her cause. She recruited the president of
what Peter Drucker called the five fundamental ques- MetLife to raise funds for a state-of-the-art conference
tions for an enterprise: What is our mission? Who is our center in upstate New York, where she engaged thinkers

feature organizations & people

customer? What does the customer value? What are our such as John Gardner, an education and leadership pio-
results? What is our plan? She commissioned research neer; leadership scholar Warren Bennis; and, of course,
from top universities on trends affecting girls, to iden- Drucker to speak to and work with Girl Scout leaders.
tify the kinds of programs that might help them grow She asked Herzlinger, the first female tenured professor
up as independent thinkers and self-reliant, successful at HBS, to create an asset management seminar to im-
individuals. She replaced the iconic Girl Scout hand- prove financial management in the Girl Scout councils.
book with four handbooks aimed at girls of different “The Girl Scouts was a franchise organization,”
ages, and switched programs and badges to focus less recalls Herzlinger. “As CEO, Frances did not have the
on domestic skills and more on fields like science, tech- power to choose, fire, or promote council leaders. She
nology, and math. She enlisted Vernon Jordan, then had to make the most of what she had, so she asked me
president of the National Urban League, and Robert to bring together a group of HBS faculty to develop a
Hill, the foremost researcher on the black family, to corporate management seminar for local council CEOs
help identify ways to appeal to minority girls at a time and national staff. It covered everything: strategic plan-
when scouting was almost entirely white and middle ning, finance, negotiation, professional management
class. She commissioned promotional materials specifi- skills. We wrote case studies of various councils — one
79
cally targeted to diverse communities, quickly tripling near bankruptcy, one with too much money — and
minority representation. used the case method to teach the program, which we
Just as important were her efforts to dismantle a ran for the Girl Scouts for many years.”
fairly entrenched hierarchy; like many other youth Herzlinger sees the ambitious scope of Hesselbein’s
organizations, the Girl Scouts had adopted a military development programs as an example of her general
structure. “The brass” in the national organization was commitment to high-level aspiration for the organiza-
mostly insulated from the realities in the field, author- tion and the girls it served. “It’s the same reason she got
ity flowed only from the top, and there was still an in- Bill Blass to redesign the Girl Scout uniform [in 1984]
dustrial-era divide between those who made decisions and then unveiled them at a runway luncheon at the
and those who executed them. Four Seasons with all the press invited — not the kind
Hesselbein began a comprehensive restructuring, of thing the Girl Scouts had been known for doing in
drawing new org charts using concentric circles to, as the past.” Or as Hesselbein herself put it: “Only the best
she put it, “free people from being stuck in little boxes.” is good enough for those who serve girls.”
This new “web of inclusion,” as it would later be de- Amid all this change, she also faced personal loss.
scribed, fostered communication across levels and di- Two years into her tenure, her husband died suddenly
visions, enabling teams to come together from across after being diagnosed with a brain tumor. At work,
the organization, and giving people scope to make their Hesselbein viewed her most essential role as recogniz-
 ing what should not be changed: the organization’s tual capital rather than money. Having for nine years
bedrock identity and mission. Despite the wholesale witnessed Hesselbein’s talent for persuading the power-
transformation in systems, structures, and service de- ful to donate time and services on behalf of her causes,
livery, the Girl Scout Promise and Law, its values and Drucker insisted she assume leadership of the founda-
soul, remained untouched. tion. “Otherwise it won’t work,” he said bluntly.
Nevertheless, her efforts stirred pushback, which At their joint press conference announcing the
she diffused by leaving local councils free to reject most foundation, Drucker surprised Hesselbein by describing
innovations. When traditionalists objected to the rede- their first initiative: an assessment tool to help nonprofit
signed Girl Scout pin, they were told the old one would boards and staff evaluate what they had achieved and
remain in production and could be ordered if they pre- determine where to make improvements. Developed
ferred it. When a number of regional offices were con- in 18 months, and since then updated periodically, the
solidated in New York, the move took place in multi- tool provides a series of exercises that guide nonprofit
year stages so people would have time to adjust, even if leaders through Drucker’s five key questions, leading
that made the process less efficient. Her concern was to them to articulate their mission, customer profile, value
give people maximum scope to make their own choices proposition, results, and plan. This process helps non-
as well as “a way to save the face and dignity of people profits move beyond good intentions to meet what Hes-
who oppose…initiatives.” selbein calls “the bottom line for social-sector organiza-
feature organizations & people

“Doing this is a key principle in managing change tions: changed lives.”

and mobilizing people around it,” she explains. “If you The foundation also began publishing a journal
act in a dismissive way with those who oppose you, they called Leader to Leader, and a series of books that in-
will never support you, but if you give them time and cluded the best-selling anthology The Leader of the
your respect they will usually come around. Leading Future, which is now in its second edition. Today the
this way creates tremendous goodwill. And you need institute that evolved from the foundation holds con-
goodwill in a transformation.” ferences and forums around the world and offers year-
long executive development programs to fellows from
The Big Influence of Little Things small, often underfunded nonprofits. An article in the
Retiring from a demanding job in her mid-70s, Hes- New York Times in 2000 noted that in contrast to the
selbein claimed her only plans were to write a memoir Ford Foundation — once described by essayist Dwight
and continue serving on a couple of boards. But on her MacDonald as “a large body of money surrounded by
first day of unemployment, insurance company Mutual people who want some” — the Drucker Foundation,
of America presented her with an office on Park Ave- “with little money, is a pool of management wisdom for
nue and the half-time use of an administrative assistant all who choose to dip their cup.”
80
in the expectation that she would “do something of In recent years, Hesselbein’s institute has been
value.” Six weeks later, she and two friends — Bob particularly active in bringing private and social-sector
Buford, a television executive, and Dick Schubert, head leaders together with their counterparts in the military.
of the Points of Light Foundation and former presi- Hesselbein, intensely proud of her family’s military ser-
dent of the American Red Cross — flew to Claremont, vice (her son, husband, father, and uncles all served in
Calif., in order to discuss with Drucker, then in his the army), seems to find a particular energy in this en-
90th year but very active, how they might combine deavor. In 2009, she was named Class of 1951 Lead-
forces to spread his work and philosophy more broadly. ership Chair for the Study of Leadership at the U.S.
Thus the Peter F. Drucker Foundation for Nonprofit Military Academy — the first woman and the first
Management was born. non–West Point graduate to hold such a position. She
The basic idea was to foster excellence by providing travels regularly to West Point, bringing friends like
management and leadership resources to public-service Collins and Mulally to participate in the fireside chats
strategy+business issue 79

organizations — struggling soup kitchens, domestic she holds for cadets.

abuse shelters, after-school programs, immigrant assis- Colonel Bernard Banks, head of the academy’s de-
tance centers, and so on — connecting them with top partment of behavioral sciences and leadership, says,
educators, consultants, and thinkers. The organization “Her relationship with West Point runs very deep. I still
would remain tiny, and its currency would be intellec- hear cadets who met her years ago comment on the in-
fluence she had on them [and] how she exemplifies the notes, to feel good about it — is not just something that
leadership qualities we value here, like passion, intellect, comes naturally to Hesselbein. It is something she has
character, and vision. When she’s here, you’ll see her studied, modeled, and taught, which is why so many
surrounded by cadets. This very small woman speaks leaders see her as inspiration, mentor, and even muse.
so softly that you have to lean in to hear. But she exudes That passion for service is also what keeps her go-
this huge emotional presence that the cadets find fasci- ing decade after decade. This was made vividly evident
nating. When they are listening to her, they exude joy.” at a book party for Goldsmith, held at the Four Sea-
Banks adds, “The cadets are inspired by her be- sons restaurant in 2011. A reporter fell into conversation
cause, despite their great difference in age and experi- with an executive who had just left the top position at a
ence, they recognize that she respects them. She has a large international nonprofit.
genuine appreciation of anyone called to service — her “You sound as if you’ve retired,” said the reporter.

