Strategy business autumn 2013 by fellipe moraes

LET 999 FLOWERS DIE GET DISTRACTED YOUR FIRST 10 DAYS

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HOW TO DESIGN A WINNING COMPANY

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Illustration by Lars Leetaru

Leader, Do No Harm Human pathology has long been a management metaphor. We like to “diagnose” company problems and “prescribe” courses of care for our organizational ills. But how carefully do we consider the side effects of our approaches? Several articles in this issue remind us that the phrase “ﬁrst, do no harm”—a fundamental precept for physicians since Hippocrates (or at least since the 17th century, when it began to be quoted in medical writing)—is highly appropriate for business leaders as well. “How to Design a Winning Company,” by Ashok Divakaran, Gary L. Neilson, and Jaya Pandrangi (page 42), is the latest in a long series of Booz & Company features on changing an organization through the design of its formal and informal attributes—its organizational DNA. Like a skilled physician, the effective leader must understand how to avoid broad-spectrum applications when tweaking just a few elements with ﬁnesse and sensitivity can lower the pain and raise the game. An accompanying article, by Walgreens senior executives Mark Wagner and Wayne Orvis (page 46), recounts the effort by the pharmacy chain to

build a high-performance company through a precision approach to organizational redesign. Another article on organizational design, “Life in the Matrix,” by Jon R. Katzenbach and Adam Michaels (page 28), explains that this cross-boundary, multiple-boss structure isn’t as bad as many think. The trick to doing no harm in a matrix is treating the structure as a cultural phenomenon: an opportunity for building better relationships. Then there’s United Technologies Corporation, the conglomerate that—contrary to most received wisdom about organizational design—became one of the most successful companies in the Fortune 500. UTC, better known for its industrial brands like Otis Elevator, Pratt & Whitney aircraft, and Sikorsky helicopters, has had a 20-year winning streak. George L. Roth, an MIT-based researcher on organizational learning and lean production, tells the company’s story (page 56). Other topics in this issue include the challenges of managing the Arctic region as it opens to the world (page 18); the valuation of nature as an inﬂuence on business models (page 6); the disrup-

tion facing bankers during the next few years (page 22); an argument that distraction is an essential prerequisite for high-quality strategic decision making (page 82); and the correlation between strong performance and readiness for growth (page 68). This last article, by Ashok Divakaran and Vinay Couto, lays out three main attributes needed to cut costs while growing stronger: a coherent strategy, alignment of company resources to that strategy, and an organizational structure to support the ﬁrst two factors. This issue we welcome new staff members Melanie Rodier, editor of s+b’s digital platforms, and associate editor Christie Rizk. We wish departing digital editor Bridget Finn, now at Twitter, well. And we celebrate those readers who, while consciously doing no harm, still know how to break the rules every now and then. Art Kleiner Editor-in-Chief kleiner_art@strategy-business.com

leading ideas 6

The Business Case for Nature Mark Tercek with Jonathan Adams By demonstrating the value of investing in the environment, conservationists can forge unexpected partnerships and reap large-scale beneﬁts.

The Big Bite of Small Brands Elisabeth Hartley, Steffen Lauster, and J. Neely Upstarts are gaining market share across consumer packaged goods categories. Here’s how incumbents can respond.

How to Let 999 Flowers Die Freek Vermeulen For innovation to ﬂourish, variation must go hand in hand with selection.

Daniel Pink’s New Pitch Theodore Kinni In today’s markets, we are all salespeople.

Is the Arctic the Next Emerging Market?

Per-Ola Karlsson and Laurence C. Smith The earth’s northernmost regions are rich in resources. The challenge will be accessing them sustainably.

s+b Trend Watch Banks Go Digital

essays FINANCE

To an Analog Banker in a Digital World Catherine Palmieri What happened to recorded music is about to happen to you. But only a few banks are making the right moves from branches to online services.

ORGANIZATIONS & PEOPLE

Life in the Matrix Jon R. Katzenbach and Adam Michaels As companies evolve away from traditional hierarchies, a major cultural shift is required.

STRATEGY & LEADERSHIP

The Secret to a Successful Divestiture Eduardo Alvarez, Steven Waller, and Ahmad Filsoof When you are selling part of your company, don’t just offer buyers a potential asset; give them the capabilities to gain value from it.

features ORGANIZATIONS & PEOPLE

How to Design a Winning Company

Best of the s+b Blogs 78 China: The Mother of All Black Swans

Ashok Divakaran, Gary L. Neilson, and Jaya Pandrangi The eight components of your organizational genome hold the secret to unleashing superior performance.

John Jullens 80 What You Should Accomplish

in Your First 10 Days

Eric J. McNulty

46 Changing Structures and Behaviors

at Walgreens

Mark Wagner and Wayne Orvis

THE THOUGHT LEADER INTERVIEW

STRATEGY & LEADERSHIP

Loran Nordgren Ken Favaro and Amy D’Onofrio

An Uncommonly Cohesive Conglomerate

The cofounder of unconscious thought theory explains how taking a break and distracting the mind can lead to higher-quality decision making.

George L. Roth How United Technologies Corporation—owner of Pratt & Whitney, Otis Elevator, and a wide range of other businesses—became one of the major corporate success stories of the past two decades. STRATEGY & LEADERSHIP

How Ready Are You for Growth?

BOOKS IN BRIEF

Cynthia A. Montgomery 91

72 Calculating the Fit for Growth Index 74 What a “Ready for Growth” Company Looks Like

The Wizards of Money Rob Norton

Feminine Values Ascending Sally Helgesen

A Robot Ate My Job David K. Hurst

Ashok Divakaran and Vinay Couto A Booz & Company study reveals that only 17 percent of companies are poised for a proﬁtable future.

Strategic Change without Tears

END PAGE: RECENT RESEARCH

Getting IT and Marketing Managers to Make Nice Matt Palmquist Differing views about technology usage can hurt a company’s performance.

75 Consumer Products and the Power of Fitness

Deniz Caglar, Jaya Pandrangi, and Thomas Ripsam Cover illustration by Aad Goudappel

Published by Booz & Company

Issue 72, Autumn 2013

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Published by Booz & Company

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leading ideas

Leading Ideas The Business Case for Nature By demonstrating the value of investing in the environment, conservationists can forge unexpected partnerships and reap large-scale beneﬁts. by Mark Tercek with Jonathan Adams

ver the past decade, sugarcane farmers in the Cauca Valley, near Colombia’s Paciﬁc coast, have become increasingly concerned about the availability of water for irrigating their ﬁelds. The valley is home to one of the richest cane-growing regions in the world. The Nature Conservancy (TNC, where I am president and CEO) met with the farmers in October 2011 to

develop a solution that would draw on both basic ecology and economics: Defend the water supply by protecting the forested watersheds that feed the Cauca River. The cane growers are now helping ensure that the forests remain intact through an investment strategy called a water fund—an endowment for water conservation. The idea is simple: Treat those upstream forests as valuable natural capital. Make a relatively small investment in nature now to obtain plentiful clean water in the future, and avoid the prospect of much higher future spending on expensive filtration plants and equipment. Not only does it cost less to protect the forests than to implement the engineered alternative, but the investment also produces a host of other benefits, including improved wildlife habitat and cleaner water for local communities. Environmentalists sometimes see large agricultural interests such as cane growers as the enemy. But in doing so, they are missing out on an opportunity that could have farreaching effects. Environmental issues are rarely black and white, and finding common ground can open

the door to effective conservation programs and bottom-line growth— both for small businesses like the Colombian sugarcane farms and, potentially, for large multinational corporations. It’s an idea we’ve heard before, but one that has been difﬁcult to put into practice. Historically, that’s in part because we environmentalists have done a better job of speaking to one another than to businesspeople. We need to get better at growing the constituency of conservation, and getting others to prioritize protecting nature. We can begin to change the dynamic by demonstrating the investment opportunities that nature can offer. Emphasizing the pragmatic value of nature has rarely been a strength of environmentalists. To champion long-term investments, we should listen closely to what businesses and governments need, and think carefully about how nature can help ﬁll these gaps. Although many leaders may be personally dedicated to protecting nature, I know from experience that environmentalists cannot depend on goodwill alone. The surest way to get the attention and commitment of key stakeholders is to put

strategy+business issue 72

Illustration by Andre de Loba

Making the Case

When I started my first job on Wall Street more than 25 years ago, few (if any) bankers spent much time considering the business opportunities of making investments in nature. I know I didn’t. We didn’t think the environmental community had much to tell us about how to run our business, and my guess is that the feeling was mutual. But times and attitudes change. I began working on an environmental effort at Goldman Sachs in 2005, with the support of then CEO Henry M. Paulson. We thought it made great commercial sense to be smarter about environmental issues. Our primary motivation was not philanthropy or corporate social responsibility; it was purely business. The fundamental idea was to look for investment opportunities that produced two kinds of benefits: strong commercial results for Goldman Sachs and positive environmental outcomes. The more we pursued these win-win opportunities, the more we found. From my current vantage point on the environmental side, I see a similar transformation in thinking. Today, as the leader of TNC, I collaborate, together with my colleagues, with businesses, governments, and other groups not usually considered to be environmentalists. Alliances like these can still be difficult terrain for a conservation organization. But by focusing on the value of nature, environmentalists can reach those who once stood on the sidelines of conservation, and even those sometimes viewed as opponents. Instead of vilifying them, we can see what they want to ac-

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derlying threat is human demand for food, energy, space, and water. An expanding global middle class will only intensify this demand. It will push companies to build more roads and other infrastructure, expand agricultural lands, and extract more minerals, oil, and natural gas. Simply ignoring these trends will only put the planet in greater peril. Likewise, just saying no to these companies and their customers is unlikely to be a successful strategy.

environmental issues in terms of “here’s what’s in it for you.”

Changing the Conversation

complish and ﬁnd shared goals. This is not a call for naivete. Businesses must always ask tough questions about what will yield profitable results. Governments must do their part in enacting smart environmental policies and regulations. And environmentalists must remain vigilant about identifying and confronting companies that undermine environmental standards and regulations. Collaboration does not mean that companies should expect a free pass from environmentalists; watchdog organizations will always play an important role in exposing bad corporate practices. But even those organizations that push companies hardest see the beneﬁts of working with those willing to do things differently. We will have opportunities over the next several decades to make real progress on these issues, if we start now. In many of the places conservationists want to protect, the un-

What if instead of saying no, environmentalists ask “how?” How might companies change their practices to achieve better environmental and business outcomes? How might governments create incentives for companies to invest in and protect nature rather than degrade it? The water fund in the Cauca Valley is just one project being framed by these questions. Another can be found along California’s central coast. There, the same frustrating dynamic played out for years: Environmentalists argued for limiting or halting all bottom trawling and creating reserves where fishing would be prohibited, while the fishing industry fought all restrictions as assaults on fishermen’s livelihood. The result was as predictable as it was devastating. The groundfish industry collapsed, and that environmental disaster rippled throughout the local and regional economy. Some conservationists gradually came to realize that simply talking to (or on occasion yelling at) the fishermen was not going to work. A breakthrough came when we at TNC decided that instead of fighting the industry, we would join it. We bought trawlers and trawl permits from willing sellers in the fish-

from nature, they will see a bottomline payoff from investing in the natural assets that generate those services. If that hypothesis proves to be right, a straightforward business calculation should motivate new corporate practices that favor nature protection. Those changes could ripple across entire industries. But this is an experiment. The proof will be in what Dow does with what we learn, and how receptive other companies are to the ﬁndings. Mining giant Rio Tinto Group offers another opportunity. The company is hoping to construct one of the world’s largest copper and gold mines in Mongolia. Done poorly, such a massive project could

A breakthrough came when we at The Nature Conservancy decided that, instead of fighting the fishing industry, we would join it. We bought trawlers and trawl permits. Major corporations are learning the same lessons. In 2011, Dow Chemical Company CEO Andrew N. Liveris challenged TNC to help apply the concept of nature’s value to his company’s business decisions and operations. His questions were eminently practical: How do Dow’s operations both affect and depend on nature’s services? How would the natural assets that generate such services be accounted for on the company’s balance sheet? How vulnerable are those services, and what might Dow do about those vulnerabilities—either on its own or by joining with other stakeholders to influence natural resource policy? Today, TNC and Dow are working together to answer these questions. The hypothesis is that once businesses can quantify a broad range of services they depend on

be a serious threat to the species and landscapes of the Gobi desert. TNC is working with Mongolian scientists, Rio Tinto, and others to ﬁnd ways to beneﬁt the environment and the economy. The goal is to provide a blueprint for a shared vision—a plan that will be adopted and applied by government, industry, lending institutions, environmentalists, and communities, and that will guide land-use decisions in order to support healthy natural systems and a more sustainable Gobi region. Partners in Progress

Making a business case for nature enlists new and sometimes surprising groups of people in our cause— Wall Street bankers, companies with large environmental footprints, governments planning big infrastructure projects, and agribusiness-

es that clear forests and apply fertilizer. Further, as these groups engage with their “investment” project, their perspective changes: Cane growers now also worry about their water footprint, fishers stop trawling, Dow engineers consider climate change. And perhaps most important, as we look ahead to the political progress we’ll need in order to protect the environment, we expand our support base beyond committed conservationists to a far bigger and more inclusive group. This approach may be a significant breakthrough. None of us can find the answers we need on our own, and all of us can benefit from a good dose of humility in the face of major challenges. Projects like those in the Cauca Valley and Morro Bay, and like those burgeoning at some large multinationals, can get people who don’t consider themselves to be environmentalists to join us on common ground. And they can attract the kind of large-scale investments that we need to truly make a difference. + Reprint No. 00202

Mark Tercek president@tnc.org is president and CEO of The Nature Conservancy and a former managing director of Goldman Sachs. Jonathan Adams pangolin19@gmail.com is a science writer and conservation biologist based in Rockville, Md. This article is adapted from Tercek and Adams’s recent book, Nature’s Fortune: How Business and Society Thrive by Investing in Nature (Basic Books, 2013). strategy+business issue 72

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ing town of Morro Bay, and the fishermen who wanted to keep fishing agreed to support the protection of 3.8 million acres of fish habitat that would be off-limits to trawlers. No one had ever tried this approach before, and the fishing community reacted with disbelief. Who could imagine that a bunch of tree huggers would end up owning a large share of West Coast fishing rights? Some TNC supporters and even some staff reacted the same way. But the result has been a successful partnership with local small businesses. Instead of trawlers, most fishermen are using hooks and lines, and the market for live-caught fish is booming.

Upstarts are gaining market share across consumer packaged goods categories. Here’s how incumbents can respond. by Elisabeth Hartley, Steffen Lauster, and J. Neely

Illustration by Felix Sockwell

mall consumer packaged goods (CPG) companies in the U.S. are steadily gaining market share these days, often at the expense of larger competitors. Booz & Company recently analyzed the food and beverage industry and found that small players (those with sales of less than US$1 billion) are outperforming the competition in 18 of the top 25 categories, including the largest and most consolidated ones, such as bakery, dairy, snacks, and ready meals (see Exhibit, page 10). From 2009 to 2012 in packaged foods and from 2008 to 2011 in beverages, small players grew revenue about three times faster than the overall category. Speciﬁcally, in packaged foods, small players experienced a three-year compound annual growth rate (CAGR) of 6.2 percent, and gained 1.7 percent of market share. Meanwhile, large players increased sales by just 1.6 percent CAGR and saw their market share decline 0.7 percent. Along with market share gains, small players enjoyed price premiums in many categories. A survey of

back-ofﬁce SG&A functions. Retail consolidation is further chipping away at scale advantage. The preference among bigger retailers is to work with a broad range of manufacturers—both large and small— to keep large consumer packaged goods companies from gaining too much leverage. How do the most successful large CPG players respond to these changes and the serious threats they contain? The leaders of these companies begin by developing a better understanding of the strategies that upstart competitors are employing to grab market share. Next, they look at the capabilities underpinning those strategies and consider how they might take advantage of these capabilities themselves. Capabilities That Differentiate

Small players don’t have a single or consistent approach across all categories to account for their success. They are using a variety of strategies that incorporate brand positioning, pricing, market entry, innovation, route to market, and in-store marketing and merchandising. Within these categories, each carves out distinct positions depending on the product and competitive environment. The overall effect is a patchwork of bespoke strategies. That means one needs to look harder for the lessons—but they are there.

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The Big Bite of Small Brands

in-store pricing found that Godiva chocolate cost 138 percent more than the Hershey’s product of comparable size and ﬂavor, and Amy’s Kitchen soups cost 58 percent more than Campbell’s. Small players also showed pricing strength over privatelabel manufacturers. From 2011 to 2012, the price premium for small players over private labels jumped 5 percent for butter, olive oil, and packaged/industrial bread. Several broad forces, most of them peculiar to our times, are combining to create advantageous conditions for small companies. A market segment known as “selectionists,” who constitute 30 percent of consumers, are seeking greater variety and new tastes in the food and drinks they buy—and sometimes care deeply about factors such as the origins of a product and how far it has been shipped. Some traditional supermarkets are catering to this trend as a way to differentiate themselves from Walmart and big price clubs. The fragmentation of media and the generally lower cost of digital platforms are giving small players new outlets to reach customers in more targeted, cost-efﬁcient ways. But what should most concern large players is how technology is eroding their scale-driven advantages. Small players are increasingly able to outsource invoicing, HR systems, and logistics, as well as other

The Large Player Response

In most of the biggest food and beverage categories, small CPG firms are increasing their market share.

The success of small players and the conditions that have arisen to make them more competitive raise some critical issues for large players about their organic and inorganic growth strategies. Large players need to think carefully about how to access the capabilities that small players are using to such advantage. But at what point should the large incumbent company respond to a small player’s inroads? Should the response be to build or to buy? In either case, what new capabilities does the company need to succeed, and how can they be incorporated into existing systems? Addressing these issues is a tall order, but several large companies are countering the incursion of small players effectively and consistently. Some, such as Coca-Cola, have acquired a long list of successful small businesses, capturing their continued high growth for themselves. Others, such as Frito-Lay, win by mimicking the small players’ approach to innovation and then using their scale and brand leverage to compete and drive growth.

Three-Year Growth of Small Players Relative to Category Coffee Snack bars Dairy Soup Other frozen processed food Ready meals Meal replacement Oils and fats Sweet and savory snacks Sauces, dressings, and condiments Chilled processed meat Category Size, $US

Ice cream

$50 billion and over

Frozen processed poultry

Bakery

$20 to $49.9 billion

Rice

$10 to $19.9 billion

Fruit/vegetable juice

Under $10 billion

Confectionery Spreads Baby food Carbonates Sports and energy drinks Bottled water Pasta –5%

10%

15%

20%

25%

30%

Notes: Ready-to-drink tea and frozen processed vegetables are not shown because those categories have no small players. Packaged food categories show 2012 data; beverage categories show 2011 data. Source: Euromonitor, Booz & Company analysis

Successful small players appear to have one important similarity: They possess a coherent system of capabilities that allows them to focus on a few critical areas where they can most effectively exploit the weaknesses of less-nimble large players. This coherence gives its owner the means to differentiate itself. Take the Cabot Creamery, a cooperative dairy enterprise based in the northeastern U.S., which plays against the corporate stereotype of rivals by highlighting its business model and connection to the Vermont dairy farmer. In the same vein, Cabot uses its online presence (Facebook, Twitter, Pinterest, Instagram) to promote community involvement. The company has developed the capabilities to roll out new ﬂavors and specialty aged cheeses that appeal to consumers’ desire for vari-

ety and homespun creativity: Horseradish Cheddar, Hot Habanero Cheddar, and Tomato Basil Cheddar, to name a few. These specialty cheeses have allowed Cabot to expand its presence in stores to the deli case (with other artisanal cheeses), thus gaining shelf space in a more “premium” section of the store. Utz Quality Foods is a familyfounded potato chip brand in the United States that creates a direct relationship with consumers by offering products online and delivering directly to homes. It also appeals to health-conscious consumers with wheat-free and gluten-free Rice Crisps, non-fried light potato chips, and organic tortilla chips and pretzels. This capability to create healthy innovations is a powerful differentiator for snacks that are often labeled as junk food.