feature organizations & people

own life exemplifies it.” “Shhhh!” the man cautioned, glancing over his
In late 2013, after a fall sent her crashing facedown shoulder with an almost fearful expression. “Don’t let
on a marble floor, Hesselbein was told by her physician Frances hear you say that!”
that she could continue to do everything but travel; the “Why, what’s the problem?”
previous year, she had flown to Russia and New Zea- “When I called to tell her, I said, ‘Frances, I’m
land and completed a nine-city tour of China as well going to re— ’ but she cut me off in the middle of the
as twice-monthly trips within the United States. Most word. ‘You and I do not retire,’ she told me. ‘You and I
of her travels were to speak or to receive honors, always are called to serve, and we will serve until the pine box
wearing the Congressional Medal of Honor she received lid is closed upon us.’” +
from President Bill Clinton in 1998. John Alexander, Reprint No. 00332
who accompanied her on a number of trips, notes her
indefatigability, as well as her ability to immediately
engage people from widely diverse cultures. “She looks
straight at them and listens so intently — people can
read that kind of engagement across cultures.”
81
Hesselbein recently noted that “technology and
society change, but what people want in their hearts Resources
doesn’t change.” Her success and the breadth and ro-
Sally Helgesen, The Female Advantage: Women’s Ways of Leadership
bustness of her legacy have to a large extent been built (Doubleday/Currency, 1990): Portrays Hesselbein at work, as both an
on this understanding. She has always been comfort- example and an advocate of inclusive, highly engaged organizational
able speaking the language of the heart, of passion leadership.

and purpose, even in the toughest environments. The Frances Hesselbein, foreword by Jim Collins, Hesselbein on Leadership
(Jossey-Bass, 2002): Compendium of essays focused on how and why to
fundamental lesson she learned from her first troop of
“develop quality, character, mind-set, values, principles and courage.”
10-year-olds — that people want to be engaged, want
Frances Hesselbein and Marshall Goldsmith, eds., The Leader of the
to contribute, want, in the much overused phrase, to Future 2: Visions, Strategies, and Practices for the New Era (Jossey-Bass,
be empowered — has remained central to her vision of 2006): Incisive anthology of essays on leadership.
building a society in which people collaborate in chang- Frances Hesselbein, foreword by Jim Collins, My Life in Leadership: The
ing lives. Journey and Lessons Learned Along the Way (Jossey-Bass, 2011): Auto-
biography in which Hesselbein recounts her experiences and explains the
Today, the full engagement of employee hearts
sources of her approach.
and minds, which money alone can never buy, is the
More thought leadership on this topic:
fulcrum upon which organizational excellence seems strategy-business.com/organizations_and_people
to turn. Persuading people to serve — and as Collins
81
 THOUGHT LEADER

The Thought Leader Interview:

Mark Bertolini
For Aetna’s CEO, the lauded move to raise employee wages is just one
part of a broader strategy to adapt to changes in healthcare.

BY JON R. KATZENBACH, GRETCHEN ANDERSON, AND ART KLEINER

out the 2010 Affordable Care Act,

health insurance companies would
have been forced to revise their busi-
ness models. Consumers have far
more choices now than they had
even a few years ago, and they ap-
proach them in a more conscious,
more participative way.
Aetna, which as of 2014 was the
third-largest health insurance com-
pany in the United States (after
UnitedHealth and WellPoint), has
been shifting its strategic focus, and
its cultural orientation, for several
decades. It has evolved from its role
as a primarily financially oriented
payor to a role as a healthcare solu-
tions provider, helping medical orga-
nizations, insurance carriers, and

S
ince January 12, 2015, hike by a chief executive since 1914, consumers operate in harmony at
Aetna chairman and CEO when Henry Ford doubled his as- lower cost. This has resulted in sig-
thought leader

Mark Bertolini has been ap- sembly line workers’ pay to $5 a day. nificant changes in the company’s
plauded by the likes of the New The Aetna pay hike was a multi- prevalent attitudes and behaviors,
Yorker and the Wall Street Journal as faceted and strategic move — and with more change to come.
an uncommonly forward-thinking one that stemmed from personal Bertolini is the third Aetna chief
Photograph © 2015 Derek Dudek

and compassionate chief executive motivations as well. It also showed executive in a row who has moved
— or perhaps just a quixotic one. Bertolini to be a culturally astute the company in this direction. The
On that day, he announced a raise in leader with a real stake in improving first was Jack Rowe, chairman and
Aetna’s minimum wage to US$16 the well-being of people who rely on CEO from 2000 through 2006, who
per hour. For the 5,700 employees Aetna, be they customers, employ- turned Aetna around from a declin-
who stood to benefit, this meant an ees, or long-term shareholders. He is ing bureaucracy (with a hidebound
average pay increase of 11 percent; also keenly aware of the changing culture known to employees as
some saw an increase of 33 percent. nature of the healthcare industry in “Mother Aetna”) to a profitable en-
82 It was arguably the most visible wage the U.S. and elsewhere. Even with- terprise. Rowe’s successor, Ron Wil-
liams, CEO and chairman from to mix formal and informal leader- S+B: Not just for Aetna, but for
2006 to 2010, restructured the com- ship; his advocacy of preventive every company?
pany and paved the way for its re- medicine (after using yoga to recover BERTOLINI: Yes. But at Aetna, this
turn to growth at a time of dramatic from a debilitating ski accident in meant having a style of leadership
industry change. Bertolini, a 58- 2004, he introduced it to Aetna em- that was approachable, real, and tan-
year-old Detroit native who holds ployees and ultimately to custom- gible. One of my goals was cultural
an MBA from Cornell University, ers); and his penchant for speaking impact. I told the PR team, “You
joined Aetna as head of specialty candidly and off the cuff. In this in- cannot protect me; you must prepare
products in 2003, and became presi- terview, conducted in two sessions in me. So get ready. I’m going to go out
dent in 2007. In this post and as his Hartford, Conn., offices — the there and speak truthfully, and talk
CEO, he has overseen Aetna’s busi- first in August 2014 and the second about how to move forward.” That
ness response to the Affordable Care in January 2015, just after the wage approach has served me well.
Act, which helped attune him to announcement — he spells out the I became active on social media.
Aetna’s complex cultural legacy as reasons for the pay and benefits We have an internal network called
well as its potential for change. change, the reaction it evoked in the Aetna Connect, and I’m constantly
Interestingly, the wage raise company’s culture, and the connec- talking to the employees on it. They
stemmed directly from Bertolini’s ef- tion to Aetna’s audacious strategic also talk to each other. More and
forts to engage the Aetna company goal of becoming one of the few more often, I saw people online say-
culture, through social media and payor companies with a profitable ing, “I can’t afford my benefits. My
personal interactions. It was also and influential leadership position in healthcare coverage is too expensive.”
driven by a wish to be considered the emerging healthcare industry. I heard the same thing in site
thought leader
among the ethical leaders of Ameri- visits. When I visit an Aetna office,
can companies. Bertolini “explicitly S+B: How did you come to the wage after the town meeting where I
linked the decision to the broader hike decision? speak, I try to go to every cubicle in
debate about inequality,” wrote New BERTOLINI: When I took this job as the building and shake everybody’s
Yorker columnist James Surowiecki. CEO, I had three objectives. One hand. I ask them what they’re up to
“He said that it was not ‘fair’ for em- was to set Aetna on a course for the and how they feel about it here. The
ployees of a [Fortune 100] company next 160 years. Our purpose should same message came through.
to be struggling to make ends meet.” be to become a consumer company. At the same time, I could see
Even Mother Aetna found it hard to The second was to make healthcare that the economic recovery was un-
undermine the emotional appeal of reform actually work. The third was equal. People were suffering, but
this rationale. to reestablish the credibility of cor- capital was cheap and corporations
Bertolini is known for his no- porate leadership in the eyes of the were hoarding cash and not invest-
nonsense, energetic style; his ability American public. ing. Business leaders were saying, 83
 Jon R. Katzenbach Gretchen Anderson Art Kleiner
jon.katzenbach@ gretchen.anderson@ kleiner_art@
strategyand.pwc.com strategyand.pwc.com strategy-business.com
is a senior executive is a principal with Strategy& is editor-in-chief of
advisor with Strategy& based and a director of the strategy+business.
in New York, and co-leads the Katzenbach Center.
Katzenbach Center’s cultural
initiatives.

“When the government gets its act able to keep people motivated on So I asked for data on the business
together, we’ll move forward [with the front line. After we had looked impact. Our accepted figure for
helping low-income wage earners].” at a number of options to help our turnover costs was $27 million per
Then Thomas Piketty’s Capital lowest-paid employees, I finally year, but that was only voluntary
in the Twenty-First Century [Belknap said, “How about we just pay turnover. I asked for total turnover
Press, 2014] came out. I know a them more?” costs. How many people leave invol-
number of well-known economists, [Aetna chief of staff ] Steve Kel- untarily? How much does it cost to
and they all leaned the same way. mar is my sounding board. When he hire their replacements? How long
There is pressure to fix this [income said the organization was ready to does it take to train the new recruits?
inequality] problem through the law make this kind of change, we got a We looked at absenteeism, rework,
of the land. That was a scary pros- team together. First, we needed more productivity, dissatisfied employees,
pect: massive wealth redistribution
through the federal government. We
needed to prevent that. “After we had looked at a number
Another influence was Clayton
Christensen. He and I have been of options to help our lowest-paid
working together since 2011. Clay’s
basic idea is that companies should
employees, I finally said, ‘How about
husband scarce resources and put we just pay them more?’”
plentiful resources at risk. In our
current environment, the scarcest re-
thought leader

source is talent: human capital, not data. I asked the HR team to build a and our net promoter scores [a mea-
financial capital. Companies have profile: How much did the lowest- sure of survey respondents’ enthusi-
cash sitting on balance sheets around paid people at Aetna make? What asm] in recruiting new employees.
the world. It makes more sense to did their healthcare coverage look Incidentally, our industry’s general
spend the money on people than on like? What were their out-of-pocket net promoter scores are below those
acquisitions. costs? How hard was it for them to of airlines and cable TV companies.
get by? We figured out that our total
S+B: What did the business leaders It took months to get this infor- turnover costs were $120 million per
strategy+business issue 79

within Aetna think? mation. The organization really year. By that measure, $10.5 million
BERTOLINI: They were also starting wasn’t ready to talk about it, but I looked like a low-risk investment.
to agitate about the income inequal- kept pushing. Ultimately, we deter- We [had] also recently hired a new
ity problem. Some of them were mined that a raise to $16 per hour head of human resources to partner
84 worried about turnover, and being would cost us $10.5 million per year. with me on doing the right thing.
S+B: How many employees were crease in PDI. We also added anoth- get to $16 per hour and here you are
affected by this policy? er element to our social compact by handing it to them. What are you
BERTOLINI: About 5,700 employees offering certain employees enhanced going to do for me?” It was disap-
got wage increases to $16 per hour. medical benefits based on household pointing to hear this.
Most of them were call center em- income and their commitment to
ployees; some were single mothers or engage in certain wellness programs. S+B: How did you deal with cultural
fathers, and others had children on resistance?
Medicaid because they couldn’t af- A Proud Moment BERTOLINI: I kept control of [the
ford our dependent coverage. initiative]. I brought the senior team
It wasn’t enough to just increase S+B: What was the announcement into it because everyone would have
their wages; we also had to do some- like? to implement it, but I stayed closely
thing about their medical benefits. I BERTOLINI: I went down to our involved myself.
talked to economists at the Peterson largest call service center in Jackson-
Institute for International Econom- ville, Fla., to announce it on January S+B: What was the reaction from
ics, where I’m on the board, and they 12. We had to get a hotel ballroom the shareholders?
pointed out that wage increases can to fit everyone in. Everybody was BERTOLINI: They’ve been largely
affect benefits negatively [by reduc- wondering why I was there. “He’s re- supportive, with many going out of
ing subsidies]. So we reduced the tiring.” “The company’s been sold.” their way to ask about the move and
cost sharing on their benefits. This Very few people knew in ad- voice their approval. Many of those
gave many of them our richest ben- vance. I had given the Wall Street who were concerned about the po-
efit plan at the price of our least rich Journal an exclusive interview the tential financial impact quickly be-
plan — a zero premium cost for week before but embargoed the story came supportive when they came to
many of our frontline employees. until that evening. I wanted the em- understand the total magnitude of
Our objective was to raise the per- ployees to hear about it from me di- the enterprise impact, versus the
sonal disposable income [PDI, or rectly. We had also given our top 300 benefits in employee satisfaction and
income after taxes, benefits, and managers a heads-up the day before; retention.
other withholdings] of this popula- we got them on the phone. They Of course, all along I’ve been
tion as high as we could without said things like “This is the proudest trying to move our shareholder base
breaking the bank. moment I’ve had in 42 years at the to long-term investors who will be
thought leader
company.” more supportive of the changes we
S+B: This wasn’t a cascading mea- Then I made the announce- need to make to succeed in the new
sure where you’d also raise other ment, and the place exploded. I had healthcare environment.
wages through the company. known people would be happy, but I As Clayton Christensen points
BERTOLINI: There was a huge gap wasn’t ready for the raw emotion. out, the shareholder formula in most
between the people making $13 There were people crying. People companies is much too tightly con-
to $14 per hour and the rest of saying, “Praise the Lord. My prayers nected to earnings per share. And
the company. People at the next have been answered.” The frontline you know what? Shareholders do not
higher salary level didn’t have the managers were thrilled. directly benefit from earnings per
same issues. share increases. They get the differ-
When we made the change, S+B: Were there negative reactions? ence in the value they bought at ver-
some people saw a 33 percent in- BERTOLINI: Some employees said, sus the value they sell at. What drives
crease in wages and a 45 percent in- “Wait a minute. I worked six years to that stock price? It’s Wall Street’s be- 85
 lief about whether we have a sustain- don’t have the authority to do some- spend in major internal meetings. It
able product that our customers thing, I say, “Here’s a secret: Do it was 180 out of about 200. We had a
consistently buy. This is reflected in anyway.” They’ll say, “Well, that’s staff of 250 people who did nothing
the P/E ratio. not my job.” I say, “Yeah, it is.” but put PowerPoints together for
Aetna’s earnings per share have such meetings. So we set a goal of 70
grown at 15.5 percent for the last Culture and Behavior percent less paper, 10 percent fewer
five years. But our total shareholder meetings, and 50 percent fewer peo-
return grew 207 percent [during S+B: You’re the third CEO in a row ple attending. You should attend
the same period]. What changed? trying to create a culture of only meetings where you’re needed
The P/E. The magic question is: Are productivity and accountability at to make a decision, not to learn
your business fundamentals sound Aetna. How do you see those about [the topics].
enough that you can consistently de- efforts? At first, people were upset:
liver a product that customers will BERTOLINI: I don’t think you can “Why am I no longer invited?”
continue to buy over time? If people create a culture. A culture emerges “Well, you were grousing about
believe our business fundamentals and evolves slowly over time. It’s a having to sit in the back row doing
are sustainable, it will move the stock bit like a Petri dish. You hope the emails. Go see a customer instead.”
price higher. This should be the way conditions are good for the right cul- We just had our monthly results
we think about it. ture to grow. You try to get as much meeting; there were 15 people in the
help as possible from the current cul- room. Prior to this change, it would
S+B: Not many company leaders tural situation. Fortunately, it is sel- have been 80.
have that kind of confidence. dom all good or all bad. At the end
BERTOLINI: In the summer of 2009, of the day, my biggest challenge has S+B: How do these changes affect
we missed our plan by $450 million. been to show the organization that it customers?
I was president. I asked [CEO] Ron is necessary to take something apart BERTOLINI: The healthcare industry
Williams, “Why haven’t you put a while it’s successful, in order to make is going through yet another major
bullet in me?” it even better. That is one of the the- change. It will be a retail business be-
He said there were three reasons. ories of creative destruction. fore too long. By 2020, more than
“One, you’re running the place, and 75 million people will be purchasing
I can’t get rid of you. Two, you’ve S+B: What’s an example of the insurance directly. That’s why Aetna
thought leader