Coca-Cola: The Acquirer

Coca-Cola routinely expands its beverage portfolio to leverage its impressive and differentiating distribution capabilities. More recent acquisitions include Glaceau, an enhanced water; Fuze, a vitamin-enriched beverage; and a handful of other specialty drinks including Odwalla, Honest Tea, Innocent, and Zico. • Brand positioning: To keep each new brand distinct and attractive to its established and sometimes devoted customer base, Coca-Cola does not afﬁliate the acquired brand directly with the Coca-Cola brand. • Pricing: Acquired brands are

strategy+business issue 72

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Exhibit: Small Players Outperform

Frito-Lay: The Builder

Instead of making acquisitions, Frito-Lay leverages its well-honed capability to mimic market innovations. Consider kettle chips (potato chips cooked in small batches, rather than in the more common continuousﬂow machines), a category dominated by two small players: Cape Cod and Kettle Chips. Frito-Lay took careful notice, and created Lay’s Kettle Cooked. • Brand positioning: Frito-Lay positions its Kettle Cooked brand as a value brand in comparison to Kettle and Cape Cod products, and promotes the healthy aspects of the chip (e.g., “40 percent less fat than regular potato chips”). • Pricing: In keeping with its value brand position, Lay’s Kettle Cooked is priced below other kettle

competitors. A canvass of supermarkets in January 2013 found that a $3.29, 8-ounce bag of Lay’s Kettle Cooked was as much as 7 percent less expensive than the small player alternatives. • Market entry: Frito-Lay rolls out different ﬂavors of Kettle Cooked chips over time, instead of

players or to compete with them head on, it needs the right capabilities system. An acquirer must have the people, processes, and tools in place to leverage its scale and strength without snufﬁng out the new brand’s innovative spirit and upstart image. And a builder needs these elements in place to innovate

Frito-Lay has developed the ability to rapidly replicate new flavors introduced by [small players] Kettle and Cape Cod that it would not have considered offering in the past. all at once, while consistently pushing them as a healthier way to enjoy Lay’s potato chips, which have a long-established brand following. • Innovation: Frito-Lay has developed the ability to rapidly replicate new flavors introduced by Kettle and Cape Cod that it would not have considered offering in the past (for example, jalapeño and sun-dried tomato and Parmesan). • Route to market: Frito-Lay sells primarily through grocery and supermarkets rather than restaurants and boutique markets. Lay’s Kettle Cooked leverages Frito-Lay’s extensive direct-store-delivery network to penetrate key channels. • In-store marketing and merchandising: Lay’s “category captain” position in traditional flat potato chips gives Frito-Lay the power to influence, if not set, category shelf plans. That sway over product placement is a key advantage. An Opportunity for Growth

Large companies should view small players not simply as a threat or nuisance, but as valuable working examples of how they might recharge their own growth. Whether a large company decides to acquire small

quickly in response to small players and to reinforce the new brand through in-store marketing and merchandising. Careful attention to building or buying the right capabilities will allow large companies to leverage the winning strategies of small players for their own growth ambitions. + Reprint No. 00197

Elisabeth Hartley elisabeth.hartley@booz.com is a principal with Booz & Company’s consumer and retail practice, and is based in New York. Steffen Lauster steffen.lauster@booz.com is a partner with Booz & Company based in Cleveland. He leads the ﬁrm’s consumer and retail practice in the United States. J. Neely j.neely@booz.com is a partner with Booz & Company’s consumer and retail practice, and is based in Cleveland.

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often positioned as premium brands and are priced higher than the competition. • Market entry: Coca-Cola chooses brands that have an established market presence in their niche and that have reached a certain multimillion-dollar revenue threshold. • Innovation: Coca-Cola uses different governance models to oversee acquisitions, but the common priority is to keep the company ﬂexible and innovative. • Route to market: Coca-Cola continues to distribute the acquired brand to specialty retailers, but it also leverages its extensive distribution network to reach more consumers. • In-store marketing and merchandising: Coca-Cola takes advantage of its reach and distribution to merchandise new products. For example, Vitamin Water is now available in numerous convenience stores and kiosks with coordinated displays and in-store support.

For innovation to ﬂourish, variation must go hand in hand with selection. by Freek Vermeulen

hen it comes to innovation, most executives place a high value on variation. They set up formalized systems that encourage employees to generate ideas and submit them to their superiors. Even ﬁrms without a formal mechanism frequently empower their people to experiment

To avoid these pitfalls, executives need to focus on developing a process that systematically manages selection in a way that aligns with their company’s strategy. For most companies, this is uncharted territory. The following ﬁve steps can help guide their way. 1. Enable selection to happen.

The ﬁrst thing that top managers need to accept is that they themselves should not decide which projects live or die. At FremantleMedia Ltd., the London-based television production company known for such popular programs as the Idols and X Factor franchises, former CEO Tony Cohen put in place a formal process that ensured deliberate selection of new television programs. Cohen often received numerous proposals. But he resisted the temptation to select the ones he himself considered most promising. Instead, he built an internal system that would identify the best ideas, noting, “Why would I know better than anyone else in the company?” Every year, the company organizes an event called the Fremantle Market. Senior executives from subsidiary production companies around the world gather in London. For one full day, they present their ideas for new television shows to one another, usually by showing part or all of a trial episode. The creator of each proposed production explains the setup and logic behind it and answers probing questions from colleagues about audience, costs, and the potential for spillovers into other media, such as the Internet. Because Cohen set up an internal licensing system, the different executives then have the autonomy to decide whether to license the show for their own country. Hence, ideas that attract

Illustration by Sam Brewster

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How to Let 999 Flowers Die

without fear of punishment for failure. This approach is based on the knowledge that innovation is often a bottom-up process: Managers should cultivate many promising seeds to let a thousand flowers bloom. But variation is only half the story—in true Darwinian fashion, it doesn’t work without selection. And this is where many companies fall short. Yes, choices about which ideas are worth pursuing and which are not are continually being made, but too few companies think about and organize selection deliberately, with a clear strategy in mind. The winnowing of ideas thus becomes a subjective process, wherein political interests and personal preferences determine which projects are funded and which are terminated. I have observed the consequences of this trend firsthand at two multinational corporations that set up elaborate systems for soliciting employee suggestions, resulting in an abundance of employee proposals and ideas. In both cases, selection occurred at two points. The first was at the middle manager level. Invariably, these managers did not select the proposals that they found most promising, but instead chose the proposals they thought their superiors would want to see. They feared that passing along a bold, risky idea that their superiors might reject would be bad for their reputation. The second point started with this biased pool. Top managers picked the proposals they liked best—typically ideas that fit their preconceived notions of what the company should and should not do. As a consequence, although these companies did not seem to suffer from a lack of variation at the ideation stage, they experienced problems with their innovation pipeline.

2. Tap into the wisdom of your

How to realize leadership potential

crowd. It’s not just senior executives

who have something to offer. Taking advantage of the insight and understanding of a wider group of employees can also lead to better decisions. At the Intel Corporation, in the days when the company still relied heavily on the production of DRAM memory chips, the company allowed engineers to work on what it called embryonic technologies. Highly skilled engineers were given individual R&D budgets and ample autonomy to decide what to work on. When top management observed more and more of these engineers abandoning projects centered on the old DRAM chips and ﬂocking toward a new technology called microprocessors, they realized it was time to change their strategy. For such new, innovative products, it was impossible to compute any reliable numbers (in terms of market size, demand growth, margin, or a variant of a net present value calculation), so then CEO Andy Grove relied on the collective insights of his engineers. Although Grove later abandoned this process, his successor, Craig Barrett, partly reinstated it. His “autonomous strategy processes,” though less extreme than Grove’s original, are still in use at Intel today. Companies like Google and Pixar have also adopted versions of these autonomous processes, to great success. 3. Objectivize the process. Various research and case examples have conﬁrmed the risk of “escalation of commitment” in selection processes. This phenomenon occurs when de-

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the most interest will automatically be funded. If there is a lack of interest, the proposal will instantly be selected out.

4. Let the evidence match the investment. Data also plays a key role in the next step. Executives often rely on just one or two selection moments. But the most successful innovators view selection as an ongoing process. As a project progresses and begins to demand increased in-

vestment, more and more data becomes available. The information revealed at one decision point should guide the next. Consider the case of the Sadler’s Wells dance group, which operates three theaters in central London. It has an explicit mission to be the center of innovation in dance. It starts out by scouting a large variety of dancers whose work might be suitable for its theaters. It then invites a limited number of these artists to

of a clear and explicit strategic direction for the company—as established by top management. Innovation experts often proclaim that people need to “think outside the box” and “get out of their comfort zone.” However, what Burgelman observed in academic studies undertaken to examine the innovation processes of high-tech companies is that people actually need a box to channel their creativity. This description of a company’s

Companies need to objectivize the selection process and decouple it from individual decision makers’ personal interests and emotions. come together to develop rough ideas, in an informal way, for potential new productions. Sadler’s Wells provides studio space and a small budget to those collaborating artists who come up with a concrete and innovative idea, in order to test it. If the various people involved—artists, producers, and theater managers—believe that it has strong potential after viewing the raw idea in action in the studio, the company adds more investment to develop it into a show. Subsequently, if the show’s scale permits, it will premiere in the group’s smallest theater. If it becomes a box ofﬁce success, organizers will schedule it later for a longer period in the main theater. 5. Give them a box. Stanford Graduate School of Business professor Robert Burgelman has written that “successful ﬁrms are characterized by maintaining bottom-updriven internal experimentation and selection processes while simultaneously maintaining top-driven strategic intent.” In other words, the variation/selection process works only if it takes place within the boundaries

general strategic direction cannot be too narrow or it will inhibit new ideas, but a general direction is needed to provide boundaries within which people can innovate. For example, at FremantleMedia, the stated mission is to produce television programs that are replicable in other countries. Employees know that country-specific pitches will be immediately selected out. Letting a thousand flowers bloom will give your company the appearance of being innovative. But investing in variation alone is not enough. You must have a deliberate system of selection to ensure that the right ideas—those that are truly best for your company’s strategic direction and not those determined by personal preference and emotion— get the funding they need. It’s the 999 flowers you let die that enable true innovation to flourish. + Reprint No. 00203

Freek Vermeulen fvermeulen@london.edu is an associate professor of strategy and entrepreneurship at London Business School.

strategy+business issue 72

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cision makers hold on to a failing course of action because it provided success in the past or because someone’s reputation is tied to it or simply because they have “come this far already.” To combat escalation of commitment, companies need to objectivize the process and decouple it from individual decision makers’ personal interests and emotions. Here Intel provides another case in point. When it was producing both DRAMs and microprocessors, it let these products compete for scarce production capacity on its manufacturing line. But the company had to ensure that decisions would be made on the basis of hard facts, rather than feelings or preferences that the engineers in charge of production may have had about one product or the other. Years earlier, top management had designed a formula called the production capacity allocation rule. Using a variety of input numbers (such as efﬁciency, demand growth, and margins), it would compute which product would get what amount of production capacity. When it came time to make decisions about what to produce, the engineers followed the formula to a T. Even when the outcome of the formula seemed to run counter to the company’s focus—which until that time had centered on DRAMs—Grove would urge engineers to follow the formula, and with it the objective process. When microprocessors won out, it was because the data supported it.

In today’s markets, we are all salespeople. by Theodore Kinni

Photograph by Rebecca Drobis

aniel Pink didn’t plan a career exploring the world of work as much as he gravitated toward it. After studying linguistics at Northwestern University and law at Yale, he became an aide to U.S. Secretary of Labor Robert Reich, and then served as chief speechwriter for Vice President Al Gore. “When I had the opportunity to dole out assignments, I kept the ones about work, labor, business, economics, and technology,” he recalls. In 1997, disillusioned by the realities of politics and burned out by the workload, Pink quit to write under his own byline. An article published in Fast Company later that year became the kernel for his acclaimed ﬁrst book, Free Agent Nation: The Future of Working for Yourself (Warner Books, 2002). It plumbed the transition from employee to self-employment by millions of people much like Pink himself, and established a format that Pink has been following ever since: presenting a highly articulate, accessible synthesis of a topic or trend and a practical tool kit for putting it to work at work. Several more books followed, bringing Pink into the ranks of the world’s leading management thinkers and speakers. His most recent book, To Sell Is Human: The Surpris-

S+B: We used to hear that selling would cease to exist as a function— that salespeople would be disintermediated by the Internet. What really happened? PINK: Those predictions underesti-

mated how ingenious we would be at creating new products and services, all of which needed to be sold. Yes, we have fewer people selling music, but people are now selling artisanal foods and cloud computing. The predictions also missed the rise of small entrepreneurship, which means more people are selling their own services. Someone like me isn’t categorized as a salesperson by the Bureau of Labor Statistics, but I spend a huge amount of my time trying to get other people to do things. Moreover, sales is no longer always a discrete function. The software companies Atlassian and

Palantir, for example, have no formal sales forces. They say that nobody’s in sales because everyone is in sales. Then there’s non-sales selling. For instance, most of the jobs that have been created in the U.S. in the last 10 years have been in education and healthcare, which are all about selling behavior change. In 2000, one in nine people in the U.S. workforce was in sales; today, one in nine people is still in sales. And none of the salespeople I interviewed in the course of doing the stories that led up to this book ﬁt the old sales stereotype. They weren’t wearing plaid jackets and patting me on the back all the time, and I didn’t feel the need to cleanse the oil off myself afterward. S+B: So how would you deﬁne selling today? PINK: I don’t think there’s a catch-

all term to describe selling, but for me, moving is the closest word. I’m trying to get you to go from here to there. I can persuade you that the Washington Nationals will win the National League this year, but I’m just changing your mind. Selling is an exchange. If we’re colleagues and I’m trying to get you to join my team, you’re exchanging your time and talent for the opportunity I’m Daniel Pink

leading ideas leading ideas

Daniel Pink’s New Pitch

ing Truth about Moving Others (Riverhead Books, 2012), explores a topic ripe, perhaps even overripe, for Pinkian synthesis. The very nature of selling has been fundamentally altered by digitization, which continues to render long-accepted sales conventions irrelevant, yet, paradoxically, makes salespeople more important to companies and customers than ever before.

S+B: You propose changing the ABC sales mantra “Always be closing” to “Attunement, buoyancy, and clarity.” PINK: These qualities encompass

what you should do and how you should be if you want to move other people. For example, attunement is the ability to understand where someone else is coming from; it can also be called perspective taking. There’s a difference between perspective taking and empathy that I might have conﬂated in my book A Whole New Mind [originally subtitled Moving from the Information Age to the Conceptual Age (Riverhead, 2005)]. I’ve since come to realize that empathy is related to understanding someone’s emotional state or feelings, whereas perspective taking is much more cognitive and analytical—it’s understanding someone’s interests. I think interests is the key word here. The facts say that both perspective taking and empathy can en-

hance your understanding of someone else, but if you have to go with one, go with the analytical. I think the evidence says very clearly that people are able, especially in negotiation and sales situations, to reach a better deal for both sides when they’re focused on interests. S+B: There’s a great quote in the book from the last Fuller Brush Man about sales being “an ocean of rejection.” How is buoyancy different from the power of positive thinking? PINK: A lot of the power of positive

thinking was not built on any evidence. It was built on beliefs, some of which turned out to be right. But it wasn’t guidance from an empirical perspective. [University of North Carolina professor] Barbara Fredrickson has shown that positivity enhances well-being when it’s in the right balance. She has a three-to-one ratio: Your positive emotions should

probably not entirely your fault. But if you explain it that way, it’s going to be debilitating. If, after a rejection, you say, “Well, this always happens,” that’s just not true. [University of Pennsylvania professor] Martin Seligman’s research has shown that if you adopt an optimistic explanatory style and widen your ability to explain things with accuracy, you’ll be better off. S+B: You deﬁne clarity as “the capacity to help others see their situations in fresh and more revealing ways and to identify problems that they didn’t realize they had.” What role does framing play in that? PINK: Framing is curation, in a

more conceptual sense. You’re looking all over the place and I’m saying, “What’s signiﬁcant is what’s here.” I’m helping you separate the signal from the noise. If you frame choices

“I want people to see the act of selling in a new light. It’s more urgent, more important, and also more beautiful than we realize.” outnumber your negative emotions by three to one. But if the ratio is above 11 to one, you’re in la-la land. Studies have also shown that purely positive self-talk—“You can do it,” the Bela Karolyi school—is better than nothing. But it’s less effective than interrogative self-talk. Asking, for example, “Can you do this?” The early proponents of positive thinking would ﬁnd that abhorrent: You’re questioning your ability? But interrogative self-talk leads to preparation and planning. Also important is changing the way you explain things. You can ascribe outcomes to internal or external causes. If you lose a sale, it’s

in a digestible way, people are more likely to pick something. If I’m selling you a great used car that has a minor nick, I’m going to be tempted to park the car in such a way that you won’t see the damage. But research by [Tel Aviv University professor] Danit Ein-Gar and [Stanford University professors] Baba Shiv and Zakary Tormala says that I should point it out, because the nick creates the context for everything else. It helps frame the valuation of the car. In some ways, you’re widening the frame when you do this. You’re saying, “Oh, there’s a nick there, but look at everything else. The totality of it is really good.”

strategy+business issue 72

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giving you. It’s not denominated in dollars, but I still think that’s sales. I recognize there are headwinds with sales because of the negative connotations. I’d like to bike into those headwinds and take back the idea of selling, not in a namby-pamby, defensive way, but in a slightly more sharp-elbowed, muscular way. I say in my book that I want people to see the act of selling in a new light. It’s more urgent, more important, and also more beautiful than we realize. It requires some fundamentally human skills, and it has become increasingly conceptual. As the VP of sales of the Italian candy company Perfetti Van Melle told me, “We’ve gone from selling Mentos to selling insights about the confections business.” You can’t get any more conceptual than that.