hopped on the problem, and the behaviors you’re trying to change? became one of the largest players
plans look great. And three, nobody’s BERTOLINI: A lot of it has to do in Affordable Care Act exchanges —
ever going to really be successful as a with improving accountability. This a move that surprised everybody.
Fortune 100 CEO until he or she is a real issue when shifting from a Those markets are blossoming for
faces one of these crises and actually command-and-control organization us, because people really want safety.
fixes it. So, finish it up and you’ll be to an organization where people They’re not saying, “I can’t wait to
the next CEO.” make important decisions at all lev- get insurance so I can run off to the
You always have the opportu- els. But you cannot change that all at doctor and spend somebody else’s
strategy+business issue 79

nity to lead, no matter what your ti- once, so you work on a few key be- money.” They’re solid working peo-
tle. I never let the lack of a title get in haviors at a time. ple trying to take care of their fami-
my way; when I found a leadership One example is the way we lies. I want us to really care about
vacuum, I’d jump in. When I talk to manage meetings. In 2008, I added those people.
86 my direct reports and they say they up the number of days I had to When I was growing up, my
dad worked as a pattern maker in the ers, including hospitals. They think on the market. We went and talked
auto industry. Since the models highly of us, and they all want to get to them and bought them, and
changed every five years, he only in the insurance business, so why they’ve been very successful. But nei-
worked six months every year. My don’t we create a franchise kit for ther acquisition would have been
mother was a nurse in a pediatrician’s them? We built Healthagen [a line of made with a purely financial or data-
office. That’s how we got our health- health management, information driven rationale. We did them be-
care paid for. Our market is families technology, and related services for cause we believed in them.
like that. healthcare providers]. When we To make this work, we need to
The Affordable Care Act will started working on it in 2005, we be willing to share our intellectual
commoditize this industry. That called it “Health Plan in a Box.” property and our technology. We
gives companies two options. They We also built a clinical capacity can even let providers use it for free.
can put their thumb in their mouth, exchange called WellMatch, which If Healthagen technology helps peo-
cut their costs, and hope they’re the lets us resell excess capacity in the ple buy healthcare more intelligently,
last company standing. Or they can healthcare system — services like or gets them to the right doctor, or
focus on the two or three parts of the imaging, lab tests, office visits, and stops them from having to go to the
emergency room, that helps our cus-
tomers and it helps our business.
“You always have the opportunity Aetna’s medical costs in 2014 were
over $40 billion. If we can reduce the
to lead. I never let the lack of a title annual rate of increase in medical
get in my way; when I found a costs by 50 basis points, that’s over
thought leader
$200 million of potential incremen-
leadership vacuum, I’d jump in.” tal underwriting margin.
We have begun to build ac-
countable care organizations (ACOs)
business that have the most value, let flu shots. And we’re making invest- for providers. We are helping them
the rest disappear, and repurpose ments in new technologies, like evolve from a revenue-based model
their businesses accordingly. iTriage [a health literacy and self-care to margin-based insurance. We hired
We chose the second option — app] and Medicity [which has a net- executive vice president Dijuana
to focus on a critical few elements. work of more than 1,000 hospitals, Lewis from Walmart, where she ran
So what could we leverage? Where 270,000 healthcare professionals, the healthcare vertical, to create a
do we have an emotional as well as a and 20 regional and statewide health retail business for these organiza-
rational advantage? One was our information exchanges connected to tions. The other two major parts of
reputation with healthcare provid- it]. Those two acquisitions were not the enterprise are Healthagen, the 87
 provider-facing business, run by Buying coalitions to lower the prices S+B: What does this change mean
senior executive vice president Joe of drugs, stents, and wheelchairs. for the people of the company?
Zubretsky; and the core institutional Giving them access to capital mar- BERTOLINI: There are three kinds of
business, run by president Karen kets, debt and equity, to build their people at Aetna. There are people
Rohan, effective January 2015. From capacity to meet the needs of the full who want to operate under the old
the combination of these three units, community. We want to make it model, and they probably have five
we are building, in essence, a funda- easy for them to do the right thing or 10 years left before that model is
mentally different value proposition for their customers. obsolete. But they are generating the
in the marketplace; it is a population I use Tesla as an analogy. Elon capital that will fund the transition.
health model, in which providers get Musk has a car that runs purely A second group is focused on
rewarded for keeping people well. on electricity, but it’s constrained the new stuff. Many of them work at
Eventually, instead of primarily be- by a lithium ion battery that repre- Healthagen, whose offices are in Salt
ing a health insurance company, sents 65 percent of the cost, and Lake City, Silicon Valley, and Den-
we’ll be like “Intel Inside,” providing the car costs $85,000. So he builds ver. They largely came out of venture
the common infrastructure.

A Next-Generation Payor “The provider system represents

S+B: What do you need to do to go 85 percent of our cost. Unless we
down that road?
BERTOLINI: First and foremost, we
reinvent that system, we can’t make
thought leader

have to make provider relationships healthcare a retail proposition.”

work over the long term. For em-
ployers to give up their ability to put
health benefits directly in employees’ a factory to reinvent the battery. If capital and private equity. When I go
hands, they have to believe that the he can get to a $35,000 electric see them, it feels very natural to wear
costs will be sustainable and afford- car and if free charging is every- jeans and Birkenstocks or cowboy
able over time. where, he can turn the energy and boots. It’s a completely different style
The best shot is to get providers automotive industries upside down. of enterprise and cultural situation.
strategy+business issue 79

engaged in population health. We Similarly, the healthcare provider The third group is people who
will need to work with them in a va- system represents 85 percent of our are involved in the old businesses,
riety of ways: fee-for-service systems, cost. Unless we reinvent that system, and who need help making the tran-
clinical efficiency, avoiding readmis- we can’t begin to make it a retail sition to the new world. The new
88 sions, and supply chain efficiency. proposition. model will need a lean operating in-
frastructure, so we will need to pre- just wanted to do their jobs. At the don’t even need to interject. I just
pare for that. But we’ll also need new end, I said, “I really appreciate every- watch it go on. I know I’m going to
kinds of roles. For example, we’ll one’s honesty. But I’m not going get attacked at times; people will say
need to find roles for people in case away. This is going to happen. Look unfair things about me. But I think
management, marketing, and other to your left and right and decide. If it’s much more efficient than email. I
fields where we haven’t needed many you want to be here, we want you.” have 7,000 emails in my inbox, and
people before. Our budget in 2018 I respond to virtually none of them.
for consumer advertising might be S+B: How do you find and cultivate But with internal social media, we
10 times what it is today. the people who are enthusiastic can create real teams. Eventually I’d
about change? like to replace email altogether with
S+B: Does everybody at the BERTOLINI: I’m working now with social media.
company understand the need for the top 300 people, looking for a
change? group of about 120 who can be in- S+B: You have another project
BERTOLINI: We’re talking about a formal leaders — people whose in- called “reinventing capitalism.”
lot of change. Some people have fluence does not just depend on their What’s involved in that?
been with the company for a long position in the hierarchy. That will BERTOLINI: I am connected with a
time, and their attitude is: “What are probably get honed down to a small- group of chief executives at Harvard’s
you doing?” er group. Eventually I would like to Center for Higher Ambition Leader-
At a leaders’ meeting, one man- have a kitchen cabinet of people who ship. [Harvard professor emeritus]
ager said, “Mark, why are we making are authentic informal leaders drawn Michael Beer wrote a book about it.
such significant change? The com- from all layers of the company. We started five years ago with five
pany has had record earnings, reve- I’m also continuing to use social CEOs, and there are now 40 of us.
nue, membership, and stock price.” media. I actually write my own We’re talking about how we can
I was really surprised by that. I tweets [he’s @mtbert]. My most combine social and financial value
said, “Then all this talk about what’s widely recognized exchange on so- — and what we need in the way of
going on in the marketplace, you be- cial media was with @PoopStrong metrics to create better companies.
lieve all of that’s just fake?” [the Twitter handle and website of At our last meeting, in January
We had just done an employee Arijit Guha, a graduate student at 2015, I talked about this wage initia-
engagement survey and the lowest Arizona State University who was tive. There are now 30 other CEOs
thought leader
scores were from people like those in diagnosed with stage IV colon can- who want to do something similar.
the room, two levels below me. As cer, and began fundraising online Some of them have started, and it’s
you look at the survey results down when the costs of his care exceeded already clear they have the same hur-
through the organization, the scores the benefits limit on his Aetna policy dles to overcome. Even in companies
rose again, and the frontline employ- — Bertolini intervened directly in where they talk about values and cul-
ees were among the most engaged. his case]. Sadly, Mr. Guha passed ture all the time, when asked what
So I said, “45 percent of the people away, but we solved the benefits the lowest-paid group in their work-
in this room really don’t want to be problem, and that was important to force looks like, [the staff will] tell
here. So why are you here? Why are a lot of people, inside and outside you they don’t know and they don’t
you wasting your time and mine?” the organization. have the data. You have to learn
The dialogue for the next hour Most people think it’s hard to to persevere with or without data.
was amazing. People talked about find the time to manage social me- That’s how you have impact. +
how hard it was to change, how they dia. But people talk to one another. I Reprint No. 00324 89
 Books in Brief

The Ghost of Financial quately connects subprime mort- from a thoroughly international per-
Crises Past gage loans in Phoenix and Philadel- spective, detailing how the crisis
by Marc Levinson phia with bank failures in Madrid spread and showing how contain-
and Munich, the bankruptcies of ment efforts stumbled on the mis-
Hall of Mirrors: The Great Chrysler and General Motors, and match between a highly integrated
Depression, the Great Recession, Ireland’s sudden transformation global financial system and a regula-
and the Uses — and Misuses — from beacon to basket case. When tory system dominated by national
of History, by Barry Eichengreen, Queen Elizabeth asked British econ- political concerns.
Oxford University Press, 2015 omists in November 2008, “Why Hall of Mirrors is constructed as
did nobody notice it?” she was not comparative history, as Eichengreen

E
verybody has an explana- referring to the dodgy lending, artfully alternates between discus-
tion for the crisis that began which had been noticed far and sions of the Great Depression of the
quietly when Ownit Mort- wide. Rather, QE2 was referring to 1930s and the near-depression of the
gage Solutions shut its doors in the interconnections that trans- 2000s. The 1920s, he recalls, was
December 2006 and has yet to end formed a provincial banking prob- a decade of financial innovation in
(thanks to Greece). The list of cul- lem into a global economic crisis. the United States. Investment clubs
prits is endless: easy money, reckless The best answer the experts could pulled small investors into the stock
lending by Ownit and its many come up with, after eight months of market for the first time, while banks
peers, feckless rating agencies that debate, was that there had been “a and insurance companies stuffed
allowed banks to mint AAA securi- failure of the collective imagination their portfolios with newfangled
ties from junky loans, banks lever- of many bright people.” mortgage-backed securities. Weak
books in brief

aged to the hilt, clueless bank super- Of the scores of books that have economic conditions in Europe sent
visors and regulators, investors blind examined aspects of this never- gold flooding into the United States,
to risk, U.S. government policies ending crisis, none may be better where it drove stock prices into the
aimed at turning the working poor than Barry Eichengreen’s Hall of stratosphere. Longtime Federal Re-
into homeowners, defective risk Mirrors. Eichengreen, who teaches serve governor Adolf Miller de-
models, and more. And we can’t for- at the University of California at scribed the situation as “optimism
Illustration by Noma Bar

get the ultimate cause most fre- Berkeley, is one of the most prolific gone wild and cupidity gone drunk.”
quently cited in the media: unscru- economic historians writing today. The Fed, at the time an institu-
pulous bankers. He is also among the most astute. tion in its adolescent years, wanted
Each alleged cause has its parti- The author of books on the gold to pop the bubble without hobbling
sans, and most of the purported standard, European unification, and the economy. Instead of raising in-
causes have some truth. Yet none of the international monetary system, terest rates, in 1929 it employed “di-
90 them, alone or in combination, ade- Eichengreen approaches his subject rect pressure,” leaning on banks to
stop lending to stockbrokers. The really were, in both Europe and the banking system to its knees.
modern Fed could have learned from United States. “This buildup of vul- Eichengreen saves his most
this, Eichengreen says, as an example nerabilities bore more than a passing pointed words for those obsessed
of regulators trying to shape an in- resemblance to the 1920s,” Eichen- with another lesson of history —
tervention that addressed the prob- green writes. that inflation lurks behind the near-
lem without crippling the economy. But few noticed the historical est tree. Inflation was certainly a
They also could have learned that echoes. Which is strange, consider- problem in Europe in the 1920s and
interventions focused on the bank- ing several of the leading actors in worldwide in the 1970s. But in the
ing system may not be effective if this modern drama are themselves 21st century, in good times and bad,
nonbank lenders such as insurance economic historians. Ben Bernanke, it has been consistently low, and
companies, stockbrokers, and invest-
ment trusts, none of which were sub-
jected to Fed control, step into the The best answer the experts could
breach. When that occurred in
1929, the Fed finally raised interest come up with was that there had
rates to calm the frothy market —
with devastating consequences.
been “a failure of the collective
The 2000s, of course, saw their imagination of many bright people.”
share of financial innovations, with
mortgage brokers reprising the role of
the “binder men” who, in the 1920s, chairman of the Federal Reserve sometimes negative, in North Amer-
signed up rubes to buy Florida real Board from 2006 to 2014, and Chris- ica, Europe, and Japan. Yet central
estate sight unseen. Sophisticated in- tina Romer, chair of President Barack banks and leading politicians in
vestors, not least supposedly conser- Obama’s Council of Economic Ad- many countries hesitated to stimu-
vative European banks, willingly visers in 2009 and 2010, both wrote late their crisis-racked economies,
purchased collateralized mortgage books on the Great Depression. Yet as either with rock-bottom interest
obligations and CCC-rated bonds in Eichengreen points out, these experts, rates or with government spending,
an almost desperate search for higher their colleagues in central banking, lest doing so resurrect dreaded infla-
returns. And, now as then, dodgy ac- and their political overseers took a tion. Eichengreen argues passionate-
counting made it seem that banks bad problem and made it much ly that economic policy should have
were far better capitalized than they worse, in large part by drawing the been far more aggressive. “The im-
wrong lessons from history. plication is not that the disappoint-
For example, many experts, in- ing recovery following the 2008–09
cluding Fed officials, worried openly financial crisis was inevitable,” he
that foreign investors in China and writes. “The presence of unemployed
the Middle East might lose their resources in the wake of a crisis
books in brief
willingness to buy U.S. bonds, po- means there is space for the economy
tentially causing chaos. This focus to bounce back even more vigorously
on net capital flows was presumably than from the typical recession.”
a relic of the days of the gold stan- With any luck, policymakers
dard, when a country with a per- will be able to draw on that lesson
sistent balance-of-payments deficit the next time a crisis rolls around.
might eventually run out of gold. They could do worse than asking
Meanwhile, nobody seemed to no- Eichengreen for advice. +
tice that European holdings in the
United States had shifted massively Marc Levinson’s books include The Box:
into mortgage-backed securities — How the Shipping Container Made the World
Smaller and the World Economy Bigger
and it was that unnoticed shift that (Princeton University Press, 2006). He is
ultimately brought the European working on a history of the 1970s. 91
 the Internet, ours has become a
What’s Wrong with winner-take-all economy. This, of
the Internet? course, reinforces more general con-
by Edward H. Baker cerns about the rise of the 1 percent–
dominated economy.
The Internet Is Not the Answer, Keen’s description of the Inter-
by Andrew Keen, Atlantic Monthly net’s effect on culture is more inci-
Press, 2015 sive. Though here again he offers
little that’s truly new, the examples