S+B: In your ﬁnal chapter, you propose extending Robert Greenleaf’s concept of servant leadership to sales. Why are service, purpose, and meaning such a pervasive theme throughout your books? PINK: When you sit down and talk

to people about their work, you realize that they’re spending at least half of their waking hours on the job. Their work is a window into who they are. And I think that as human beings, we aspire to do something

meaningful. All of us ask ourselves, “OK, why does what I’m doing matter? What is my purpose?” What’s exciting for companies is that appealing to a sense of purpose and meaning is very effective. [Wharton professor] Adam Grant has done some great research in this area. In a study of people in a call center raising money for a university, he found that employees who spent ﬁve minutes before their shift reading letters from people who were on the receiving end of the scholarship money they raised more than doubled their sales results. S+B: To Sell Is Human is a pretty rare sales book. It doesn’t provide the reader with a sales process. PINK: I did that consciously, because

I don’t think there’s a one-size-ﬁtsall process to selling Winnebagos, to asking somebody out on a date, to

getting your kids to clean their room, or to pitching your idea to a book publisher. I didn’t want to give people a set of custom Legos that builds only one particular castle, even if that’s an awesome way to build that particular castle. I’d rather give people a rich set of basic building blocks, which they can fashion into a process of their own and constantly evaluate. Sales processes tend to be very algorithmic. And when people get wedded to a process or to an algorithm, they miss all kinds of other clues and opportunities that could be really valuable. + Reprint No. 00204

Theodore Kinni info@strategy-business.com is senior editor for books at strategy+business.

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Of course, this depends on how essential that nick is. There’s a big difference between a blemish and a scar. If it’s small thing, then widening the frame is actually helpful. If it’s a substantive defect, then you have to either explain that the defect doesn’t matter as much as customers think or lower the price.

The earth’s northernmost regions are rich in resources. The challenge will be accessing them sustainably. by Per-Ola Karlsson and Laurence C. Smith

s the ice recedes in the Arctic, talk of industry entering the region to take advantage of its economic opportunities is on the rise. The territories contain significant natural resources, including conventional hydrocarbons (natural gas, condensate, and oil), metals, fish, high-value minerals such as diamonds and rare earths, and fresh water. If the region’s waters become more navigable, viable new trans-Arctic shipping routes between the North Atlantic and Bering Strait could emerge. Even if such routes are available only in the warmer months, they could bring substantial logistics savings over routes through the Suez and Panama Canals, offering cost benefits for industries and consumers, and global environmental benefits from reduced fuel consumption and associated greenhouse gas emissions. It’s no wonder the world’s interest in the Arctic is so keen. But many of those who wish to develop the region overlook the pri-

ty, is also fraught with complexity. The desire for resource wealth must be tempered by respect for local populations and customs, and for the land itself. Governments and businesses should start by addressing the following ﬁve key challenges. Although this is not a complete list, it brings together current, convergent dialogues and debates about the region. 1. Protection of the environment and its people. The effects of climate

change in the Arctic have globally relevant repercussions: witness rising sea levels resulting from ice loss on the Greenland ice sheet and altered weather patterns caused by the perturbation of jet streams. Such consequences also put local populations at great risk. Their livelihood and wellbeing are directly linked to the land, but their control over its preservation is uneven, ranging from substantial (in North America and Greenland) to limited (in Fennoscandia and Russia). Long-term changes in the Arctic are driven primarily by external factors, such as world commodity prices and rising greenhouse gas emissions. Therefore, future environmental, economic, and social developments in the

Because the region is small and ecologically fragile, inequalities heighten the risk to all stakeholders. Agreeing on common policies across the Arctic countries is thus crucial. raises everyone’s worst fears. For example, the impact on the local environment of an oil spill or of the northward shift of the world’s ﬁshing ﬂeets remains unknown. And current levels of investment won’t begin to resolve these and other uncertainties. Thus, developing the Arctic, though ripe with opportuni-

region depend critically on policy and business decisions made elsewhere at the national and international levels, such as progress in climate change negotiations. At present, strong disparities exist among national policies on economic development, aboriginal rights, climate change, and environmental

strategy+business issue 72

leading ideas leading ideas 18

Is the Arctic the Next Emerging Market?

mary truth about it: It is an emerging market. To be sure, as one of the last of the true wildernesses remaining in our world, the Arctic is a uniquely challenging environment. But it is not empty. It is home to some 4 million people comprising a broad range of cultures—and an economy worth about US$230 billion annually. The land is inhabited by more than 40 ethnic groups, such as the Sámi of northern Scandinavia, the Evenki of Russia, and the Inuit of Canada. In Canada, Greenland, and the United States, in particular, local control by aboriginal communities and regional business corporations can be substantial. Most of the Arctic region is governed under existing national structures and international frameworks similar to those in other areas of the world. It’s not the northernmost equivalent of the next frontier, waiting to be conquered by big business or governments desperate for resources. Adding to the complexity, the interested parties don’t yet possess the technology or know-how to access the Arctic’s resources in a sustainable way. The increased commercialization of a pristine region

2. Insufﬁcient investment for infrastructure. Except for certain areas

of Norway and Western Russia, the Arctic region remains vastly underserved by transportation, ports, and

other critical infrastructure. This deﬁciency will continue to limit access and hinder development. Increasing the attractiveness of the Arctic for investment in infrastructure is tied to the need for stable, transparent political, governance, and judicial systems and a consistent, clearly deﬁned regulatory regime. The main issue here is that without clear rules for how to operate, multinationals will hesitate to engage with the region—and if they don’t, there is no need for infrastructure. Establishing clear criteria for obtaining a license to operate is of particular importance to the oil, gas, and mining industries. At present,

clarity exists for onshore operations, but not for operations performed offshore, which increases risks to both project success and the environment. Addressing this inconsistency would create a more favorable investment climate. 3. Navigation of dangerous waters. As the extent of summer sea ice in the Arctic Ocean continues to lessen, the likelihood is mounting of increased commercial trafﬁc in one of the most remote, dangerous oceans on Earth. Besides ordinary open-water ships, there will be more moderately strengthened ice breakers (such as those used currently in the Baltic). These are

s+b Trend Watch The current state of bank–client interaction is fragmented and cumbersome. But some leading banks have adopted a more efﬁcient, highly automated process—resulting in cost savings of 15 to 30 percent and enhancing the customer experience. Go to strategy-business.com/ multimedia-banks for an interactive version of this graphic. How Banks Are Digitizing Their Business Current State

Target State CLIENT

FINANCIAL PLANNER

Opens account, notifies client 10

CLIENT

Meet to discuss financial need

Advisor creates financial plan and sends to support assistant

Keys in data, sends hard copy of application to client

MIDDLE OFFICE

Client submits application

BACK OFFICE 9

Scans application and reviews again for errors

FINANCIAL PLANNER

Meet to discuss financial need

Sends disclosure documents to client

Advisor creates financial plan, uploads client data (software catches errors 2 and gaps), and submits application electronically to middle office

4 Sets up account with auto-filled fields from application. Client receives automatic notification

MIDDLE OFFICE

SUPPORT ASSISTANT

Informs back office

7 Reviews application for gaps and errors, and submits to middle office

BACK OFFICE

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protection. Because the region is small and ecologically fragile, such inequalities heighten the risk to all stakeholders. For example, strong protections to prevent oil spills could be implemented in some but not all Arctic regions, leading to impact outside the protected areas. Agreeing on common policies and legislation across the Arctic countries is thus crucial, as is the adoption of sustainable operating standards by industry participants.

Reviews data 3 and sends to back office electronically

Reviews application and faxes to back office

Source: Daniel O’Keefe and Ashish Jain, “Transform Your Bank’s Operations Model: A Best Practices Discussion,” Booz & Company, Mar. 1, 2013, booz.com/bank-operations

4. Unresolved governance disagreements. The vast majority of

Arctic territories and coastal waters are uncontested and under the jurisdiction of the eight Arctic states: Russia, Finland, Norway, Sweden, Iceland, Denmark (Greenland), Canada, and the United States. Further offshore, much of the central Arctic Ocean has been or will likely be apportioned among Russia, Norway, Canada, Greenland, and the U.S. under the provisions of Article 76 of the United Nations Convention on the Law of the Sea (UNCLOS). Importantly, a decades-long overlapping claim in the Barents Sea (between Russia and Norway) was recently settled. However, some lingering disputes create an atmosphere of uncertainty for both policymakers and business interests. For example, the United States has not yet ratiﬁed UNCLOS, and it also has overlapping claims with Canada to a

small triangle of coastal waters in the Beaufort Sea. Canada considers the Northwest Passage to be a domestic waterway, whereas the U.S. and other countries consider it to be an international strait. Other barriers include a dispute over Hans Island (claimed by both Canada and Greenland) and a “doughnut hole” of high seas between the coastal waters of Russia and Alaska that is excessively ﬁshed by international trawlers. Resolution of these disagreements would further remove tensions among the Arctic states and facilitate implementation of environmental protection and economic development in contested areas. 5. A lack of research. Natural resource development, sustainable economic growth, ecosystem protection, and comprehension of the impact of climate change in the Arctic all have one thing in common—a pressing need for science. Despite coming under intense global inter-

est, the Arctic remains one of the most logistically difficult environments in the world for scientific research, and is thus one of the least studied. A few small locales have received relatively high levels of attention and funding (for example, Arctic Alaska, the Greenland ice sheet, and ocean-floor bathymetric mapping to support UNCLOS Article 76 claims), but the vast majority of Arctic landscapes, oceans, ecosystems, and climate have received little field study. Even basic seafloor mapping and a complete set of navigation charts remain incomplete. The region’s oceans and landscapes are critically important for global migrations of whales, birds, and fish, yet there is little understanding of how economic development and climate change will affect these populations. Similarly, the effects of thawing permafrost on global methane gas emissions, and of shrinking Arctic snow, sea ice, and glaciers on

Illustration by Andrew Bannecker

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treacherous waters, and ice conditions can change rapidly, capturing unsuitable vessels in the ice, or even worse, cracking their hulls—resulting in loss of life and serious environmental damage. The prospect of common open-water ships, which make up the vast majority of the global ﬂeet, entering the Arctic Ocean, Northern Sea Route, and Northwest Passage heightens the urgency for a comprehensive International Maritime Organization (IMO) regulatory framework. Such a framework would ensure adequate vessel safety standards, navigation control systems, environmental protections, and search-and-rescue capability in this uniquely challenging polar ecosystem. Establishing clear rules for the classiﬁcation of ships permitted to enter these waters in different seasons and under various ice conditions is critical.

Reprint No. 00205

Per-Ola Karlsson per-ola.karlsson@booz.com is a senior partner with Booz & Companyâ&#x20AC;&#x2122;s organization, change, and leadership practice, and is based in Stockholm. Laurence C. Smith lsmith@geog.ucla.edu is the chair of geography and professor of earth and space sciences at the University of California at Los Angeles, and author of The World in 2050: Four Forces Shaping Civilizationâ&#x20AC;&#x2122;s Northern Future (2nd ed., Plume, 2011). This article is adapted from â&#x20AC;&#x153;Demystifying the Arctic by Stating the Truths,â&#x20AC;? a report by the World Economic Forumâ&#x20AC;&#x2122;s Global Agenda Council on the Arctic, of which the authors are members (and Karlsson is chair).

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global sea levels, weather patterns, and ďŹ sheries, remain unclear. This lack of basic scientiďŹ c understanding and the paucity of data pose a challenge for business and environmental interests alike. To enable informed decision making in the region, there is a pressing need for new scientiďŹ c observationsâ&#x20AC;&#x201D;including long-term monitoring and mapping programs, improved computer modeling, and development of new technologies ranging from autonomous sampling platforms to satellite observing systemsâ&#x20AC;&#x201D;by both public and private actors. The Arctic region will require novel, cooperative solutions to overcome these challenges to sustainable economic development. The time to act is now: The resources locked in the Arctic could shift the balance of energy supply and demand in the world in important ways. +

To an Analog Banker in a Digital World What happened to recorded music is about to happen to you. But only a few banks are making the right moves from branches to online services. by Catherine Palmieri

here is a tale I like to tell people in the banking industry about change. According to a family legend, one of my mother’s aunts was Henry Ford’s neighbor in the early 1900s. Her husband was a successful businessman, and one day Ford asked them to invest US$100 in his Model T automobile. This was equivalent to about $18,000 today—not a small sum to give a neighbor with a harebrained idea. My great-aunt and her husband evaluated the opportunity for some time, and then told Ford no. They sincerely believed no one would ever buy a car; there was simply too much infrastructure supporting traditional means of transportation, and consumers were clearly quite comfort-

able with their horse-drawn wagons. In other words, they made a rational business decision, based on observations of consumer behavior, the business environment, competition, labor, and demand. I think of this story when I hear bankers defend retail distribution against online or mobile banking. Consumers, they say, prefer branches. Yet every day, in New York City, I walk past bank branches with no customers inside. Empty branches are all over the U.S., and as ﬁnancial-services (FS) industry trends continue—as the alternatives of Internet and mobile banking grow— branches will soon become obsolete. Most bankers I know understand that a major change is taking place with consumers, and that they face imminent disruption from digi-

tal technologies. But they don’t fully know how to respond. Their backgrounds, which have been typically bound up with the branch-building policies of the past 15 years, have not prepared them for the decisions they need to make today. Naturally, they are ambivalent in the face of seeming uncertainty. For example, should they balance their existing branches with an investment in digital services, or should they start selling off their real estate now? The right answer is different for each firm, depending on its strengths, its customer base, and its current footprint. Those that recognize which aspects of their business are subject to change, and act accordingly, will lead the industry and thrive. To understand how to distinguish successful digital strategies from those that will not work, it is important to understand one basic principle: Although consumer needs remain constant, technology changes the way those needs are met. The fundamentals of banking have not changed since the Templars, a Christian order of knights living in the 12th and 13th centuries, who ran what was perhaps the first multinational bank in history. The Order of the Knights Templar built their business around basic consumer needs: security and access to cash. Pilgrims from Western Europe heading to Jerusalem after the Crusades were easy prey for robbers, especially given the amount of cash they needed to carry for the trip. Because of a previous role as crusading knights, the Templars were exempted from local laws by papal decree, and this enabled them to create an international financial system. Pilgrims could deposit money in London, and then, with a secret password, go to the Templar of-

Illustration by Lars Leetaru

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FINANCE

Banking Innovation Basics

All the ﬁnancial-services innovations since the Templars—including letters of credit, checking accounts, travelers’ checks, credit and debit cards, ATMs, online banking, and direct deposit—have addressed the same three basic needs: • The security and safety of capital, and access to that capital when and where it is needed. • Leverage, or access to capital to fund growth (either personal or for an enterprise). • Deployment of excess capital in search of greater returns. Although this activity is highly important to the enterprise holding the capital, it is needed by only about 20 percent of banking customers. Those needs may not change, but the ways in which banks satisfy

them can change dramatically, and often do. The FS institutions that thrive during the next few years will be the ones that understand which aspects of their business are subject to complete disruption—and which aspects will remain intact. Even 10 years ago, it was possible to see how technologies such as broadband, mobile phones, and Internet video would change the delivery of financial services. As electronic transactions grew more popular, the need for paper (cash and check) transactions and face-to-face interactions would diminish. Much of this shift has already come to pass. Digital download speeds have evolved from 56K dialup modems to 4G mobile capabilities. As of 2011, according to CTIA–The Wireless Association, the total number of wireless subscribers in the U.S. (328 million) exceeded the population (316 million). The default choice in many retail transactions is home delivery. Face-to-face has come to mean anytime and anywhere, via Skype, video chat, or, soon, Google Glass. And currencies? Facebook credits, mobile payments, and Bitcoin all demonstrate the rapidity with which digital currencies and frictionless exchanges can emerge. In that context, it is astonishing how slow many FS firms have been, compared to other industries, in adapting to technological change. While music stores, electronics stores, and other retailers have reduced or even eliminated physical distribution, large banks have expanded it, either through acquisition or by opening their own bricksand-mortar branches. Even as firms have consolidated, the number of bank branches in the U.S. has risen steadily, reaching a peak of almost 100,000 in 2009. From 2002 to

2012, the top four banks doubled their number of branches. To be sure, all of the largest banks in the U.S. now offer some form of online banking, but most have added branches at the same time. Based on the measurement of deposits per branch (which is a good proxy for the number of customers, because deposits are the core of FS relationships), these new branches have not translated into operational efficiency or a much larger customer base. I know of one major bank which led the industry in deposits per branch in 2004 (more than $300 million) and then lost that leading position to its rivals as it built up its branch network and ignored its digital distribution. Its efficiency ratio of deposits now stands at about $150 million per branch, half its 2004 ratio. Dependence on branch distribution has also been complicated with the Dodd-Frank Act; as revenue streams have disappeared, branch managers seeking a balanced P&L have pushed more aggressive cross-selling of products, even if those products are unprofitable. In short, although every bank can point to improved performance in some respect, the performance that matters most has grown fastest for the banks that pruned their branch networks and expanded their digital capabilities—especially since 2009. Having fewer branches does not cause customers to flee, nor does it lower assets; it is the first step toward survival. Yet, many financial institutions and their managers still cling to the myth that customers bank with them solely because of their branchbased distribution. Their consumer research suggests as much. But any good researcher will tell you that consumer behavior often differs

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fice in Paris, Athens, or Jerusalem, and make a withdrawal. Word of the Templar bank quickly spread, and soon kings, princes, and even popes were depositing funds there. The Templars deployed this cash by investing in land and lending to small businesses (investment banking); they were involved in manufacturing, import, and export; they had their own fleet of ships; and at one point they owned Cyprus. In the early 13th century, the Templar story ended abruptly when the group lost their papal support and privileges, and King Philip IV of France (who had inherited a huge debt to them) turned against the order. On October 13, 1307, hundreds of Templars were arrested for heresy and many were killed; five years later, their grand master was burned at the stake. But their model of longdistance banking lived on; you invoke it every time you use a PIN to access cash at an ATM.