H
ere’s yet another in a he cites are truly alarming. It’s diffi-
growing list of books at- cult not to agree with his heartfelt
tacking the brave new rage at the prevalence of digital
Internet-centric world we live in. In piracy. By one estimate, “in January
the rich vein mined by authors such 2013 alone…432 million unique
as Evgeny Morozov (The Net Delu- Web users actively searched for
sion), Jaron Lanier (You Are Not a content that infringes copyright.”
Gadget), and Nicholas Carr (The Meanwhile, global sales of music
Glass Cage), Andrew Keen brings us had declined, he notes, from US$38
The Internet Is Not the Answer. Keen billion in the late 1990s to a little
argues that “rather than democracy over $16 billion by the end of the
and diversity…all we’ve got from the Much of what the 54-year-old 2000s. Are streaming sites like Spot-
digital revolution so far is fewer jobs, Keen, who was born and raised in ify and Pandora the solution for art-
an overabundance of content, an the U.K. and trained as a historian ists seeking to make a living from
infestation of piracy, a coterie of In- and political scientist, says will be their craft? Not according to Keen,
ternet monopolists, and a radical
narrowing of our economic and cul-
tural elite.” Creative destruction is all fine and
Those are pretty strong words,
and, indeed, Keen’s book is essen- good, so long as once you’ve
tially a diatribe about the damage
the Internet has done to our econ-
destroyed something, something
omy, our culture, and our sense of else gets created in its place.
ourselves. And Keen speaks from
experience. He founded Audiocafe
.com — a first-generation Internet familiar both to readers of his two who points out that after one of
company — in 1995, and is current- previous books (Digital Vertigo, The songwriter Ellen Shipley’s hit songs
books in brief

ly the host of the “Keen On” Cult of the Amateur) and to those in- was streamed more than 3 million
Techonomy chat show and a CNN terested in the impact of the Internet times on Pandora, she received a
columnist. Unlike more philosophi- — positive and negative alike — on royalty check for $39.61.
cally grounded books such as those society. Despite the many claims by The Internet Is Not the Answer
of Morozov and Lanier, The Internet technological optimists to the con- is full of similar gory details of
Is Not the Answer takes a decidedly trary, for example, Keen points out how the Internet’s massive consumer
empirical approach to the problem. that “distributed technology doesn’t surplus can also create artistic and
Keen deploys more than 40 pages of necessarily lead to distributed eco- economic deficits. He shows how
strategy+business issue 79

footnotes (but no index) to back up nomics, and the cooperative nature participation online seems to consis-
his argument. However, the citations of [the Internet’s] technology isn’t tently undermine economic firm-
come mostly from frightening news reflected in its impact on the econ- ness. And he’s at his best when he
stories or other journalists who hap- omy.” Instead, thanks in part to the buttresses his case with reporting.
92 pen to agree with him. massive network effects inherent in The book begins with a description
of the Battery, a recently established all too often deteriorates into mere that all is OK because it is in the
private club in San Francisco whose whining. Keen is at his worst when very nature of the Internet to leave
founders claim to be trying to re- rehashing the case against Uber or the wreckage he describes behind is,
create a “village pub” with a diverse describing, yet again, the rise of San in his view, no excuse.
clientele of regulars, but who have Francisco’s exclusive tech buses. And If the Internet is not the answer,
actually done little more than repli- he takes great pleasure in bashing what is? In Keen’s view, the solution
cate the growing gap between the Google: While lauding the compa- to these problems lies in the hope
rich and poor in the city as a whole. ny’s genius, he returns time and that the Internet will grow up. But
Keen also takes a memorable again to its sins — its anti-privacy that won’t happen unless govern-
trip to Rochester, N.Y., where he stance, its role in the creation of a ments and companies are willing to
describes vividly how the collapse surveillance society, its deleterious counter the Internet’s most problem-
of industrial-era stalwart Kodak has effect on cultural production, its atic effects through laws, regula-
ravaged the city. He notes that monopolistic power. Some readers tions, and changes in how compa-
Kodak, which once minted massive will likely find this familiar territory nies do business. Harking back to
profits manufacturing, processing, tiresome. the trust busters of the Progressive
and printing film, laid off 47,000 Still, Keen’s overall point is an Era, Keen surveys the many current
workers in 2013, the same year In- important one: Creative destruction efforts to rein in the tech companies’
stagram sold itself to Facebook for is all fine and good, so long as once monopolistic control, their massive
$1 billion. At the time, the photo- you’ve destroyed something, some- data collection programs, their in-
sharing company had only 13 full- thing else besides massive wealth for fringements on copyright, and their
time employees. Keen is fully aware a very few founders and investors enabling of hate speech. He sees
books in brief
of the irony implicit in seeing Ko- gets created in its place. The Internet progress, but not enough as yet.
dak, which single-handedly brought has prospered greatly by pandering Still, he puts his faith in history and
photography within reach of the to the “consumer” as the be-all and the sense that change is inevitable.
masses, being disintermediated by end-all of its commercial existence Ultimately, he believes, the disrup-
Instagram, which is filling the same — Free music! Free news! Selfies! In- tors will themselves be disrupted.
role for free. In his view, however, stant gratification! What’s not to What that will lead to is anybody’s
the billions of dollars in value creat- like? — while discounting the im- guess. +
ed for consumers by Instagram, as portance of the “citizen,” who, in
well as Skype, WhatsApp, and simi- Keen’s account, has suffered greatly Edward H. Baker
baker@edwardhbaker.com
lar new technologies, do not com- over the past two decades through is a longtime business journalist and a
pensate for what’s lost in the process. the loss of jobs, privacy, and collec- contributing editor at strategy+business.
Like many other diatribes, how- tive identity, and a declining sense of
ever, The Internet Is Not the Answer the common good. And the notion 93
 and technology redefine you. You “outsight” and leadership capacities.
Hey, Leaders: Stop have to act like a leader before you’re How? By creating slack in your
Thinking So Much and appointed to a leadership position, schedule so you can get involved in
Just Do It and you have to manage your own projects outside your core area and
by Daniel Gross leadership path. The way to do it is participate in extracurricular indus-
by intentionally making yourself try activities. By consciously mak-
Act Like a Leader, Think Like a uncomfortable. Only by exiting ing the effort to network with peo-
Leader, by Herminia Ibarra, your comfort zone can you develop ple who work in different industries
Harvard Business Review, 2015 “outsight” — the term she coins to and have different competencies. By
describe the valuable perspective finding a context or situation that

“Y
ou can only learn what you gained through actions. makes you uneasy — giving a pre-
need to know about your To do so, people must overcome sentation, showing up at a confer-
job and about yourself by the gravitational pull of inertia. ence for the first time, speaking up
doing it — not by just thinking about Ibarra notes that psychology and at an internal meeting. “Act as radi-
it.” That may be a strange way for financial incentives push us to do cally different from your normal be-
someone who thinks about (and more of what we are good at, and havior as you can,” she suggests.
teaches and writes about) business to get still better at it. But, she Trying on a new identity at
for a living to start a book. And it writes, “when we allocate more time work may seem anathema to the ris-
certainly represents a fork from the to what we do best, we devote less ing cult of authenticity. But Ibarra
increasingly well-trod intellectual
path that celebrates mindfulness
and introversion. But to Herminia Everybody wants to be true to them-
Ibarra, it represents a truism: “Sim-
ply put, change happens from the
selves, but they can “hit a wall as
outside in, not from the inside out.” they transition to more senior roles.”
Those are just two of the many
counterintuitive and easily digest-
ible bits of wisdom in Act Like a time to learning other things that urges readers to recognize how ad-
Leader, Think Like a Leader. Con- are also important.” And pursuing hering strictly to behaviors that feel
cise, direct, and possessing a certain the comfort of our competencies natural can inhibit career evolution.
books in brief

flair, Ibarra’s new book (her second) can set us up for failure when cir- Everybody wants to be true to them-
is a projection of her personality. A cumstances change. A professional selves, but they can “hit a wall as
native of Miami and veteran of Har- might spend decades thriving as a they enter the transition to more se-
vard Business School, Ibarra has newspaper editor, or as a manager of nior leadership roles.” Ibarra notes
taught since 2002 at INSEAD in a big-box electronics retail supply that she has faced this dilemma in
Paris, where she chairs her depart- chain, or as the head of coal-mining her own career. Starting to teach
ment as the Cora Chaired Professor operations — only to find that cir- compelled her to make the adjust-
of Leadership and Learning. cumstances suddenly render his or ment from an academic researcher
strategy+business issue 79