Personal Banking’s Future

The shift occurring now in financial services has been seen before in other industries—for example, in recorded music. In the early 2000s, the convenience and lower cost of an MP3 download, the greater choice, and the delivery when and where it was convenient for the consumer all combined to create a tipping point that drove consumers to the iPod. The entire music industry had been organized around the economics of physical distribution: Record labels bundled songs into albums, because the cost of physical distribution (stores and the production of media such as records, tapes, and CDs) could not be supported by the revenue generated by single songs. Suddenly, Internet distribution of songs, videos, movies, and TV shows enabled much broader audience reach at a fraction of the cost, and disintermediation ensued. This soon led to the collapse of the music store industry. Financial-services firms are only now beginning to recognize similar signals in their industry. One clear signal is the shift to electronic cash in the form of debit and credit cards. According to the federal government, checks and cash represented more than 70 percent of all U.S. financial transactions in 2000; by 2010, that percentage

had dropped to 43. Another signal is the generation of people now in their teens and 20s who are used to communicating over mobile devices, with far less need for face-to-face interactions. Especially with intangible products and services (such as any FS offering), they expect merchants to deliver what they want whenever, wherever, and however they choose. There is often a gap between knowing what needs to be done and knowing how to get there. It is helpful here to remember the Templars and the basic needs that banks fulﬁll—the security and safety of capital, access to that capital when and where it is needed, and the deployment of excess capital in search of greater returns—but to interpret those needs through the lens of current enabling technologies. Because of the nature, volume, and velocity of the transactions it enables, and the demographic spectra it crosses, personal banking is at

you recognize that consumers are as interested in security, money movement, cash access, and capital access as they always have been, moving these services into the digital sphere becomes much easier. Precepts for Digital Banking

The following guidelines can help ﬁnancial-services institutions make the transition to a world in which their customers meet them online most of the time. • Choose the right metrics and methods of measurement. Today,

most ﬁnancial-services ﬁrms focus on tracking and benchmarking standard accounting metrics. Every quarterly report provides a comparison to the previous quarter, and gives year-over-year results. In the past, these measures could easily demonstrate the impact of competition, because most banking competition took place in the same neighborhood. But your most

Checks and cash represented more than 70 percent of U.S. transactions in 2000, and only 43 percent in 2010. the core of every ﬁnancial-services relationship. Between bill payments, debit and credit card usage, withdrawals, and deposits, the average individual interacts with his or her bank between 100 and 200 times per year—compared to the same person’s six to 12 transactions with investments and one or two transactions with retirement products. At the center of this relationship is the security of capital; therefore, most banks—from the simple ceramic pig to the elite private bank—start with savings or other deposit products. If

important rivals are no longer across the street. A good example can be found in German banking. Between 1995 and 2005, one leading German bank was able to increase its number of accounts from 127 million to 132 million. Since the trends were upward, the executives felt they were in good health. However, had they measured market share, they would have observed that new online entrants had expanded the market, and they had in fact lost 10 percent of their market share during that time. Few banks are brave enough to

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from research responses. When Citibank introduced ATMs in New York City in the 1980s, market research found that 99 percent of consumers would never use one to get cash. In the late 1990s, 99 percent of consumers said they would never trade or bank online. Yet today, virtually every bank account holder uses an ATM, 90 million U.S. households bank online, and about 22 million households trade online.

of a low-fee, online-only savings account, called e-Savings, in 2006. • Focus on the customer experience. For a signiﬁcant number of

prospects and current customers, the online portal is the primary door to your customer experience. But when they “walk in” that “door” to open an account, they are often required to mail in their application or use other non-electronic channels. We live in a world of instant gratification, e-signatures, ID verification, and electronic money movement, so if you do not yet have truly instant account opening online, drop what you are doing, and enable it now. At Citibank, when we implemented instant account opening, we increased new accounts by 472 percent, with only a 38 percent increase in fulltime employees. If you need another reason to move rapidly, remember that every online account will cost your bank only about $9 to open, and it will typically drive repeat sales and customer loyalty. Upselling online should emulate Amazon’s one-click feature. Use the data you already have on file to pre-fill applications or reduce product applications to a minimal number of questions. At Citibank, we allowed current customers to open new savings accounts with only two clicks, and we reduced the number of questions required for a home equity instant pre-qualification from 40 to nine. • Drive efficiency by offload-

tions to lower-cost channels can not only reduce your cost to serve, but also enhance customer satisfaction. You can find service offload opportunities by meeting with your call center management every quarter to identify their top 10 call categories. We used this strategy at Citibank to identify low-value transactions— such as address changes, requests for statements and copies of checks, and check reorders—that we could easily move to online and mobile channels. We knew this created greater efficiency but were surprised at the increase it delivered in customer satisfaction. One of the things that most wowed customers was enabling check viewing and printing online—hardly innovative, but our customers thought that was practically the best thing we had ever delivered to them. • Treat mobile banking as a unique, separate channel, not a “small-screen Internet.” The great

value of mobile technology is that it ﬁnally delivers on the Internet’s original promise of 24/7/365 access around the world. Mobile banking allows people to do everything anywhere anytime, including reporting fraud claims, making payments, managing loyalty programs, and transferring funds, with very low transaction friction. Make use of mobile’s geo-location capabilities for branch and ATM locators, and potentially for basic needs such as identity veriﬁcation.

ing routine transactions to lower-

• Segment services by what cus-

cost digital servicing. At Citibank,

tomers want, not in ways that justify

we knew that online transactions cost 4 cents each, those conducted via ATMs cost 14 cents, those conducted via interactive voice response $2.53, and those conducted via people at a call center upward of $18. Driving everyday servicing transac-

your business strategy. The tradi-

tional business model for many retail banks is based on the businesscentric premise that high-net-worth clients deserve intensive face-to-face contact. But that’s not necessarily what they want. They want prefer-

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measure market share these days, much less the contribution of various channels to revenues. In the U.S., online-only banks grew from $3 billion in deposits in 2002 to more than $380 billion in 2011, yet they are often excluded from competitive analyses conducted by bricks-and-mortar banks. And during the last decade, many banks have opted to assign all accounts driven by other channels (such as phones and Internet) back to the “branch of domicile,” obscuring the relative impact of online and offline banking. I have a personal example: In 1997 I walked into a Citibank branch in Manhattan to open a checking account. Since then, I’ve physically entered that branch at most five times, and not once to add an account. Yet the nine Citibank products I have added to the account continue to accrue back to this branch, as if it were somehow responsible for my cross-purchase. As long as this practice continues, it will be impossible for any bank manager to assess the importance of physical distribution to the bank’s performance. One good way to determine the market share your institution may be losing to Internet competitors is to ask your chief digital officer to provide metrics for how many people have visited a product page on your website and then applied for that product elsewhere—the digital equivalent of the foot traffic you’re losing to your competitor next door. When I was at Citibank in 2005, we determined that more than 500,000 customers opened an account at ING Direct, an online-only bank (which, after being acquired by Capital One, was renamed Capital One 360 in 2013), just after reviewing our savings account pages. That data provided the impetus for our launch

• Devote 70 percent of your investment to enabling technologies.

Emphasize technological capabilities that help you reach customers without bricks and mortar—or potentially without any human intermediaries. For example, rather than building a large face-to-face sales force, use technologies such as Salesforce.com and Skype to create “high-touch” services that provide a mix of human- and computerbased interactions. You can also use a variety of advanced technologies to further develop your marketing capabilities for competitive advantage. These include segmentation, cross-selling, most-likely-to-respond models, prospect mining through retargeting, next-best-product marketing, product and offer design, CRM, and database mining. The data provided by social media can help you better understand your customers’ motivations and intent to buy. Use LinkedIn feeds on job changes or Facebook information on new homes and new babies to

trigger loan or insurance offers that will have greater response rates. • Use Web-based channels to merge delivery excellence with customer intimacy. One of your most

important steps is to consolidate customer information—for example, pulling in data from one part of operations to another, so it doesn’t have to be reentered when a customer is opening a new account. This says to a customer, “We know who you are, and we value our relationship.” Unfortunately, it’s very difﬁcult to built an aggregated mega-data-warehouse in most institutions, but you can fake it with graphic user interfaces. We used this at Citibank to bring customer data from personal to investment accounts. Your contact center will draw from your customer data in the same way, enabling them to offer investment, retirement planning, insurance, mortgage purchasing, and other guidance, tailored to each consumer’s needs and shifting as his or her patterns of activity change. Using customer data this way will also equip you to cross-sell more effectively, to better assess customer proﬁt contributions against the cost of service, and to change your pricing accordingly. • Don’t abdicate responsibility for digitization to your technology or marketing groups. Because of its

overall importance to your bank, digital technology should be managed as a capability within the business, not as a marketing or branding adjunct, and not as a technology deliverable. Neither IT nor marketing by itself is well positioned to fully realize the complex potential value of the Internet and mobile channels in acquiring new accounts among the tech-savvy younger consumer generation, in promoting cross-selling, and in driving business efﬁciencies.

• If you can’t innovate from within, partner with others. The secret

to great innovation is that it does not require radical change. Truly great innovations often took place through either a series of baby steps to a goal or a combination of smaller innovations. The iPod, for instance, was not an innovation at all. Akio Morita of Sony had invented the portable music player two decades before the iPod was introduced, and music downloads had been offered by Napster for more than five years. And touch screens? Apple didn’t introduce those until 2007 with the iPhone, but Citibank had touchscreen ATMs in the 1980s. The “innovation” was in pulling all these capabilities together in a way that was relevant to the consumer, and most importantly, easy to use. Partnering with small technology firms can be a great way to deliver innovation rapidly. Your innovation doesn’t have to be too far out on the leading edge, if you remember the core needs of banking customers. At Citibank, we partnered with outside firms to deliver our award-winning capability for instant account opening, and to be the first in the country to deliver a downloadable mobile banking app. Of course, innovations like these must be developed in close collaboration with your chief technology officer and the external partner, and everyone involved needs to understand the business objectives. (It helps, too, to be bullheaded, because you will be surrounded by doubters and naysayers, above and below, particularly if you are ahead of the curve.) We don’t know who the most successful financial-services providers will be in, say, 2020, but we can guess that among them will be some that do not exist (or barely

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ential treatment and a high level of care, which may or may not mean sitting in front of a person in a bank branch during business hours. At Citibank, our segmentation analysis showed that our best customers were our middle-aged, techsavvy, high-income urbanites and suburbanites. They were devoted to using our online and mobile capabilities, and they loved every innovation we introduced. Today, with the mobile Internet, Skype, texting, and social media at their ﬁngertips, many high-net-worth consumers expect instant communication and delivery, anytime and anywhere. Why would they make an appointment and trek to a branch when they could just FaceTime their banker or investment advisor?

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Catherine Palmieri cdpalmieri@gmail.com is a writer, entrepreneur, and consultant in the Internet and mobile financial-services field. Her experience includes launching small business and brokerage capabilities for American Express, online banking (Citibank Direct) and mobile banking (CitiMobile) for Citibank, mobile payments for CashEdge (Popmoney), and banking for TIAA-CREF (TIAA Direct). She is writing a book on digital financial-service strategies, from which this article is adapted.

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exist) in 2013. Powerful disrupters have entered the financial-services fray. Walmart has reloadable prepaid offerings that act like checking accounts. PayPal is enabling payments outside the banking system. Isis provides deposit accounts with payments facilitated through mobile phones. Mint delivers free automated financial advice over the Internet. Lending Tree disintermediates conventional lending, eliminating much of the hassle. Covestor links individual investors with portfolio managers who meet their investment needs. Each of these disruptions has already begun to dismantle part of the traditional financial-services value chain. Today’s banks need to act now— to head off the competitive forces that are coming from every angle, and to become disruptive forces, on behalf of their consumers, in their own right. +

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Life in the Matrix As companies evolve away from traditional hierarchies, a major cultural shift is required. by Jon R. Katzenbach and Adam Michaels

ot long ago, a global consumer products ﬁrm based in Europe found itself hobbled by its traditional organizational culture. It had ﬁercely independent product development and marketing divisions, and equally siloed business units, whose members hardly talked to one another. Even small management decisions languished while awaiting sign-off from the top four executives, who were the only people with accountability for the whole enterprise. The company’s top management recognized that something had to change. So they reorganized the enterprise into a matrix structure. In formal terms, a matrix is an organizational design in which employees have multiple reporting relationships; one person may be accountable to two or more functions or

businesses. The typical goal of this design is to ensure cooperation among business and market leaders, by dispersing accountability. At this consumer products firm, the leaders hoped their matrix would help them get products out to market with agility, finesse, and speed. To their credit, the people of the firm took the reorganization seriously. The CEO pulled together representatives from every part of the company to redesign the process and flow of work. They crafted a highly articulated formal structure, assigning equal responsibility for P&L to the business units and the marketing staff, and integrating all the roles across functions. The designers of the matrix worked thoughtfully and diligently to redefine decision rights, to place strong talent in high-priority roles, and to set up new financial systems that made the data on business results highly transparent throughout the company. They put

everyone into new, cross-disciplinary management teams—in which one individual would report to two or three teams—and charged the teams with developing local strategies that would reflect the global strategy set by business units. The firm then brought its top 500 executives together for the rollout. After an energetically facilitated retreat, participants signed a formal agreement to collaborate, and capped it off with handshakes all around. A memo that clarified responsibilities and roles was disseminated to people at every level, and people dubbed “tie breakers” were assigned to mediate potential conflicts. Expectations that the company would operate with enhanced alignment ran high. Yet it didn’t take long for most of the new matrix structures to fizzle. To be sure, it was already a challenging year. The global economic recession hit the company hard, triggering unexpected cutbacks. But tensions rose even in the more successful parts of the enterprise. Business unit managers, accustomed to having sole responsibility for finance, grew frustrated at the need to act in concert with marketers. They felt it bogged them down in negotiations and reduced their efficiency. Marketing leaders, for their part, sometimes overstepped their roles. At other times, they hung back and deferred to the business leaders, even when they had something valuable to say. “Tie breakers” found themselves in heavy demand, mediating even small-bore disagreements. People spent a great deal of time clarifying who “owned” which decisions. Pre-matrix problems continued to surface: Regions squabbled over shared services, and supply chain partners remained

Illustration by Lars Leetaru

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ORGANIZATIONS & PEOPLE

Don’t Blame Your Matrix

We’ve seen similar scenarios play out in many other organizations. First, they adopt a matrix structure, believing this realignment will solve problems caused by hierarchical rigidity and internal silos. They often spend significant effort and resources on getting the formal elements of the matrix right, paying particular attention to defining roles, rules, measures, policies, and procedures. Optimism usually prevails until the organization encounters a problem. It could be a business problem, such as a new product failing to gain traction in the market; the R&D and product development teams then blame marketing and sales for insufficient effort. It could be an organizational problem: Two newly merged units continue to operate as if they were separate entities, their supposedly aligned leaders fiercely contending every inch of turf. It could be a process problem: Managers feel unsure whether they should even mention a new idea in a meeting in which another matrixed unit is not represented. It could also be a teaming problem: Designated work groups overlook the discipline required for seamless, genuine, “real team”–style collaboration. If these problems crop up repeatedly and require constant mediation, people become disappointed and exhausted. It isn’t long before they begin to blame the matrix structure. We believe the problem in most instances is not the matrix but how the matrix is understood. All too often, a matrix is viewed as a structure, a formal mechanism for managing

dispersed accountability. But a matrix also has an innate cultural dimension. It is a way of operating and interacting—a complex web of formal and informal relationships that reflects how things actually get done across the organization. Even when the matrix structure has been well defined, this existing web of relationships and concerns continues to be a far greater influence on behavior. And when the web of relationships is at variance with the alignment that the organization needs, people experience it as frustrating and inauthentic. A matrix structure, for example, might show two co-workers, Nora and Charlie, being connected, in the

rational aspects of the matrix can be clearly defined, drawn, and mapped, which makes them easier to deal with. By contrast, the web that connects people and influences how they go about their daily work seems intangible, difficult to define. It is at least as emotional and informal as it is rational. Certainly it remains resistant to mapping. Too many leaders naturally focus on the more tangible aspects of design—who reports to whom, where lines intersect—and then hope for the best when it comes to the functionality of relationships among people. To set the matrix free, we must recognize its dual nature. A structure that demands collaboration across

Even when the matrix structure has been well defined, the existing web of relationships continues to be a far greater influence on behavior. sense that they share responsibilities for the same part of the supply chain, or the same product line. But if Nora and Charlie have no real relationship, no sense of common purpose, no habit of keeping in touch, no way to identify or express common values, they will struggle to collaborate. And they may end up concluding that their interests are opposed. When matrixed organizations flounder, it’s usually because the company has taken on the formal elements of organizational redesign— reworking the org chart and reassigning decision rights—without making the corresponding cultural moves that are needed to support the new structure. It’s easy to understand why this happens. The concrete and

traditional silos and boundaries requires a culture that fosters and energizes correspondingly collaborative behaviors: openness, a willingness to try new things, acceptance of small missteps, and so on. In short, the matrix should be designed as a web of alignment. What people bring to the table and how closely their attitudes and behaviors are aligned should affect the ﬂow of information and activity as much as where people sit on the formal organization chart. Cultural Alignment in Mexico

One of the more compelling examples of cultural alignment across a matrix took place starting in 2009 within PepsiCo’s subsidiary PepsiCo Mexico Foods (PMF). All through

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hard to reach. As people became disillusioned, an unspoken consensus emerged that the matrix itself had become the problem.

recognition that Gamesa and Sabritas were coming together not in a takeover, or owing to the failure of one company, but rather, as he stated, “as a merger of equals.” It was thus important to signal that the merger would not result in the transformation of one company or the absorption of one company into the other; rather, PepsiCo Mexico Foods intended to obtain the very best of each company. Padierna began by assuring employees that as redundant positions needed to be

that we belonged now to a new company: PMF.” The logo of the new company helped express this idea. “We created a powerful image of two rivers coming together to form a new river. We used the image of the Amazon River, which is actually formed by two rivers: the Madeira and the Rio Negro.” One compelling part of the story is the way the two originating rivers blend. “Because of the way they drain from the mountains, their waters are different colors. One

The Amazon became a symbol of the new PepsiCo Mexico Foods. Each employee could identify as a drop of water in the united river. eliminated, leaders would choose the people they kept “based on merit. It’s not going to be a quota system, taking one from here and one from there.” Although some people were skeptical the merger would truly unfold this way (as he expected they would be), after several months they began to believe that Padierna’s intentions for a new, hybrid company were sincere. Blending Two Rivers

Another essential step was to ﬁnd a new image for everyone to share, to help employees come together as a new company. As Padierna explained, “One of my early decisions was to move away from the former dual company images and adopt one PepsiCo Mexico Foods image. All of us who were driving the transformation, from that moment on, simply forgot about our past. We emphasized behaviors that demonstrated

is black and one is brown. Once they come together, for the ﬁrst 100 miles they don’t mix. The Amazon runs with one side one color, the other side the other color. Then they mix, to become one river that really drives the ecosystem of the world. I believed the same thing would happen here. Our two cultural situations would not mix at ﬁrst, but then they would become one.” The image of the Amazon became a simple, accessible symbol of the new PMF. Each employee could identify him- or herself as a drop of water in the united river, contributing to a single enterprise. This idea helped capture everybody’s imagination, in ways that launched critical behavior changes—including among many of PMF’s 40,000 frontline employees. The symbol of the two merging tributaries was rolled out in many concrete ways. One example

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this episode, PMF was a crown jewel of performance within the overall global PepsiCo organization (it is also one of the biggest food companies in Mexico, with 55,000 employees and more than US$4 billion in annual revenues), but that didn’t make it any less challenging. As PMF president Pedro Padierna tells the story, it began in 2010 with the merger of two major food producers in Mexico, both of which had been acquired by PepsiCo years before. Gamesa, Mexico’s largest cookie manufacturer, was based in Monterrey. Sabritas, a snack company headquartered in Mexico City, was the source in that country for the Frito-Lay global brands and its own local brands, such as Sabritas chips. The merger was intended to further strengthen PepsiCo’s position in Mexico, but it also brought together two very different companies. It would take a high level of engagement to align them. Padierna, who became president of the combined enterprise in 2011 (he had formerly been president of Sabritas), viewed this cultural challenge as being at least as signiﬁcant as the strategic and operating challenges he faced. As he described it to us, “The two [legacy] companies could not have been more different” in how they approached the market and how they ran their operations. Sabritas was direct and functionally oriented, and Gamesa was collaborative and process oriented. Sabritas prized the individual as heroic, able to solve any problem, whereas Gamesa believed that teamwork created results and passion for the work. What was important to Padierna, however, was that they were both successful companies, and their cultures were individually thriving. The key to success was the

identities would remain in place for a while. To create a better hybrid culture, people on both sides would have to focus on something new and different from the old companies’ cultures—a culture that perpetuated what was good from each, but was not afraid to develop wholly new elements as well. During its ﬁrst year, through mid-2011, the merger engendered a measure of confusion and did not itself create an automatic sense of alignment. Entrenched behaviors and traditions remained in place even as new reporting lines and processes were solidiﬁed. Territoriality surfaced in the business units, which continued to drive the business as if they had their own P&L sheets. Leaders competed to get the more highly regarded people to be loyal to them. In addition, while the more interconnected and horizontal structure mandated that people take more responsibility and initiative,

with trying to create the new cracker and get it out into the market. As a result, marketing and R&D got pulled in opposing directions as the biscuit and snacks units sought the same resources. Collaborating for the greater good was not an easy task, despite the tremendous efforts and disposition of everyone involved. Change also proved difficult— even impossible—for some people individually. Most of them quickly identified themselves, and were offered an easy out. As Padierna put it, “In a merger, there are three kinds of people: those who are willing to accept change and become your partners from the very beginning; those who are willing, but cannot make the change even if you help them; and those who don’t want to be part of it at all.” Finding and energizing the first group, he added, is essential: They can model and help spread the change you want the company to follow.

Finding “those who are willing to accept change and become your partners” is essential: They can model the change you want. the long-established traditions in both cultures made people reluctant to challenge leaders or hold them accountable for decisions that undermined real collaboration. A leader in the savory snacks division launched a cheese-based cracker, even though the biscuit division was already developing a similar product. Instead of acknowledging the possible consequences of this overlap, people on the snacks team simply went ahead

By late 2011, with the structural and formal parts of the merger largely complete and the matrix design in place, Padierna knew he had to ﬁnd a better way to integrate the best of both cultures. The organization would have to identify behaviors and customs that needed to change, and ﬁnd ways to support these changes. In 2012, he went to the global corporate leadership group at PepsiCo headquarters in Purchase, N.Y.,

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involved the uniforms that the sales force wore on daily visits to customers. For the ﬁrst time, Gamesa and Sabritas employees wore shirts of the same color, with the new PMF logo on them. The new shirts became ever-present reminders that helped fuel key behavior changes. However, the company also kept the old Sabritas and Gamesa logos on the left side of the new shirts, so as not to disrupt the sales force’s identity, or move too quickly. The rivers need to merge at their own pace, and since they were most closely associated with each brand, the sales forces were very sensitive. PMF took time to merge their practices. They used a matrix structure to set up the new organization. One goal was to free up the collaboration across boundaries that true integration would require. Another goal was to focus attention where it mattered most: on opening new markets and meeting customer needs with well-targeted products delivered in a timely manner. The new enterprise was composed of four business units: savory snacks, biscuits, confectionary and new businesses, and foods. As president, Padierna had 12 direct reports, four heads of the business units and eight leaders of functions: ﬁnance, sales, R&D, marketing, IT/transformation, legal, operations, and human resources. The sales units, which had formerly been organized according to product, were now deployed by customer—for example, one each for Walmart and for convenience stores. Most departments reported both to a function and to a business unit. Even with this new structure in place, Padierna knew leaders could not simply move people around, especially because the two legacy

and made a presentation to more than 20 senior leaders. In it, he described how his leadership team was implementing a capabilities-driven strategy based on superior customer and consumer service across priority food categories. He explained that to become the kind of culturally aligned company that this strategy required, PMF would emphasize four fundamental behaviors that he described as follows: 1. Focus externally by always putting the customer, shopper, and consumer first. 2. Foster open and honest dialogue by soliciting input, listening respectfully, and sharing opinions proactively. 3. Expedite and empower decision making based on facts, processes, and PMF’s priorities as a multicategory business. 4. Mobilize and support effective matrix teams that unlock the value of a PMF-wide perspective. Although these behaviors are both clear and achievable, they manifest differently at different levels and in different parts of the four businesses. For example, the executive team made a simple but significant behavior change in all meetings. Team members, to make their first critical behavior of “focusing on the customer” concrete and tangible, began opening every meeting with a report on customer feedback and reviews. Meetings used to begin with performance reports, and Padierna described the shift as initially “awkward, because we were not used to that.” But it has not only had the effect of reminding everyone that the customer must be central, but also demonstrated a meeting behavior that is new to both Sabritas and Gamesa people, thereby reinforcing a better, unifying hybrid.

Another change, aimed at the second behavior, was to create a new shared vocabulary for PMF, paying attention to the differences between the way Sabritas and Gamesa people referred to things, and fostering open dialogue about it. For example, Sabritas called the HR department recursos humanos (human resources), whereas Gamesa used the term capital humano (human capital). Neither side wanted to use the other’s name, so Padierna decided they needed an entirely new name, talento y cultura (talent and culture). Padierna said this attention to semantics was essential: “One of the hardest things that we did was to write the new vocabulary. Now, everybody speaks the same language.” Padierna also expected that the sales force, PMF’s front line, would once again be the hardest part of the company to engage with about the new behavior. For this reason, PMF delayed working on the salesforce culture until after cultural work was under way in the rest of the company. Sabritas’s sales force was very metrics oriented, and each individual salesperson collected speciﬁc, detailed numerical indicators. Gamesa was much more focused on teamwork, and used peers to motivate salespeople to do their best, without tracking their speciﬁc results closely. To “empower decision making based on facts,” the third critical behavior, the new sales force would have to adopt many of Sabritas’s practices and collect more individual indicators. So sales-force training for Gamesa became much more oriented around metrics. At the same time, Gamesa’s teaming skills could bring valuable motivation and energy to the Sabritas sales force, and help salespeople focus on the fourth critical behavior:

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First Principles for the Matrix

For many companies these days, an effective matrix structure has become a viable way to achieve organizational success, if only because the demands of the global economy have grown more complex. At the same time, culture has become more challenging as an instrument of change

because high-trust relationships are more difficult to develop and sustain across highly dispersed geographies. A decade ago, if a company sent a U.S.-trained executive to open a division in China, he or she would have already developed ties with colleagues and leaders at the corporate office. This would provide an informal and intuitive sense of whose support, at headquarters, could help make the venture a success. Today, such a firm would be more likely to engage someone based in China to open the office there, giving him or her little opportunity to forge relationships or get a feel for the cultural situation back home. Without knowing the right person to call or the right questions to ask, a manager in charge of the Chinese operation might have no way to access information essential to success. The result? The manager’s potential would never be fully realized, and lessons learned in other parts of the organization will go to waste. A structural matrix can help address these global complexities, providing the individual with a broader range of reporting channels and more formal connections to the firm. But if people on the ground don’t have personal connections across geographies or speak the uncodified language of the organization, they will be operating with limited information and resources, and their behaviors may undercut what they are in good faith trying to achieve. As Douglas Conant, former CEO of Campbell Soup Company, suggests, a guiding principle for a matrix-bound culture could be as simple as “It’s a win for both of us or there’s no deal.” The enterprise leader should then provide just enough structure for people to make progress, while letting them figure

out the actions they need to take to get there. In effect, this approach allows people to construct the matrix experience themselves. Once they begin to make progress, their new behaviors will start to feel natural, part of their experience. When this happens, the organization is on its way to cultural alignment in a way that ﬁts its strategic and operating priorities. A company’s ultimate goal should be to liberate the emotional energy of the matrix, to unlock its full potential by emphasizing the importance of its cultural aspect. With that process under way, people throughout the organization can take on together the hard but rewarding work of building a high-performance, collaborative company. + Reprint No. 00207

Jon R. Katzenbach jon.katzenbach@booz.com is a senior executive advisor with Booz & Company, and co-leads the ﬁrm’s Katzenbach Center in New York. He is the coauthor, with Zia Khan, of Leading Outside the Lines: How to Mobilize the (in)Formal Organization, Energize Your Team, and Get Better Results (Jossey-Bass, 2010). Adam Michaels adam.michaels@booz.com is a principal with Booz & Company based in New York. His work focuses on innovation and organizational change in consumer packaged goods. Also contributing to this article were Booz & Company partner Jose Gregorio Baquero and s+b contributing editor Sally Helgesen.

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essay organizations & people 34

“mobilize and support effective matrix teams.” Within Sabritas, salespeople were encouraged to give one another more feedback, and gather in teams to come up with suggestions for improvements. Although the merger of the sales forces is still in its early stages, PMF’s critical few behaviors have already become a guidepost for how to reinvent behaviors on the front lines. “We are now marching ahead to really complete the integration of the sales force,” says Padierna. “But that will bring, again, lots of culture alignment challenges.… So, I’m not going to let the new behaviors go. I would say that’s [priority]number one. And I think that it is already beginning to pay off.” The cultural transformation program in PepsiCo Mexico Foods is still under way. It is part of a holistic multiyear transformation strategy that is led by Padierna, overseen by the executive committee, and designed by a transformation team. Although it is still too early to come to conclusions about its success, the signs are positive. PepsiCo Mexico Foods recently received the Donald M. Kendall Award and the Business Unit of the Year Award from PepsiCo CEO Indra K. Nooyi. This is the ﬁrst time a business unit has received both awards in the same year, a clear recognition of the value of what Padierna and his team are doing.

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The Secret to a Successful Divestiture When you are selling part of your company, don’t just offer buyers a potential asset; give them the capabilities to gain value from it. by Eduardo Alvarez, Steven Waller, and Ahmad Filsoof

major North American oil and gas company had formulated the straightforward part of a deal—deciding to sell one of its reﬁneries and a group of its gas stations—a few months earlier. Now, as part of its business strategy in preparing these assets for sale, the company was diving into the details of divestiture, and the capabilities that would be affected by the deal. This exercise was going to be almost as complex as a typical merger or acquisition; certainly it would be more complex than the company’s leaders had expected. The decision to divest these assets was part of a new M&A strategy—one that would have the oil

and gas company concentrate on its higher-margin energy businesses, including refineries that produced diesel and other heavy forms of fuel. The deal was also a first step in getting out of the service-station business altogether—part of a broader industry trend in which major energy businesses had moved away from the idea of being “fully integrated,” with positions in drilling, refineries, and gas stations. This oil and gas company (which is real, but will remain unnamed) was in the early stages of fine-tuning its strategic focus. Business strategy is always intertwined with capabilities. A capability is the combination of processes, tools, knowledge, skills, and organizational design needed to deliver a specified outcome. Thus, although most M&A departments spend

much more time thinking about the sale price, attention to capabilities can make a major difference in a deal’s outcome. For example, when you sell major assets, you can often maximize the deal price by identifying buyers with capabilities systems of their own that are a good ﬁt. Such buyers can make the best use of the capabilities (including skills and technology) associated with the assets being divested. They are often willing to pay big premiums to complete the deal—and with good reason. Deals that leverage a buyer’s existing capabilities typically fare well (see “The Capabilities Premium in M&A,” by Gerald Adolph, Cesare Mainardi, and J. Neely, s+b, Spring 2012). But maximizing price is only one of four major goals in a divestiture. The others are minimizing any disruptions to your retained businesses, keeping capabilities away from particularly strong competitors (which might mean turning down a deal that is favorable in other respects), and handing the buyer something that can be operated successfully from Day One. Your motive is not altruistic; in M&A, it is generally in a seller’s interest to minimize the length of entanglement, and to establish a reputation as a good partner for making deals. Our example is an energy company, but it could just as easily have been in healthcare, media, or ﬁnancial services. The leaders of any company divesting assets must deal smartly with capabilities issues or risk having the deal fall short. Differentiating Divestiture

As a seller, you should begin your divestiture process by identifying the desired end state for the important capabilities involved: those you

Illustration by Lars Leetaru

essay strategy & leadership

STRATEGY & LEADERSHIP

To make the process of divestiture more manageable, we recommend ﬁve steps. Each step gains its power from how it builds on previous steps, helping sellers during the critical period—usually lasting up to 18 months—when they are readying assets for sale. Note that these steps focus only on the analyses and business process changes that are relevant to managing the capabilities you are divesting. How to identify a buyer, manage a road show, negotiate price, and execute post-deal service agreements—all critical activities—are outside our focus here. Step 1: Capability Scoping

In the ﬁrst step, you set the overall strategy for the divestment—including the assets you want to sell, when you want to sell them, and to whom. This takes place through an exercise called “capability scoping,” in which you take stock of the most important capabilities associated with the assets you are putting on the block. Often what’s up for sale

is not a stand-alone business unit but (as in our oil and gas example) a product, service, or asset that sits within that business unit. It likely draws on capabilities that are centralized within the company or that are used by other parts of the business unit (and therefore can’t be offered as part of the deal). This step usually precedes the identification of a buyer and should be done before any transaction-related activity, such as planning an auction. During the oil company’s first capability-scoping exercise, its senior executives identified almost a dozen capabilities that needed to be bundled with the refinery and service stations it was selling. These capabilities—including logistics and scheduling at the refinery, and a way of managing the service stations’ customer data that was built into their distinctive software system— would inevitably end up in the buyer’s hands. Some of the other capabilities that the oil and gas company ini-

Exhibit 1: Anatomy of the Capabilities in a Major Oil and Gas Divestiture The top oval represents capabilities that are of more value to the seller, and the capabilities in the bottom oval have more value to the buyer. The seller, in deciding which capabilities in the middle group to put on the market, can influence how both companies will compete in the future.

Required Capabilities

Retained Business

B O T H

Differentiating capabilities Essential but nondifferentiating capabilities

Divested Business

Source: Booz & Company

• Upstream oil capabilities • Field exploration/development • Safety practices

{

• Refining supply • Marketing supply/trading • Pricing • Retail marketing/branding • Card processing • Health, safety, and environment • Capital project management • Asset management • Pipelines and terminal operations • Sales and marketing • Tax, legal, treasury, finance, IT, HR

• Commercial operations • Engineering/inspection • Transport operations

{

essay strategy & leadership

will still need after the deal is done, those you won’t need, and most importantly, those that both you and the buyer will need (see Exhibit 1). In each group, some capabilities are “table stakes”—every company in the industry needs them—whereas others are truly differentiating. The latter can distinguish your company in the market and give you an advantage over competitors. These capabilities require the most attention during a divestment, and you should seek to keep them intact while enabling the buyer to benefit from the deal in every other way (see Exhibit 2, page 38). In practice, most sellers, facing the pressure of time, end up having to choose which capabilities to focus on. Your goal is to keep the process moving without sacrificing the quality of your decision making or jeopardizing the outcome. There are certainly divestitures in which the buyer is known from the beginning, but it is not uncommon for a company to decide to divest something just because it no longer fits strategically, announce this plan publicly, and then search for a buyer. In these cases, major portions of a divestment plan must be executed before a buyer has been identified, and certainly before the transaction has taken place. This adds to the challenge. There are also partial divestitures (such as that in the oil and gas company example in this story), in which only some assets of a given business or parts of an asset are sold. A partial divestiture is often more complicated from the standpoint of capabilities, because of the seller’s need to hold on to some people, processes, and technologies that it could let go of if it were selling an entire business or product line.

BUYER’S PERSPECTIVE

SELLER’S PERSPECTIVE

Differentiating (competitive advantage)

Competitive necessity (“table stakes”)

Nonessential

Differentiating (competitive advantage)

IN DEMAND Both sides need the skills and technologies. This situation is most common in a partial divestiture, and the terms may depend on the seller’s need for cash.

MUTUAL GAIN, WITH MORE AT STAKE FOR SELLER Both sides should exercise caution; otherwise, buyer may end up overpaying, while the seller risks losing essential staff or technologies.

UNLIKELY DEAL Neither seller nor buyer has reason to proceed.

Competitive necessity (“table stakes”)

MUTUAL GAIN, WITH MORE AT STAKE FOR BUYER Both sides should exercise caution, or seller may end up retaining too much, and the buyer may not gain everything it needs.

MUTUAL GAIN, WITH FRUGALITY During the sale, both sides should think about the investment required and whether to begin arrangements for outsourcing. The two sides might even collaborate to share operations and expenses after the deal.

BUYER BEWARE The buyer has little or no interest in these capabilities, but the seller may use this as an opportunity to reduce its ongoing costs by selling off some of its operations.

Nonessential

MUTUAL GAIN Potentially a good deal for both sides; make sure the buyer gets every aspect of these capabilities and the products and services associated with them.

BUYER’S BARGAIN OPPORTUNITY The buyer gains from these capabilities, and should not have to pay very much for them.

BOTH SIDES BEWARE Both sides have an interest in making sure that they don’t end up with these capabilities and the activities associated with them. Explore selling to a third party.

Source: Booz & Company

tially planned to look at were capital project management, asset management, and activities that fell under the heading of health, safety, and environment. Often, the seller realizes there isn’t time to address every capability on its list, and it must set some priorities. As the scoping exercise at the oil and gas company went on, the company focused on four capabilities that would matter signiﬁcantly after the deal was completed: the pricing expertise and proprietary algorithms of its reﬁneries, an advanced system for understanding its inventory positions, a unique approach to credit card processing, and brand development. These four capabilities worked together (along with others) to allow the enterprise to be a low-cost producer and attract price-conscious consumers, many of whom went out of their way to drive to one of the company’s gas stations. These four capabilities would also remain critical to the seller after the deal, since the seller planned to con-

tinue to operate other reﬁneries and service stations. Undoubtedly there is a set of analogous activities at your company, drawing on people and technologies that are dispersed throughout the organization. A scoping exercise in and of itself isn’t a plan for divesting assets—it doesn’t answer the question of how to ensure the integrity of differentiating capabilities. But it does lead to a hypothesis of what will have to be accounted for, and either added to or carved out of an asset, in the months leading up to a divestiture. Step 2: Baseline Analysis

This step involves understanding the components of key capabilities and how they come together to enable products and services to be successful. The idea is to break down those activities into their constituent parts—what the activities consist of, who performs them, where in the company they are performed, how long they take, what technologies

make them possible, and what problems are associated with them. The baseline analysis identifies exactly what you can let go of and what you need to keep—and illuminates where a new owner might be left with a gap. Not all buyers have gaps. Some may have capabilities systems that are a better fit for the assets you’re selling than your own capabilities are. In other cases, the ability of your activities to fill the buyer’s gaps becomes a point of negotiation in the deal—factoring into the price, the time to completion, or the transition services that you must provide. If no buyer has yet been identified, this is your chance to formulate a clear picture of the value that your divested assets might hold for someone else. Completing a baseline analysis of your capabilities is more difficult than it might seem. The problem is that most people in a company— even, and sometimes especially, those with special talents or important functional roles—have a

strategy+business issue 72

essay strategy & leadership 38

Exhibit 2: Divesting Capabilities: The Buyer’s vs. the Seller’s View

Step 3: Option Analysis

In this step, having identified one or more potential buyers, you look closely at the buyer’s capabilities needs and how your assets can help fill those gaps. This enables you to maximize the value of the deal. At the oil and gas company, pricing emerged as one of the obvious gaps—a capability too valuable to simply hand over. Energy is a dynamic market, with prices that change continuously throughout a trading day; a refinery’s ability to take market information and know what to bid for a given set of deliveries is crucial to its ability to make a profit. Yet this was not a capability the oil and gas company felt it could cut loose. After all, it was keeping

the buyer tap into the systems and processes that the seller already had in place. The second option was providing the buyer with the mechanical part of its pricing capability (the hardware and basic software) after stripping out the algorithms and the bulk of the system’s intelligence. And of course it was possible that the buyer would have a sophisticated pricing capability of its own, and not need any part of what the seller had to offer. The seller could not assume that this would be the case, however, so it analyzed the relative impact of each option. This is a key part of this step. Sharing the pricing system was going to be very complicated, both in terms of the technology and from a regulatory perspective, since the owners would be operating reﬁneries in different states within the U.S., with different environmental laws. Dividing up the system was going to be an equally big job, and would leave the buyer having to ﬁll in many software blanks and recreate processes that were already locked down. Ultimately, though, the oil and gas company determined that the second option, dividing up the system, was better; it would

Some buyers may have capabilities that are a better fit for the assets you’re selling than your own capabilities are. other refineries, and they also drew on this capability. The seller identified two main options for dealing with this dilemma. The first was sharing its pricing capability with the buyer—letting

eliminate a link that could interfere with both companies’ business processes later on. The information it got from the analysis was instrumental in helping the oil and gas company start the preliminary work

of dividing the system—even before it found a buyer. The information uncovered during this step may prompt you to revisit a previous step. For instance, one of the oil and gas company’s tests had to do with the amount of time it would take for a buyer to bring the ﬁnancial systems of the divested gas stations, including the credit card system, into full operation. It was clear that this couldn’t be implemented on the day the deal went through. So the seller returned to Step 2 to understand the impact of a delay. Some iteration of this sort is to be expected as new information and possibilities emerge. Step 4: Transition Planning

Having identified the gaps and decided how to fill them, you as the seller now must start carving out the asset and making sure it has the capabilities it will need. This involves the creation of detailed project plans—perhaps one for each of the major capabilities involved—and of work teams. Where to begin? At this stage, there is still no guarantee of who the buyer will be. Focus on activities that need to be conducted for any buyer. This forces you to tend to the known things first, as opposed to doing what comes more naturally and tending to the biggest things first. This approach can speed a sale once a buyer has been identified—and even if you don’t sell the asset, in the end, you won’t regret the planning effort. The oil and gas company knew it wanted to cordon off parts of its pricing capability, no matter who bought the refinery. Identifying and stripping out its proprietary algorithms was one of the “no regrets” projects it embarked on. By contrast, another technology issue—

essay strategy & leadership

narrow view of what underpins a business’s success. The salespeople will describe the differentiating capabilities in one way, the marketing people in another, and the product development people in a third. From up close, and amid the competing perspectives, it can be hard to tell which activities truly make a difference. You may need to weigh all these inputs dispassionately—and pull back to get a wider perspective.