The book’s core message is sim- her expertise significantly less valu- to someone who had to directly en-
ple and incisive. In an age of con- able, even obsolete. gage MBA students. Years later,
stant disruption, you had better re- To avoid this competency trap, when she was tapped to become a
define yourself before the rapidly Ibarra argues, you have to regard department chair at INSEAD, she
94 shifting sands of corporate America your job as a platform for building felt the job was infringing on her ca-
 s+b
thought
pacity to do what she did best —
writing and teaching. “I wasn’t step-
ping up to leadership, because I
cles to acting like a leader in the way
Ibarra suggests. “The actual advice
I’ve given people is to try to carve
leaders
didn’t think that leading was real out 10 to 15 percent of their time for
Hear from the best
work,” she writes. To gain outsight, side projects — networking events,
Ibarra practiced some of what she connecting to people not in the im- minds in business on
preaches. She began networking mediate path of your operational the brain science of
outside her comfort zone, sought responsibilities,” she said. But not strategy, the digital
out board positions, and became in- every company or organization is economy, what makes
volved with outside groups like the designed to let employees have reli-
World Economic Forum. able slack in their schedules; if any-
brands go viral,
Ibarra’s advice definitely cuts thing, the trend is in the opposite and more
against the grain. As she put it in direction.
a recent interview with strategy+ Also, the prescriptions may not
business, her argument calls into work in every context. Ibarra con-
question the “long tradition of social cedes that the impulses that in-
psychology research that the way we form her book are characteristically
think follows what we do, and not American — the ability to network,
the other way around.” And humans to invent (and then reinvent) one’s
tend not to focus on the need to self. In the U.S., “it’s a culture where
build capacities before they actually hierarchical differences are mini-
need them. mized, and you can walk up to any-
There may be practical obsta- body and introduce yourself,” she
said. “It’s not something you do as
easily in France.”
But that doesn’t mean you
shouldn’t try. And it’s never too early
to start. Becoming a leader, this valu-
able book reminds us, is a process,
not an event. And it requires build-
books in brief
ing a set of skills rather than follow-
ing a series of prescribed steps.
“Stepping up to leadership is more
like becoming a great chef,” Ibarra
writes, “than following a recipe.” +

Daniel Gross
gross_daniel@strategy-business.com
is executive editor of strategy+business.
 ness books are today. Rather, it’s a tuosos” and those at the bottom as
Everyone Profits manual for 21st-century leadership. “self-focused.” The simple naming
from the Return on And Kiel acknowledges from the of those two CEO categories will
Character start that at the age of 75, he wrote help you understand the core mes-
by Tom Brown the book because he wants “to sage of the book. For Kiel, it’s not
inspire a movement that forever enough to lead an organization by
Return on Character: The changes people’s expectations of simply meeting goals or making a
Real Reason Leaders and Their leadership and performance in orga- profit. Virtuosos use both head and
Companies Win, by Fred Kiel, nizational life.” The book carries the heart to orchestrate a high-perfor-
Harvard Business Review Press, tone of someone who wants to share mance team that includes board
2015 both current research and seven members, top executives, managers,
decades of personal experience. and employees. That team serves all

I
t’s rare to find a business book, Throughout, Kiel comes off as a those who have an interest in the
let alone one on leadership, generous sage, not as a profit-seek- company or who are affected by its
that is well researched, well ing consultant. policies and practices. Self-focused
documented, well written, convinc- Kiel’s team started with a “met- leaders, says Kiel, are mainly out for
ing, credible, and imbued with a ric for assessing the character-driven themselves and few others.
voice that one grows to trust and ad- behaviors” of the 44 U.S.-based Kiel’s profiles of the CEOs high
mire. Fred Kiel’s 200-pager, Return companies from which they were on character as well as the character-
on Character: The Real Reason Lead- able to compile a complete set challenged are sufficiently descrip-
ers and Their Companies Win, is a of both interview and financial tive that it’s not hard to see how they
standout for at least three reasons.
First, there’s the mission of the
book itself. Kiel cofounded a con- Virtuoso CEOs achieved a
sulting firm called KRW Interna-
tional, which set out nine years ago 9.35 percent return on assets while
to find the connection, if any, be-
tween the “character” of a leader
those tagged as self-focused CEOs
and an organization’s performance scored a mere 1.93 percent.
by interviewing 84 CEOs and their
executive teams in depth (while also
polling some 8,600 employees). performance data. The survey in- act in the office on a daily basis. The
Though many other authors have cluded Fortune 500, private, and book amply details the behaviors of
touched on the subject, the book’s nonprofit companies. both extremes of CEOs, enough so
publisher (Harvard Business Review Character isn’t a term that is as that you find yourself unconsciously
Press) claims this is “the first major precise and measurable as, say, re- coming up with real names of peo-
books in brief

study to show a measurable relation- turn on assets (ROA). So Kiel dis- ple you have worked for in place
ship between CEO character and cusses how the researchers came to of the anonymous names Kiel uses.
business success” — i.e., the “return define the word as being innately Though he lists the names of CEO
on character” (ROC). tied to integrity, responsibility, for- participants who gave their permis-
Second, Kiel infuses his book’s giveness, and compassion. Those sion, he expands on only a few ROC
conclusions with enough data (nice- four “universal principles” were then champions, such as former Costco
ly graphed) that even the most hard- refined into key behaviors (such as CEO Jim Sinegal, former REI chief
nosed reader would have to concede “telling the truth” for integrity). executive (and current secretary of
strategy+business issue 79

they are substantiated, even if that And it was those behaviors that the the Interior) Sally Jewell, and Barry-
reader wanted to debate them. researchers sought to measure. Wehmiller CEO Bob Chapman.
Third, this is not an autobiogra- After all the interviews and sur- What sets this book apart from
phy or a hard sell for the author’s veys, Kiel’s team designated the top its peers in the marketplace is the
96 consulting services, as many busi- CEOs on the character scale as “vir- handsome way it links research data
 formed more than five times as well
as the self-focused execs at the bot- Why Beanie Babies
tom end of the curve. For some, this Boomed — Then
gap will be the definitive reason to Busted Badly
read this book. by Mark Gimein
But a stronger reason to read it
can be found in its third section. The Great Beanie Baby Bubble:
Kiel argues that one’s character can Mass Delusion and the Dark
be changed, and he details the six Side of Cute, by Zac Bissonnette,
steps others have taken to move Penguin, 2015
from self-focused myopia to a world