Step 5: Buyer Engagement

Once you have a definite buyer and a signed contract, you can flip the switch on all the plans you have been making in Steps 1 through 4. Begin by sharing your thinking with the buyer, including which capabilities you see as most important and what your plans are for transferring them. Describe how you will deliver a fully functioning business to the buyer. The buyer has its own market strategy, quite possibly different from yours, and may have a different view of which capabilities are important. These differences sometimes lead the buyer to ask for something you don’t expect. That’s another reason not to start on this stage prematurely: That early work might have to be discarded. In the oil and gas company divestiture, the operation of the gas stations was a major issue. These assets couldn’t simply be handed over, with the seller washing its hands of them—the buyer wouldn’t have had the personnel or the knowledge to operate the assets successfully. Although the parties initially discussed a commercial services agreement, in which the seller would have operated the retail assets for the buyer indefinitely, they ultimately settled on a technical service agreement, which had the advantage, in both parties’ eyes, of spelling out a clear end date. The seller began laying the groundwork to fulfill that agreement.

Preparation, Skills, and Pride

Divestitures can be some of your company’s most complex transactions. They require strategic thinking, a massive amount of contingency planning, and—once a certain point is reached—the simultaneous management of multiple work streams and projects. You will need to be ﬂexible and ready for the unexpected. This checklist can help you get ready for the process: 1. Do you have a clear sense of what you’d like to sell, what you think it’s worth, and what capabilities might be involved? 2. Do you know when you’d like to complete a transaction, and do you have a rough sense of the time line leading up to that? 3. Do you have a list—if not by name, then by type of company— of who might be interested in your assets? 4. Do you have a clear sense of how the sale will affect capabilities you’ll need for your retained businesses or assets? 5. Do you have a dedicated transaction team, and if so, does the team have a clear set of priorities? 6. Do you have measures in place to track your progress? Do you have clear measurements for the success or failure of the transaction? The skills you develop during this process aren’t relevant just to divestitures. They can also be used to reduce risk; create value; and improve the outcomes of acquisitions, spin-offs, and portfolio restructurings. Your work on divestitures can span organizational boundaries, geographies, business units, and functions, and thus help you develop the structures and communications links you need for other complex initiatives. The focus on capabilities involves accounting for factors that

are often overlooked. It can help you avoid the tunnel vision that often accompanies a singular focus on financial matters during major transactions—and that can keep you from seeing the broader strategic impact of your decisions in general. Many companies pride themselves on their ability to use acquisitions to drive inorganic growth. It’s far more rare to find a company that prides itself on the way it divests a business or asset. That’s understandable; by their nature, divestitures focus on businesses or assets that once seemed promising but no longer fit with where the seller is heading. It isn’t surprising that there would be a mind-set of “the sooner, the better” and a narrow focus on the price. If you use the filter of capabilities, the divestiture might take a little longer, but it can leave your company better off in the ways that matter most. + Reprint No. 00208

Eduardo Alvarez eduardo.alvarez@booz.com is a Booz & Company partner based in Chicago. He leads the firm’s global operations practice and is an expert in business process transformation and technologyenabled transformation. Steven Waller steven.waller@booz.com is a Booz & Company principal based in Chicago. He specializes in technology strategy and the development of new operating models for energy and financialservices companies. Ahmad Filsoof ahmad.filsoof@booz.com is a Booz & Company senior associate based in Chicago. His focus is on operations, business process transformation, and technology-enabled transformation in the energy industry. strategy+business issue 72

essay strategy & leadership

how to turn over customer data for its divested retail business—though clearly a major undertaking, wasn’t knowable. The company identiﬁed several ways to do this, but didn’t start working on any of them, because it recognized that the buyer might have its own ideas about how to handle this.

Are You Leading Like It’s 1980? The world of work has changed an awful lot in the past 30 years. It’s time for your performance management to catch up. SUSAN CRAMM

A new Gallup poll reveals pervasive apathy in the workplace.

New posts daily on s+b Blogs

A crucial first step in applying analytics is to decode the jargon. DAVID MEER

JOHN JULLENS

JAMES O’TOOLE

Visit strategy-business.com/sb-blogs for your index to the best thinking in business

WHAT IS “BIG DATA,” ANYWAY?

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CHINA’S MID-MARKET: WHERE “GOOD ENOUGH” JUST ISN’T Seven principles can help multinationals sell to a rising segment of eager Chinese customers.

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YOU ARE WHAT YOUR DASHES SAY YOU ARE EVERYONE MAKES MISTAKES—BUT SOME ARE UNACCEPTABLE. DAVID SILVERMAN

When Good Celebrity Endorsers Go Bad, Markets Get Angry (But Not for Long) What’s the right move when your famous pitchperson takes a public beating? MATT PALMQUIST

feature organizations & people

THE EIGHT COMPONENTS OF YOUR ORGANIZATIONAL GENOME HOLD THE SECRET TO UNLEASHING SUPERIOR PERFORMANCE.

BY ASHOK DIVAKARAN, GARY L. NEILSON, AND JAYA PANDRANGI

feature organizations & people

HOW TO DESIGN A WINNING COMPANY

Illustration by Aad Goudappel

Sometimes epiphanies come by email—or, in this

case, three emails. It was Saturday at 5:17 a.m., and Joanna was already at her laptop. As the new CEO of the ﬁctional Seabright Publishing Company, just four months into the job, she had returned the night before from a 90-day “listening tour” of the company’s operations. She hadn’t slept well. A recognized turnaround expert, Joanna had been hired by a board looking for organizational change. Seabright had a new strategy. It was shifting from printbased books and magazines for professionals to global digital information products. Everyone agreed this was the right direction for the company. Yet the former CEO, despite making a major push for restructuring and change, hadn’t gotten much traction or support.

That failure had cost him his job. Joanna had concluded that the strategy itself was sound, and Seabright’s people seemed to both understand the need for a turnaround and value the shift to digital media. But they couldn’t execute it, especially when they had to work across company boundaries. The first few digital products were struggling to gain a foothold. When pressed, even the digital product managers grumbled that they’d be foolish to change too rapidly; their bonuses were linked to last year’s metrics. The organization’s culture also seemed to be holding them back. On the listening tour, when Joanna asked people what needed to be fixed, they pointed fingers at one another. So, on what was supposed to be her first weekend

feature organizations & people 44

Gary L. Neilson gary.neilson@booz.com is a senior partner with Booz & Company based in Chicago. He focuses on operating models and organizational transformation.

off since taking the job, Joanna woke before sunrise to plot a course of action. First, she checked her email. At the top of the queue was a note from Seabright’s senior vice president of production: About that R&D project—I think we’re looking at about $13 million. How soon could we seek budget committee approval? That was followed by one from the head of marketing and consumer insight: As I mentioned last week, I know that the app will deliver. Only remaining question is costs. I got an estimate today of ~$12–15m. Can we talk further? The third was from her head of sales: The new digital tool will address a lot of the issues we had with the numbers last quarter. Expect it’ ll be $10 million-plus to develop. How rich are we feeling these days? Here was a perfect illustration of the problem. Three departments, with similarly sized propositions, that clearly weren’t talking to one another. Joanna rolled her chair backward and closed her eyes. This was more than a communication issue. The company’s organizational design, which had evolved in an ad hoc fashion over its 80-year history, was out of sync with its strategy. Each business leader had good intentions, but the company had too many initiatives under way, all projecting hockey-stick growth and rosy return on invested capital. The reality was underperformance, confusion, conﬂict, and spiraling costs. The organizational design was simply too fragmented to meet the challenges the company faced. As long as that design remained in place, Joanna realized, getting Seabright to execute in the digital realm would be like entering a minivan in the Indy 500.

Jaya Pandrangi jaya.pandrangi@booz.com is a partner with Booz & Company based in Cleveland. Her work focuses on growth and cost ﬁtness strategy as well as sales and marketing effectiveness for consumer products and retail companies.

The Case for a New Organization

The Seabright story that unfolds in this article is a composite, derived from several actual cases in various industries. It is written to illustrate how to design a more effective alignment between your strategy and your business structure: how to gain a consistent advantage, or a “right to win” in the marketplace, through the way you are organized. To succeed consistently in the marketplace, a company must have a clear and differentiated way of creating value for its customers, supported by well-deﬁned capabilities—things it does exceptionally well that are central to its ability to perform, and hard to replicate. All this should be reﬂected in its portfolio of products and services. But those elements will lead to sustainable success only if the company has the right organizational design, one that enables it to execute its strategy. Every company’s situation is unique, and therefore the right design for one company will probably not work for others, even within the same industry. But the symptoms of having the wrong organizational design are regrettably common. They include business units and functions that protect their own domain’s priorities to the detriment of the overall business, hoarded or wasted resources, strategic goals without followthrough, and a culture that dismisses or ignores accountability. These problems are not just a matter of personal ill will, incompetence, external pressure, or cultural resistance. They exist because organizational design determines behavior. When a company’s organizational forms are inconsistent with the broader objectives of the business, that misalignment affects the day-to-day actions of individual employees. It leads perfectly competent people to chronically underperform.

strategy+business issue 72

Ashok Divakaran ashok.divakaran@booz.com is a partner with Booz & Company’s organization, change, and leadership practice, and is based in Chicago. He specializes in strategy-driven transformation for product- and innovationbased companies.

A COMPANY WITH A STRONG LINK BETWEEN ITS STRATEGY AND ITS ORGANIZATIONAL DESIGN IS LIKE AN ENGINE FIRING ON THOUSANDS OF CYLINDERS.

Designing for Strategic Fit

How do you translate a business strategy into an organizational design? How can you connect the dots between company-wide objectives and the concrete details of reporting relationships, information ﬂows, decision rights, and social networks? The answer is not obvious. Figuring it out requires a new way of thinking about organization: what might be called organizing for essential advantage. “Essential advantage,” in this context, refers to the creation of meaningful, lasting value for customers. Although mission statements and lists of business objectives are plentiful, it’s rare to ﬁnd a statement that explains precisely how a company creates value. As described in several recent books—notably, The

Essential Advantage: How to Win with a CapabilitiesDriven Strategy, by Paul Leinwand and Cesare Mainardi (Harvard Business Review Press, 2011)—these statements can be distilled down to two elements: a “way to play” and a system of differentiating capabilities. The way to play is how a company engages with the market, its fundamental value proposition. For example, some companies choose to distinguish themselves as innovators, continually introducing new products and services, whereas others are value providers, offering their products or services at an attractive price point. Capabilities are cross-functional combinations of technology, processes, skills, and mind-sets that work together synergistically. Differentiating capabilities are the few (typically, three to six) capabilities that enable a company to stand out from competitors and consistently provide value for its chosen customers that no one else can match. A successful company doesn’t gain its way to play and capabilities system by accident. Like an athlete picking a game he or she can win, and then honing skills to play that game more successfully, the company seeking a strategy looks to build on its strengths and its prospective market opportunities by choosing the path that encompasses both. Inevitably, this means choosing not to pursue some directions. That’s a difﬁcult decision for many companies, particularly those in rapidly evolving sectors, which have many opportunities and few certainties. Nonetheless, being clear and consistent about where to play and where not to play is a necessary step toward building a coherent strategy, where everything the company does ﬁts well together. A coherent strategy also provides the necessary starting point for the organizational design process. (continued on page 48)

features title feature organizations of the article & people

Conversely, a company with a strong link between its strategy and its organizational design can, like an engine ﬁring on thousands of cylinders instead of a few, generate energy and creativity at all levels. Even when leaders recognize that their problems are organizational, they try to solve them in ineffective ways, by making rapid, reactive changes to the organizational structure. They shift the “lines and boxes” of the org chart, or divide up responsibilities differently. They may also force a few recalcitrant leaders to resign, sending an implicit message to current executives: “If you can’t deliver, I’ll get someone who will.” But these ﬁxes don’t address the actual cause of underperformance: a misaligned organizational design. At Seabright, Joanna was able to diagnose the problem because she had seen it at other companies. By making a few major changes to the organizational design, she could enable the new strategy to deliver. Given a job this big, the main question was where to start.

When your strategy shifts, you may need to redesign your organization as well. by Mark Wagner

feature organizations & people 46

for the task at hand, and it worked for

come up with solutions on their own. We looked around at other retail

a long time. But then the competitive

players known for delivering a quality

landscape changed. New rivals en-

experience. It’s strange—people have

tered the market, such as third-party

an emotional connection to a cup of

pharmacy beneﬁts management

coffee. We provided healthcare and

companies that deliver prescrip-

didn’t see that emotional connection

tions by mail. More grocers started

anywhere in the drugstore space.

offering in-store pharmacies. An even

Our market research data also told

bigger challenge was the growth of

us that customers didn’t perceive dif-

Internet pure plays, like Amazon and

ferences among the major drug retail

Google, which sell most of what we

chains. We realized that we could

carry. All of these had the potential to

really differentiate ourselves based

lure customers out of our stores.

on the experience we delivered. This

At the same time, we started to

represented a fundamental change

see signiﬁcant changes in health-

in how we engaged with our market.

care, which ultimately resulted in the

We wanted to be more than a simple

passage of the Affordable Care Act

retail chain—we wanted to be an

hange is never easy, and

and the advent of accountable care

experience provider.

when you’re a 112-year-old

organizations. Throw in the worst

and Wayne Orvis

It was straightforward and effective

To execute that strategy, how-

enterprise like Walgreen Company

economy since the Great Depression,

ever, we needed to redesign some

(“Walgreens”), it’s even less so. For

and we knew we had to change our

components of the organization. We

most of the past three decades, our

strategy. In this new market, with

had to focus our frontline and ﬁeld

success came from expanding our

the huge push to improve quality and

leadership on coaching employees

retail footprint. That was our busi-

reduce overall healthcare costs, Wal-

and creating the right customer

ness strategy. We called it “seven by

greens had a signiﬁcant opportunity

interactions. And we had to free up

10,” meaning we wanted to have 7,000

to become a player in the healthcare

time among leaders to enable this.

stores by 2010. In fact, we beat that

value chain. As a result, we evolved

This was only partly a structural

goal—going from 4,250 stores in 2003

from simply ﬁlling prescriptions for

issue. We’d clearly need to redeﬁne

to 7,000 in 2009. At our peak, we were

people to becoming a single point of

roles, but we also knew that some of

opening a store every 17 hours.

patient care, and a destination for

our incentives weren’t aligned with

health and daily-living products and

the new behaviors we wanted among

services for our customers.

the ﬁeld employees. Decisions were

To support the seven-by-10 strategy, we had some well-reﬁned capabilities. For example, we were

To succeed in this new role, we

an issue too; leaders spent too much

very good at managing real estate,

had to change our business strategy.

time making decisions that could be

including construction and analytics.

Instead of relying on a real estate

better handled elsewhere.

We could tell you almost anything

play—location, location, location—we

about any street corner in the United

focused on improving the customer

build a high-performance culture at

States. We could predict, within 3 per-

experience. As our strategy evolved

every level of our ﬁeld operations.

cent, the volume for a potential new

and our focus changed from opening

With that in mind, we decided on a few

location in various categories, includ-

stores to delivering an exceptional

priorities for the redesign. First, we’d

ing pharmacy and front-end sales.

customer experience, we recognized

make structural changes to free up

that not only was the command-and-

the leaders’ time and better support

strategy required a command-and-

control approach outdated, but it also

them. Second, we had to change deci-

control approach to leadership.

prevented us from getting the best

sion rights so that the right approvals

We set out clear processes for our

from our people. We were missing

were happening in the right places.

employees, and they followed them.

the richness of empowering them to

Next came incentives; we had to

The old Walgreens business

Our fundamental goal was to

strategy+business issue 72

Changing Structures and Behaviors at Walgreens

change the way that we motivated

ated a position called vice president

ployee engagement and improving

and rewarded people, to emphasize

for markets, located in the ﬁeld (the

the customer experience.

employee engagement and customer

local geography). We did this to move

satisfaction. Finally, we had to de-

corporate-level leadership closer

management skills at the store level,

velop mechanisms that could change

to the customer. These individuals

so those people could make solid

long-established mind-sets and

represent the main link between

decisions that were right for their

norms—not just changing operational

corporate headquarters and ﬁeld

community. Every store is unique.

details but putting in place coach-

operations. To support them, and to

Some are swamped in the morning,

ing, support networks, and a new

bring market-level resources closer

for example, and some don’t have

performance management model. It

to the customer’s experience, we

their ﬁrst customer until 11 o’clock.

was a big undertaking, especially with

also moved functions such as HR, IT,

Store managers are more equipped

240,000 employees.

real estate, employee relations, and

and supported to meet their commu-

ﬁnance to the ﬁeld. Along with these

nity’s needs.

Another goal was to develop

departments, we gave every market

Another goal was to provide extra

its own proﬁt and loss responsibility.

Norms of Engagement

support for our district managers,

This really drove accountability at the

In the past, we had really strong

so they could focus on improving

local level.

policies and procedures, but our

engagement with employees and cus-

The second role we added was

model didn’t allow for innovation or

tomers. Given that each district man-

community leader. These people

empowered customer service. Store

ager oversees almost 1,000 people,

serve as mentors to less experi-

employees simply executed preset

managing, developing, and operating

enced store managers; they offer

tasks. Now, the way we do things is

the business can be a challenge.

training and help them implement

different. At the store level, we don’t

Those managers were the main inter-

new service offerings. We had tried

want employees to simply complete

mediary between the corporate ofﬁce

to improve customer service in the

tasks. We want them to come up with

and our retail locations.

past. Some of those programs had

new ideas, and new ways of helping

been fantastic, but without the right

the customers.

We had recognized years before that although Walgreens had central-

framework and leadership to sustain

This requires a big shift in

ized processes for functions includ-

them, they didn’t last. With this effort,

leadership. Our model of the ideal

ing HR, IT, employee relations, and

community leaders are really driving

executive has gone from an authorita-

ﬁnance, we couldn’t make all those

the changes.

tive leader who could get new stores

decisions at the corporate level. We

up and running fast, to an engaged

didn’t understand local environments

Elevated Decision Rights

leader who can hold people account-

enough, and one-size-ﬁts-all policies

For the new strategy to succeed,

able, develop them, and manage

just didn’t work well sometimes. But

store managers needed to focus less

them. That shift changes the

as we increased local decision mak-

on operational activities, such as HR

way every employee comes to work

ing, district managers found them-

and vendor relationships, and more

each day.

selves taking on more of that work at

on employee engagement: coaching

their level, without sufﬁcient support.

their people and helping them engage

Motivators for Accountability

Those responsibilities pulled them

with customers. So we moved some

A big part of the redesign was to help

away from the stores, which is where

decisions that had been located within

employees understand how this was

they most needed to be. Providing

the ﬁeld management structure high-

different from what they did before,

those managers with the critical sup-

er up. Merchandising, for example,

what they would be expected to do

port they needed became crucial to

had formerly been handled at a store-

going forward, and how they would be

our success.

by-store level, but now it’s handled at

evaluated and rewarded. In the past,

headquarters. With this adjustment,

everything was simple. We based

the organization hierarchy. First, for

managers have more time to work on

our bonus and advancement system

each of our 30 U.S. markets, we cre-

the company’s new priorities—em-

purely on ﬁnancial performance—

So we put two new roles into

features title feature organizations of the article & people

A More Supportive Structure

meaning how sales and proﬁt num-

formers. When we looked at other

These are opportunities for the staff

bers matched expectations. Leader-

chains with strong customer service,

to talk about where the store is win-

ship skills were not a priority; if your

we saw a very highly engaged work-

ning and where it needs help. What

numbers were up, we considered you

force, but we also saw HR processes

are the big ideas, and what are the

a hero.

that allowed the company to identify

expectations for the day? If we provide

employees who weren’t doing well,

the right training and leadership, the

address that performance, and, if

store managers and employees will

ing incentives to drive the behaviors

necessary, move them out quickly.

come up with the answers they need

we wanted. Leadership at Walgreens

We hadn’t had those policies in place

on their own—the right solution for

today carries a different expectation

before. We’ve now addressed these

their location and market.

and is rewarded accordingly. Under

issues. We’re clear about the new

the new system, leaders are evalu-

expectations regarding the treatment

walks,” in which market vice presi-

ated and bonuses are set according

of customers, and we’re training em-

dents and district managers visit

to three key critical areas: ﬁnancial

ployees to meet those standards.

stores in their markets and determine

results, team member engagement,

feature organizations & people 48

We also implemented “store

what’s working well and what’s not.

and customer service. There’s also a

Networks to Drive Change

They share ideas that have worked

percentage that accounts for com-

Today we have stronger networks

well elsewhere. There are more

munity engagement and events. We

designed to drive change from the

formal elements—we have market

think that’s crucial for building ties to

ground up. We recognize how valu-

leadership meetings every other

local markets, which is why we make

able it is for our folks to collabo-

month, where people can share

it part of the bonus system. In each of

rate and communicate closely on a

ideas—but walk-throughs at the store

the past two years, our stores have

daily basis. So we designed some

level are where the ﬁeld transforma-

participated in almost 16,000 com-

network-enhancing activities to drive

tion really happens.

munity events, totaling a little over a

the change, share best practices,

million volunteer hours.

and build ties to the community. For

talk to one another more. One of the

instance, we instituted ﬁve-minute

questions in our employee engage-

meetings every day, in every store.

ment survey is “Do you have a best

There’s another component to accountability: managing underper-

Without clarity about the “what” (the way the company creates value), one can’t possibly deﬁne the “how” (the way to organize to create value). Take our ﬁctional company Seabright. Historically, its way to play had been as a premium producer; it provided targeted information to business professionals in several industries. It had a well-known brand name and strong customer retention; leaders in some industries could not function without it. But in recent years, as the value of print publishing faded relative to the value of the Internet, the company had lost its identity. On any given day, it was hard to tell whether it wanted to be a reputation player (building, like many other media companies, from a long-established brand name), a digital innovator, or a value player offering inexpensive data through online platforms. Much of Seabright’s reputation had come from its mastery of rapid print distribution. It could outpace rivals with its network of printing plants and other fa-

We also want store employees to

cilities, optimized to reduce costs and speed up delivery. Unfortunately, that capability was rapidly becoming obsolete. But another was more relevant than ever. Over the years, through its loyal subscriber base, Seabright had reﬁned its ability to measure and understand customer insights. It also had a strong innovation capability, with the skills to tailor new products to meet customer expectations. The existing organizational design, in formal and informal ways, tended to favor the print-related capabilities over those with more digital relevance. Joanna had already known, coming in, that she would have to reorient the company’s strategy. Now she saw that she would also need to rapidly shift the organization to support the movement to digital. Eight Building Blocks, One Design

Two weeks after her email epiphany, Joanna convened one of the most critical meetings of her tenure at

strategy+business issue 72

With this shift, we set up a true pay-for-performance system, includ-

friend at work?” We want that kind of

percent to the 95th percentile in our

social connection, because it’s a big

engagement survey results.

part of how our employees grow and

The Gallup Organization, which

remain engaged, which translates to

measured the results for us, actually

ence. She knows many customers

a better experience for our custom-

thought the numbers were wrong

by name. Francelle took some time

ers, and for them.

because they’d never seen such a big

off for a few weeks and, boy, did our

Some of these ideas were devel-

improvement in one year. We’ll have

customers notice. They asked about

oped during the pilot phase, when we

the next results after the full rollout

her daily. “Where’s Francelle? Is ev-

were ﬁguring out how best to estab-

in 2013. Our service levels are at

erything OK?” That kind of connection

lish new leadership and performance

an all-time high. We think next year

with customers, which you might ex-

behaviors. But they worked so well in

will be even better—everyone now

pect from a neighborhood shop, was

the pilot that we rolled them out to the

understands the larger strategy, we

rare for us in the past. We didn’t think

entire company. And now that we’ve

have targets in place, and company

it was important. Now we think it’s the

built up these networks, they’re an

bonuses will be awarded against

kind of connection that will determine

asset that we can use in the future, to

those targets.

our future.

drive other changes we want to make.

Financially, the ﬁrst year under

The Roster of Results

past decade. We also have a lot

This initiative has required a lot

of anecdotes that show that the re-

of work. There’s a huge change-

design is moving us in the right direc-

management effort to make sure the

tion. Many of them have to do with

initiatives are sustainable, and we’ve

seemingly small things we ignored

spent about US$30 million on training

in the past. For example, we used to

alone, with more to come. However, a

expect our store clerks to be efﬁcient.

year into the implementation phase,

Now we encourage them to cultivate

the results are promising. In our pilot

the kind of friendliness that will at-

program, we went from the bottom 25

tract customers.

Seabright. Gathered around the conference table were the heads of several business units and functions, along with two promising midlevel executives, Jill and Sanjay. Jill was a talented operations manager with a decade of experience in manufacturing. Sanjay had run finance at two digital media startups. Both were well respected in the organization and had a knack for delivering unpleasant truths with a minimum of drama. “Effective today,” Joanna said, “you two have a new assignment: Develop a fresh organizational design and bring back your high-level recommendations to this group in a month. At that point, we’ll see how it fits with our company strategy, and I’ll make the call on whether to detail out the new design and how to adopt it. This is the top item on my agenda.” Jill and Sanjay exchanged a glance. Joanna could tell, in that moment, that they appreciated this rare fast-track opportunity, but they also saw the risks. One major reshuffling effort had gone down in flames just

Mark Wagner info@strategy-business.com is the president of operations and community management at Walgreens. Wayne Orvis info@strategy-business.com is the vice president of customer and employee initiatives at Walgreens.

two years before. “I know,” Joanna continued. “It sounds like a big, unwieldy job, but it boils down to deliverables. First, I want a diagnostic of our organizational problems: critical bottlenecks, pain points, and areas where we’re stepping on ourselves or replicating efforts.” “OK,” Sanjay said quietly. “Second,” Joanna said, “I want a plan to rectify those issues. That means a new organizational design for the company.” “From scratch?” Jill asked. “Not entirely from scratch,” Joanna said. “We’re a decades-old company, with more than 15,000 employees. We can’t—and wouldn’t want to—just rip up all our institutional heritage. But you should be bold in your proposal, and especially clear about how it will explicitly support our digital growth strategy.” “Anything else we should know?” Sanjay asked. “Yes. Don’t limit yourselves to the org chart. We

features title feature organizations of the article & people

this project was one of our best in the

In one of our stores in Texas, a

YOU CAN’T SIMPLY SHIFT PEOPLE AROUND AND EXPECT TO TRULY CHANGE THE WAY THEY WORK.

and the governance of behavior. On the formal side are decisions—the statements, often set into rules, bylaws, or policies, that describe the underlying mechanics by which decisions get made, including how and by whom. They include aspects such as governance policies, approval processes (for everything from product launches to expenses), guidelines for delegation, and the creation of advisory panels. At Seabright, Sanjay knew, there was a reasonably clear approval process for ﬁnancial transactions. However, the approval process for new product development needed major changes. Ideas sprang up from multiple places, and they tended to get funding as a result of internal lobbying. Innovations in digital media were particularly prone to being overlooked. To rectify this, Jill and Sanjay would ultimately propose a cross-businessunit process that could collect, analyze, and prioritize competing projects—and that would give preference to digital products, especially those that analyzed user requests, proﬁled their likely interests, and customized information accordingly. The informal counterparts of decisions are norms— the unwritten shared values and standards of behavior that lead people to expect others to act in certain ways. A norm is typically expressed in statements like “We rise to challenges. We never say ‘We can’t do it’ unless there’s no alternative.” Norms are often learned through apprenticeship, or passed down from mentors. They describe what separates the people who “belong here” from the people who don’t. For example, at Seabright, people tended to discuss problems only when they could propose a workable solution. This led people to routinely understate challenges and propose small measures that tended to

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can all agree the last redesign was a bust, and that’s one reason for it. You can’t simply shift people around and expect to truly change the way they work. You have to look at the other mechanisms that influence the way people make decisions—including their attitudes and our culture. Finally, let’s be clear: If you succeed, the company succeeds. And if you fail.…” She let the thought hang in the air before continuing. “One other thing: Don’t assume any individuals belong in any specific boxes. Once we figure out the overall design, we’ll sort out who does what.” “Where do we start?” Sanjay asked. Joanna slid a printout across the table. “Start here.” The printout contained a diagram, taken from an article that Joanna had used before in other companies, a blueprint for effective organizational design (see Exhibit 1). It showed eight fundamental levers—vehicles for change—divided into two groups: formal and informal. Formal levers are factors that a company can precisely articulate, codify, and measure. These include the structure of the organization chart, along with incentives, decision rights, and rules that are fairly well defined. By contrast, the informal levers are factors embedded in culture, personal relationships, and behavior. They cannot be precisely codified, but they have a profound impact on an organization’s effectiveness and efficiency, because they represent the everyday habits of its people. In the same way that good product engineering must incorporate both software and hardware, good organizational design must incorporate informal elements along with formal rules and structures. Like the elements of a string of DNA, the elements of organizational design can be divided into four “rungs” in a ladder. The first rung is related to authority

Exhibit 1: The Eight Elements of Organizational Design

FORMAL

INFORMAL

Decisions How decisions are made

Norms How people instinctively act or take action on

• Governance forums • Decision rights • Decision processes • Decision analytics

• Values and standards • Expectations and “unwritten rules” • Behaviors

Motivators How people are compelled to perform

Commitments How people are inspired to contribute

• Monetary rewards • Career models • Talent processes

• Shared vision and objectives • Individual goals and aspirations • Sources of pride

Information How the organization formally processes data and knowledge • Key performance indicators and metrics • Information flow • Knowledge management systems

Structure How work and responsibilities get divided • Organizational design Role and responsibilities • Roles • Business processes pro

Mind-Sets How people make sense of their work • Identity, shared language, and beliefs • Assumptions and biases • Mental models

Networks How people connect beyond the lines and boxes • Relationships and collaboration • Teams and other working g units • Organizational influence uence

Source: Booz & Company

wither away without effect. Jill and Sanjay knew this component would have to change as well. The next rung addresses the way the company governs behaviors. The formal elements, motivators, are traditional mechanisms for reward, promotion, and recognition. They include performance objectives and

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Grouped by purpose (the four rungs) and formality, these components can be combined into a design that matches each organization’s strategy and purpose. When initiating an organizational redesign, start with two or three elements.

incentives such as bonuses and promotions. Motivators can be immensely inﬂuential. Seabright had a strong incentive program; as much as 30 percent of a typical manager’s compensation came through end-of-year bonuses, but the bonuses were pegged to the margins of each business unit. This struc-

A CLASSIC EXAMPLE OF A COMMITMENT WAS FEDEX’S EARLY SLOGAN, “WHEN IT ABSOLUTELY, POSITIVELY HAS TO BE THERE OVERNIGHT.”

formal relationships. Structure is especially important for large, global companies, which must carefully design the lines and boxes, no matter who occupies the various roles. Smaller firms can more easily compensate for a flawed structure with processes and talent. For this reason, and because the chart is so closely linked to traditional thinking about organizational design, many large-company redesigns start with the org chart and, all too often, stop there as well. Although a good structural design can be important, it is never sufficient by itself. It needs to be aligned with changes in other formal and informal elements. It should generally be the capstone, not the cornerstone, of a design effort. Although Seabright had already gone through a redesign, its structure still had significant problems— but it also had some strengths. For example, a new chief digital officer (CDO) position had been created, and that executive was well placed to bring new products to market. But the current CDO lacked authority and accountability, and had only a few direct reports. The informal counterpart of structure is networks: connections among employees that transcend the lines and boxes of the formal organization. Networks can be organized deliberately; many centers of expertise are designed to bring together individuals with shared interests and skills. Other networks emerge on their own, as groups of individuals who consult one another because of shared interests or business needs. In general, networks provide a necessary complement to the formal structure, and they can also reveal difficulties with the overall design. If a group with a mandate for influencing performance is systematically bypassed in daily decision making, that’s a clear problem. As you put together these eight elements, the formal

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ture inadvertently devalued the new digital products, where the margins would likely take a hit for the first year or so. The informal components, commitments, are unwritten aspirations that, when fulfilled, become part of a company’s identity and sources of pride for its employees. One classic example of a commitment was FedEx’s early slogan, “When it absolutely, positively has to be there overnight.” The company was proud to be held to that promise. Seabright had its own long-standing commitment: “We deliver must-read information.” In many industries, its publications were the first thing that executives read each morning. For commitments to be meaningful and sustainable, they must be backed by distinctive capabilities that allow the organization to deliver. This was a bedrock element for Seabright: Jill and Sanjay knew they could build on it. The next rung involves flows of knowledge and insight. Its formal element, information, encompasses the measurement of performance (through key performance indicators and other metrics); the coordination of activities; and the flow of explicit, codified knowledge. The informal component is mind-sets. These deeply held attitudes and beliefs affect how employees engage with customers, design and make products, and solve problems. For example, some companies collectively believe that they must serve a social purpose in addition to their commercial interests; others have a mind-set that superlative products require superb product design. This element often separates great companies from also-rans. The remaining rung is traditionally aligned with the concept of organizational design. On the formal side is structure—the “lines and boxes” of the organization chart, defining critical roles, responsibilities, and

Exhibit 2: Three Ways to Play and the Designs That Fit Potential organizational designs for three archetypal ways to play. Other ways to play, not shown here, would benefit from different designs. Low-Cost Value Player Generic drug manufacturer

Brand, product offering, quality, and pricing are decided by top executives to ensure consistency of customer experience; operational decisions are more dispersed.

Decisions are made from the top down for strategy, to mandate low-cost practices; from the bottom up for process excellence, applied innovation, and continuous improvement.

Decisions are made from the bottom up for applied innovation and partnership opportunities; from the top down for placing “big bets.”

Norms

“We will not compromise on what we deliver.”

“We run a frugal, tight ship at all times; we do only what we think customers will pay for.”

“We rapidly advance good ideas and get them to market quickly, but we know how to kill the ideas that won’t work.”

Rewards for lean operations, continuous improvement, and market share.

Motivators

Rewards for product or service excellence, consistency of experience, and customer loyalty.

Rewards for ideation, creativity, experimentation, speed-to-market, and category-defining entries. Flexible career tracks (a blurry line between engineers and management).

“We delight the customer at all costs.”

“We will not be undersold.”

“We do things no one else has done before.”

Information

Limited number of information flow lines and key performance indicators. Relatively low level of IT, given stability and low velocity of business.

Industrial-strength, granular, and real-time measurement systems, integrated across the value chain.

Information infrastructure set up to support team-based collaboration. Substantial capabilities involving product life-cycle and pipeline management.

Mind-Sets

“We’re the best at what we do and will do whatever it takes to keep it that way.”

“We deliver the best value in the industry.”

“We’re changing the world.”

Conservative operating model (most functions in-house and globally consolidated) to minimize risk to brand and customer experience.

Global functions to leverage scale, large spans of control, and substantial outsourcing and offshoring. Business units aligned to product lines.

Relatively flat, given the need for speed. Business units aligned to technological domains, small spans of control, and substantial and dynamic cross-functional teaming partnerships and joint ventures.

Tend to arise naturally given the relatively small scale and low organizational complexity of most luxury players; external networks (for example, with retail partners) are important.

Arranged around core business processes; as the physical dispersion and complexity of the company grows, networks become ever more valuable.

Critically important, given the rapid evolution of the business environment; if networks are not already in place, they need to be fostered.

Decisions

Commitments

Structure

Networks

Innovator Silicon Valley tech company

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Premium Player High-end consumer brand

Source: Booz & Company

and informal versions of the four rungs of the ladder, your objective as senior management is to define a single strategically aligned organization. Rather than starting with the eight elements, you begin with your way to play and capabilities system. Identify the essential shared attributes of an organization that would best serve the strategy you have already defined (see Exhibit 2). The purpose of this exercise is to lay a foundation that should guide the rest of the detailed design. As you move through the organization to specify the elements of particular functions and departments, some variation is inevitable. For example, an overall blueprint for a premium auto manufacturer like BMW, Audi, or Mercedes-Benz may not identify frugality as a central tenet. But even luxury carmakers keep a watchful eye on the efficiency of their operations. The organizational

design for such a company might specify incentives related to efﬁciency and norms of frugality for its operations group, but not for marketing and sales. The New Organizational Design

One month after the initial meeting at Seabright, Jill and Sanjay presented their findings to Joanna and an expanded executive team, including chief functional officers for finance, operations, marketing, and R&D. Sanjay began. “We’ve made a lot of progress,” he said. “We started with our way to play as an innovative value provider—using digital technology to cut prices while being more relevant than ever. This requires an organization that can continually improve print while making the transition to digital. We focused on the areas we need to improve most: the formal controls of deci-

Exhibit 3: Capabilities and Organizational Support For every distinctive capability, there is an optimal organizational design. This table shows the elements of that design for two capabilities that are relevant for many companies. Customer Insight Management Decisions, especially those involving product strategy and investments, are highly data-driven and made cross-functionally with the involvement of marketing, IT, and finance.