F
view that stresses unity of purpose, or connoisseurs of madness
harmony of teamwork, commit- and madmen, Zac Bisson-
ment to performance, and contribu- nette’s The Great Beanie
tion to community. Baby Bubble comes at an opportune
One of the pleasures of Return time. The Beanie Babies story is 20
on Character is getting to know Fred years old, and might well have been
Kiel. In the introduction, Kiel con- lost to history if Ty Warner, the bil-
cedes he was self-focused in his early lionaire creator of Beanie Babies,
to behavioral descriptions. As Kiel career: “I’m sure many of my col- had not been sentenced last year in
develops his argument, he weaves in leagues in those days felt that I was federal court for tax evasion.
charts that illustrate how the two more than willing to throw them The photos of Warner, his ar-
kinds of leaders differ. For example, under the bus if it meant more suc- chitect glasses highlighting a face
more than twice as many virtuoso cess for me.” But by the time he lays worn creepily smooth by decades
CEOs said they had a supportive out an impassioned manifesto for a of plastic surgery, have to invite
mother or father. new direction in leadership, we real- some curiosity about how this reclu-
The charts are even more re- ize how much Kiel has evolved. sive, litigious man could have once
vealing when showing how the two “People are hungry,” he writes, “to been the most successful toy seller
kinds of CEOs rated themselves on have a model of leadership that they in history.
items such as “strength of character can believe in, one they can aspire It’s a question Bissonnette, a
habits” compared to how employees to, one that is founded on and nour- journalist who has previously writ-
rated them. Virtuosos gave them- ished by a shared humanity.” ten two books about personal fi-
selves a score of 84; the self-focused It’s rare to find a business book nance, answers with mixed success.
group, 83 — virtually the same. Yet that, at the end, makes one want The Great Beanie Baby Bubble can
employees gave the virtuosos an 87 to cheer both the author and the usefully be read in two separate
rating while awarding a scant 68 to cause he champions. Return on ways: as a book about how to create
books in brief
the self-focused leaders. Character is such a book, and it de- a wildly successful product, and as a
As for quantifying the financial serves our immediate and thought- book about what turns the success-
return on character, Kiel posts ful attention. + ful product into a mania.
an attention-grabbing chart that The first of these may be the
shows that CEOs who qualified as Tom Brown more fully realized narrative. It’s
tom@mgeneral.com
virtuosos achieved a 9.35 percent is a leadership development consultant tempting to see a product like the
ROA (defined as net operating in- and coach, lecturer, and business writer. Beanie Baby and approach it in a
He is a founding columnist for NPR’s
come as a proportion of total assets), Marketplace, and editor-at-large for
“gee, wish I’d thought of it” way be-
while those tagged as self-focused IndustryWeek. His books include The cause, well, how much experience in
scored a mere 1.93 percent ROA, Anatomy of Fire and Fiscal Fairy Tales. the business does it really take to
over a two-year period. He says the come up with the idea of stuffing
research showed that the virtuosos loose beans in plush animals? A lot,
at the top end of the curve per- it turns out. Warner, born in Illinois 97
 in 1944, was a second-generation deep beneath it. Beanie Baby sellers
plush toy salesman — probably, as could check at any instant just what
Bissonnette details by going to col- the latest price was for a Royal Blue
leagues from three decades before, Elephant ($5,000 at the height of
the best teddy bear salesman in the the craze). They had no way of
United States. knowing how many unpopular
It also takes a fixation on detail models were piling up in gift store
that could redefine what you think basements or when Warner would
of as obsessive — whether it was gin up the market with a new batch
sending toys that didn’t precisely of Beanies — much as, years later,
match the sheen of a pearl earring real estate speculators watched the
back to the factory in Korea or digits spin on housing prices with-
personally plucking the fur around out seeing the pileup of unsellable
the eyes of the stuffed animals at condos backed by “liars’ loans.”
trade shows. The stories of Warner’s One area in which it may be
years in the stuffed toy wilderness possible to write down a more or less
(an industry populated by a cut- accurate formula is the ratio of spec-
throat mix of obsessive characters, ulators in a mania to actual users
a surprising number of whom of the object of desire. One reason
seemed to have passed through or- any student of the rich literature of Bissonnette tries so hard to plumb
phanages) make for a scary lesson in manias. Still very relevant now is the Ty Warner’s childhood is that Bean-
entrepreneurship. story of the symbiosis between eBay ie Babies really were designed for
The Beanie Babies mania, a pe- and the Beanie Babies mania. The children. By the end of the craze,
riod of about three years, roughly two grew up together, and the auc- kids had lost interest, and the mar-
from 1996 to 1999, takes up the sec- tion website was instrumental in cre- ket was being driven entirely by
ond half of Bissonnette’s book. On ating the market for Beanie Babies. speculators squirreling away Beanies
this subject The Great Beanie Baby EBay gave the market just enough in sealed plastic.
Bubble may be less successful. Bis- transparency for potential buyers to A toy that everyone seems to be
sonnette finds out enough about see the mania bloom in a swirl of bil- trading and nobody is playing with
Warner’s childhood to hint at Goth- lowing prices — a line of 1996 elec- may be as close as we come to the
ic-level horrors, including a feral tion-themed Beanies, retired at the definition of an investment fad.
childhood with absent and abusive beginning of 1997, jumped in price Beanie Babies caught on in suburbs
parents and the ugly rigors of mili- to US$50 in two months and to and trailer parks, but were scoffed at
tary school. But it’s not clear that $625 a year later — and not quite by professional investors. And you
“the dark side of cute” really explains enough to let them see just what un- don’t have to look far to see osten-
why this particular product generat- stable soil it was planted in. sibly more sophisticated investors
books in brief

ed the level of obsession it did. “Just as relatively minor discov- jumping on the next hot trend.
Where Beanie Babies really eries of gold had fueled the gold If you’re trying to figure out
stood out was in appealing to the rush of 1849,” Bissonnette writes, “it whether you’re looking at an invest-
collecting compulsion. Introduced only took $500,000 per month in ment fad, the “Is anybody playing
in 1994, Beanie Babies took off eBay sales to help drive, at Beanie with it?” test can be awfully handy.
slowly, swapped by collectors. It was Babies’ height, $200 million per Have you seen anyone buying much
two years later that they turned month in retail sales.” with a stash of Bitcoins lately? +
from a novelty item traded in the There may not be a precise for-
strategy+business issue 79

Chicago suburbs to a national craze, Mark Gimein

mula here, but there is clearly some-
markgimein@gmail.com
as Ty Inc. started “retiring” selected thing to the combination of a mar- is a New York–based journalist who
characters, effectively egging on col- ket that puts rising prices in bright writes about finance and the economy.
He’s @markgimein on Twitter.
lectors to bid up prices. lights and a dark sludge of hard-to-
98 There is useful material here to sell inventory hidden somewhere
MEET
THE NEXT
GENERATION
OF BUSINESS
THOUGHT
LEADERS

strategy-business.com/youngprofs
 In New Product Design, “Likes”
Can Lead You Astray
Your next innovation breakthrough probably won’t come from social media.
BY MATT PALMQUIST

collaboration on budgets, design, blogs, Facebook, and Twitter, how-

“I
t’s really hard to design products
by focus groups,” Steve Jobs prototyping, and product testing, ever, proved a hindrance, allowing
once famously said. “A lot of which in turn demands the problem- customers and managers to weigh in
times, people don’t know what they solving skills of many departments, too frequently and steer projects
want until you show it to them.” the strategic commitment of R&D down blind alleys. “We tried [using a
Social media is the ultimate fo- resources, and external communica- social network], but after several days
cus group — Twitter and Facebook tion with distributors and suppliers. we stopped using it because it was
users rarely hesitate to voice their In short, innovation entails using the annoying,” one project manager told
opinions. But although these sites full range of IT capabilities — and in the authors. “The constant alerts and
have reshaped the way people com- the hashtag era, this can also mean notifications were a bit much.”
municate, they have a long way to go keeping customers and clients Feedback via social media may
before they can help companies de- abreast of products on the assembly be able to help some projects, but at
sign and perfect new products. In line and inviting their participation this point, the authors note, “a com-
fact, a new study finds that input in design and marketing campaigns. mon frustration is the initial high
from social media is more distracting And yet, the authors found that expectations given to these tools
than beneficial during the product older technologies still worked best. only to be followed by strong dissat-
development process, reinforcing Teams that relied on email, comput- isfaction as the integrity of the sys-
the Jobsian perspective that compa- er-assisted design software, and desk- tem erodes, ultimately becoming a
nies probably shouldn’t invite con- top programs like Microsoft Office cumbersome collection of outdated
sumers to the drawing board. reported higher levels of collabora- information.” +
end page

The study’s authors surveyed tion, churned out more concepts

executives and engineers at nearly and prototypes, and received better Source: “Do Social Media Tools Im-
200 firms from various industries, in- evaluations from their managers. pact the Development Phase? An
cluding aerospace, IT, and consumer Clearly, the tried-and-true nature of Exploratory Study,” by Tucker J.
electronics. The participants de- these IT tools means employees are Marion, Gloria Barczak (both of
Illustration by Elwood Smith

scribed which technologies they used comfortable with their functionality. Northeastern University), and Erik
during the innovation process — Internal wikis and cloud-based Jan Hultink (Delft University of
such as fax machines, social media, or file-sharing systems also contributed Technology), Journal of Product In-
cloud-hosted file-sharing platforms positively to new product develop- novation Management, Dec. 2014,
— and provided evidence about how ment — especially among team vol. 31, S1
these tools affected the speed and members who are separated by
quality of their product rollouts. countries or time zones. More Recent Research at:
strategy-business.com/recent_research
100 The innovation cycle requires Social networking sites such as
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