Decisions on new products are made through a well-defined gate process with explicit, fact-driven criteria—green-lighting good ideas and killing unpromising ones.

“We’re only as good as our ability to understand the customer.”

“We strive to meet a new need no one else is addressing yet or to find ways to do things better, faster, and cheaper.”

Rewards and incentives tied to consumer acquisition, retention, and satisfaction. Celebration and elevation of employees who generate breakthrough ideas in customer insight and value creation.

Processes and mechanisms to foster early-stage ideation. Incentives explicitly tied to innovation and product life-cycle performance. Fast-tracking of team leaders of successful product launches and campaigns; firm-wide celebration of successful teams.

Commitments

“We know what customers need and want, and we are a company they love.”

“We have the best ideas in our industry, and we are open to ideas from everywhere.”

Information

Multidimensional “big data” is collected across the value chain by multiple sources, tied together by robust technology platforms (data warehousing, business intelligence tools) and analytics capabilities. Key performance indicators are biased toward customer-focused measures such as share of specific segments, ability to meet segment needs, and retention.

Accurate and granular data is available on product costs and financial performance at every stage in the value chain (development through manufacturing, distribution, and support). Standardized development tools (such as product life-cycle management) allow for seamless global collaboration in R&D across geographic boundaries.

“Our mission is to understand our customers and generate insights that the business can use to serve them better.” “We make decisions based on facts and analysis.”

“Our priority is creating world-class, competitor-beating products.”

Mind-Sets

Structure

Specific cross-functional executive accountable for consumer experience. Cross-functional customer teams with staff from sales, marketing, product, and finance.

Global innovation and product development function, pooling engineers by discipline into cross-functional product teams. Selective offshoring to maximize skills access and cost benefits. Extended supplier relationships and integration processes to enable rapid-cycle, low-cost development.

Networks

Informal networks focused on sharing customer-back insights and ideas across sales, marketing, product, and finance borders.

Global networks across the business by domain area; extensive but focused partnerships with external entities (e.g., research institutions) to rapidly source new ideas.

Decisions

Norms

Motivators

Source: Booz & Company

sion rights and motivators, and the informal leverage of commitments and networks.” “What about the other elements?” Joanna asked. She already knew the answer, but this was a small test. “Well, we can’t tackle all eight at once,” said Jill. “We need some clear priorities. We already have a strong commitment to excellence, and although our organizational restructuring was painful, the resulting structure could actually serve us well—if we bring the other elements up to par.” “That sounds right,” Joanna said. “So what’s ﬁrst?” Sanjay explained how they would strengthen the CDO’s role and expand that leader’s jurisdiction; Jill then talked about motivators. “Right now,” she said, “business unit evaluations are based on individual performance. So everyone’s working hard, but they’re not working together. We want to adjust the bonuses, linking them to the new behaviors we want in addition to margin performance. “Next,” she said, “we need to build our information capabilities. We have access to a lot of customer data— the salespeople are fantastic in maintaining those relationships—but we don’t have the capability yet to syn-

thesize that data from multiple places, make sense of it, and translate it into the products and apps that we need.” “I thought we were already building this,” said the senior vice president of production. “We are,” replied Sanjay. “That’s the problem. We have five different groups working on aspects of it, but they don’t know what the others are doing. We need to be innovative in a more systematic way, but without more structural constraints. Eventually, we will have to upgrade our information infrastructure, but the first step is to get people collaborating across boundaries. So we’re setting up long weekly lunches among the five groups. We’re also asking everyone to make a common commitment to customers—to raise our game further, giving them the information they need faster than anyone else does. To help pull that off, we’re setting up some dialogues between our content generation staff and our leading customers.” Joanna sat back in her chair. Jill and Sanjay had said the right things so far. “I know I pushed you hard to turn this around quickly,” she said. “Are you convinced it will get us aligned?”

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World-Class Innovation

Closing the Gap

It took several months to close the gap between the organization that Seabright had and the design that it needed. The first challenge was the board of directors. Because the previous restructuring had been so difficult, Joanna had to convince them (along with some top executives) that this redesign would be different. Next, she set up a handful of working teams—on product development, on customer acquisition and retention, and on information infrastructure—to lay out the details of the new organizational design. Each working team had a sponsor from the top team, ensuring that the most senior leaders would get involved. Joanna worked directly with the global HR head to revamp the bonus system. She took pains to ensure that all employees understood the new system and what it would mean for them. The formulas were posted on Seabright’s intranet, along with collective scores by business unit and geographic market. By her one-year anniversary at Seabright, Joanna was able to demonstrate results to the board. Thanks to the efforts of the newly empowered chief digital officer, several new products had sailed through beta testing. Several follow-on initiatives were in the works—all informed by consumer insights and all with a clear strate-

gic justiﬁcation. It was too early to tell for sure, but the results seemed promising; customer response and retention were favorable, and metrics on employee engagement were trending in the right direction. Seabright’s organizational blueprint would not ﬁt the needs of any other company. But a process like this one can help any company, ensuring that its strategy, capabilities, and organization are all aligned to support one another. That quality is often overlooked in organizational design, but it is probably the most important factor of all, and a critical enabler of your company’s ability to deliver on its strategy. + Reprint No. 00186

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Sanjay and Jill both nodded. “It’ll at least point the ship in the right direction,” Jill said. “And,” Joanna asked, “how will these recommendations help us strengthen the critical capabilities that we need?” Jill and Sanjay both smiled. Jill reached into a folder in front of her. “Already done,” she said, passing out a sheet of paper to the people in the room (see Exhibit 3).

Resources Deniz Caglar, Jaya Pandrangi, and John Plansky, “Is Your Company Fit for Growth?” s+b, Summer 2012: Organizational design can be an integral part of a more strategic approach to costs, helping companies prepare for the next round of expansion. Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, “The Secrets to Successful Strategy Execution,” Harvard Business Review, June 2008: Why decision rights and information flow are better starting points for organizational leverage than fixing the lines and boxes on the org chart. Booz & Company Org DNA Profiler® Survey, booz.com/global/home/ what_we_do/services/ocl/ocl_service_areas/49036161/orgdna-profiler: A short diagnostic tool that explores the formal and informal elements of your organization’s design. For more thought leadership on this topic, see the s+b website at: strategy-business.com/organizations_and_people.

feature strategy & leadership

How United Technologies Corporation—owner of Pratt & Whitney, Otis Elevator, and a wide range of other businesses—became one of the major corporate success stories of the past two decades. by George L. Roth

Illustration by Jan Feindt

Right from the start, the service call was unusual. In a business-to-business manufacturing company like Otis Elevator—or its corporate parent, the United Technologies Corporation (UTC)—field engineers are supposed to be heroes. They swoop in when there’s a technical problem too complex for anyone else to solve. But when two of Otis’s best field engineers were dispatched from their U.S. headquarters near Hartford, Conn., to Osaka, Japan, to fix a pair of malfunctioning elevators at Matsushita Electric, they weren’t brought to the problem site. Instead, they were ushered into a conference room where their customers, Matsushita’s corporate leadership, sat stone-faced around a table.

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An Uncommonly Cohesive Conglomerate

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The year was 1986. Matsushita’s recently complet- customers. It would eventually turn UTC into the ed Osaka headquarters had been outfitted with the lat- highest-performing Fortune 50 company (in the years est Otis elevators, which were repeatedly failing. This from 2000 to 2011) and one of the very few conglomwasn’t an ordinary customer. Matsushita and Otis had erates to sustain a successful diversified enterprise (see formed a joint venture called Nippon Otis, which pro- Exhibit 1). UTC is a large conglomerate that designs, manuvided the elevator maker with the credibility it needed to sell its equipment in Japan. However, the Otis failure factures, and services a broad range of engineered prodrates were damaging Matsushita’s reputation. Matsu- ucts, including air conditioners, elevators, jet engines, shita’s vice president of quality, Yuzuru Ito, along with and helicopters. It is best known for its leading indusa member of the Japanese company’s board, had visited trial brands: Otis Elevator, Pratt & Whitney (maker Otis president George David in Connecticut a year ear- of aircraft engines and gas turbines), Sikorsky Aircraft lier to complain about quality issues. Otis’s corporate (the first mass-production helicopter company), Carrier leadership had listened to them politely, but the quality had not improved. Now, in the conference room, Matsushita’s managExhibit 1: UTC’s High Performance, 2000–11 ers insisted on talking about root causes—a central conMany facets of UTC’s performance outpaced those of other companies cept in quality management, less familiar in the West. during the 2000s. Only Caterpillar and 3M also had triple-digit percentage gains; the Standard & Poor’s 500 index of leading U.S. Abashed and uncertain, the field engineers placed a hur- valuation companies declined 10 percent over that 11-year period. ried call to headquarters that reached George David. Segment The Otis president might have been expected to push 200 Index (UTC compared to S&P 500) operating profit back or deny the problem, but instead he listened in150 tently. During the next few months, he did something Segment sales uncharacteristic for Otis—and similarly out of charac- 100 ter for the rest of UTC and most manufacturing companies. David asked Ito and others at Matsushita for 50 Employees help. Over the next two decades, David and Ito would become so close that he would eventually say Ito was 0 Manufacturing square footage like “a second father” to him. –50 The story of that phone call and its aftermath is re2000 2005 2010 told regularly throughout UTC, as one of several inciSegment sales and operating profit adjusted for restructuring and other dents that marked the beginning of a fundamental shift Notes: one-time events. Segment sales include the impact of Accounting for Collaborative in attitude and practice. Over the years, this shift would Arrangements. Data includes discontinued operations. Data excludes Goodrich. affect virtually all of United Technologies Corporation’s Source: Thomson Reuters financial services data; indexed performance graph from a UTC presentation at the Barclays Capital Industrial Select Conference, Miami, Fla., managers, employees, corporate partners, suppliers, and Feb. 23, 2012

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George L. Roth groth@mit.edu is a research associate at the MIT Sloan School of Management and a visiting associate professor of management at the University of New Hampshire. He is a coauthor of The Dance of Change: The Challenges to Sustaining Momentum in Learning Organizations (with Peter Senge et al., Doubleday, 1999).

From Methods to a Discipline

Perhaps the most pivotal moment in UTC’s story came soon after that 1986 confrontation with Matsushita Electric when George David sought out Yuzuru Ito to ask if he could help Nippon Otis address its quality problems. Ito agreed, and began by teaching two methods to Nippon Otis’s factory employees. First, he taught shop-floor teams to use statistical analysis to diagnose production problems and deduce the fundamental root causes (which were not always obvious). For example, a statistical review of elevator control module failure might reveal that the established sequence for soldering components was flawed, leading the elevators to travel to undesired floors. By changing that sequence, the team could stop the failures. Second, Ito showed workers how to set up quality clinics, the manufacturing equivalent of a hospital team making diagnostic rounds. These practices were successful enough that Nippon Otis went from being an embarrassment to being a source of pride. When Ito retired from Matsushita in 1991, he consulted with Otis and then other UTC companies in the United States. In 1994, David persuaded him to join UTC as its top quality officer and to move to Connecticut, where the company is headquartered. Meanwhile, Otis’s sister company Pratt & Whitney had its own quality initiative under way, and in 1992 had hired a firm called Shingijutsu Consulting, whose founders were protégés of the late Taichi Ohno, Toyota’s former chief engineer (and technical architect of the famous Toyota production system). The early 1990s were the heyday of the quality movement in the U.S., and the UTC companies rapidly achieved gains on the shop floor. They reduced waste, consolidated space and tooling, and improved manufacturing results. But UTC also faced larger competitive issues, which struck Pratt & Whitney in particular with full force in the early 1990s. After the fall of the Berlin Wall, U.S. government military spending declined at the same time that worsening economic conditions reduced commercial jet engine demand. The aircraft engine manufacturer had to cut its 11 million square feet of factory space by 25 percent. One facility slated to be closed was a turbine components plant in North Berwick, Maine, which had been set up a decade earlier to experiment with flexible manufacturing concepts. Though it had consistently high quality levels and low costs relative to Pratt & Whitney’s other factories, it had the disadvantage

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(air conditioning and heating), Kidde (controls), Chubb (security), and Hamilton Sundstrand (aircraft). In all, UTC employs nearly 200,000 people and has a market capitalization of more than US$75 billion and revenues (in 2012) of $57.7 billion; it is number 44 on the Fortune 100 list. What has enabled UTC to sustain high performance during a decade when many comparable corporations lost ground? Those inside the company credit a deeply ingrained, broad-based, carefully established form of management proficiency. UTC is a conglomerate that learns from itself. This is partly a matter of operational excellence; as much as any other large U.S. company, UTC is credited with putting quality and lean management precepts to work. But operational excellence is just one of several management capabilities that UTC has brought to scale across its diverse member companies. Others include statistical control, flexible manufacturing, customer-focused feedback, and UTC’s own intensive approach to learning and development. Individuals are explicitly connected, through innovative training and ongoing collaborative routines, with the company’s overall strategic direction, as set by its top leaders. The company’s name for its approach to learning from itself, which was coined about a decade after that phone call from Osaka, is Achieving Competitive Excellence, or ACE. It took 10 years for UTC’s leaders to fully develop the methods that Ito and others taught them, to make those methods their own, and to extend the resulting approach across the company and the rest of its value chain. Today, UTC continues to invest in, refine, and renew ACE as a key source of its competitive advantage. When they are asked what enables the company’s momentum, UTC leaders tend to credit ACE first—describing it not as a program or as a set of quality practices, but as the corporation’s allencompassing way of doing business. “ACE is repetitive, formal, disciplined—and it doesn’t change,” said George David in 2007, speaking at MIT’s Sloan Management School. (David retired from the chief executive position the following year and was succeeded by UTC’s current CEO, former Pratt & Whitney president Louis Chênevert.) “It is the basis of more than half the shareholder value increase in UTC.… There is no force more powerful in modern business than productivity. You do it or die. It is what gives goodness to life. Make no mistake, it is productivity underneath everything.”

“There is no force more powerful in modern business than productivity,” said UTC’s CEO George David.

unit output held steady even as its workforce decreased from 2,100 to 1,500 people. Moreover, the plant took on production of higher-quality, higher-value parts, leading to a ﬁvefold increase in revenue. By 1996, people were visiting North Berwick not only from UTC divisions but from other manufacturers around the world to benchmark its operations. Moving Up to Scale

Others in Pratt & Whitney wanted to replicate what North Berwick had accomplished. Two North Berwick team members were asked to join three experts at headquarters in East Hartford, Conn., to form a team charged with developing a flexible manufacturing program for all of Pratt & Whitney. They benchmarked other companies, added some techniques, and tested their program in a nearby factory. The ACE name originated there, when one of the shop-floor operators suggested calling the program Achieving Competitive Excellence. The acronym was easy to remember, and its association with top-gun pilots resonated at an aircraft company like Pratt & Whitney. In June 1996, Pratt & Whitney launched its company-wide ACE program. It was sponsored from the top, led by operations vice president Mark Coran and championed by Pratt & Whitney president Karl Krapek. By now, ACE had evolved beyond merely making improvements on the factory floor. Pratt & Whitney reorganized all its departments into cells and encouraged team members to propose changes, implement them, and set their own clear standards. General managers nominated a few people from each facility to be “ACE Pilots,” a broader-based version of the natural leaders of North Berwick. These designated specialists attended

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of being in a remote location, and the company gave the plant leaders six months to wind it down. Instead, they decided to use that time to show what they could achieve—by integrating and implementing everything they had learned within their walls. At that time, most of the plant’s notable results came from just a few pockets of excellence within it. One production unit in particular—which made brush seals, a new component designed by the plant’s engineers that improved the sealing of turbine engine bearings—had achieved great success after organizing itself into cells, or self-managing teams of five to 10 people. This cell approach seemed so effective that the plant’s leaders made it the centerpiece of their effort, forming a task force to implement cells and related practices more broadly throughout the plant. Eight production staff members, identified as “natural leaders,” were taught how to analyze and improve production systems, with methods drawn from their own brush cell experience and Japanese quality practices. The plant’s assembly lines were restructured into 24 flexible cells. The natural leaders spent mornings in seminars learning production concepts taught by in-house experts and afternoons in teams teaching co-workers and showing them how to implement the ideas. Robert Ponchak, the plant manager, got directly involved; he developed what he called his “Maine vision” to inspire the workers, talking about it day and night across all three shifts. Before long, the productivity gains and operations improvements were noteworthy enough that Pratt & Whitney’s VP of operations took notice. He delayed and then canceled the closure plans. The plant became known for its quality and productivity gains; indeed, its

From Company to Conglomerate

In most companies, efforts like ACE prosper within one division or region, but fail to move across boundaries. At UTC, once they recognized its value, George David and the other top executives resolved to make ACE work for the entire UTC system. They set up crossbusiness councils, which are still in place, and which have become inﬂuential and important networks for UTC leaders. The most senior of these networks is the Presidents Council—a group composed of the CEO, CFO, division presidents, and other key functional leaders. It meets every month for a full day. Individuals and teams are occasionally invited to present to the Presidents Council. This is a mark of status and also, at times, a cause for apprehension. It was a major milestone when, in late 1997, almost 12 years after that pivotal phone call with Matsushita, George David invited the vice president of quality from each division to attend the next Presidents Council meeting and answer a question. How could the things they had all learned from Ito be instilled throughout UTC? David wanted these lessons to be remembered forever. The quality VPs, who ordinarily met monthly in their own council, gathered four times that month to prepare. At the Presidents Council session, they presented separate plans for their own divisions. David listened, and then replied that separate approaches would never sustain what Ito had taught them. The episode

convinced him to create a new position: UTC vice president of quality. This decision was difficult because it contradicted UTC’s usual practice of keeping the corporate role minimal in division operations. The job of institutionalizing quality across UTC was given to Pratt & Whitney’s quality vice president, Tesfaye Aklilu. He had been instrumental in establishing the division’s ACE program since joining from Xerox two years before. Aklilu proposed a conglomerate-wide approach similar to Pratt & Whitney’s ACE program with requisite training. The division presidents and their quality VPs all agreed in concept. Each division, however, wanted the program tailored to its own business priorities, meaning that there would be little consistency in curriculum or training methods. David did not agree, and it took three months of further discussion before they all reached consensus on the overall idea, came to agreement on the details, and adopted a common program for all of UTC. Despite—or because of—the time it took to reach a common understanding, ACE was then implemented with remarkable speed across the conglomerate. The five-day training class was dubbed Ito University; it has since been attended by thousands of UTC’s managers. George David attended the first session himself, along with several corporate presidents. The instructors were engineers, team leaders, and hourly workers who had used ACE. They did more than teach and demonstrate the use of tools—they shared their experiences and described how they lived ACE’s philosophy. A special Ito University session, taught by hourly workers, was held for UTC’s board. To run this new corporate program on a day-today basis, Aklilu hired Tony Black, a service program

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regular weeklong training events that included handson projects as well as classroom teaching for an ever-increasing array of quality and management methods (see “The Turnback Factor,” page 63). When the ACE Pilots returned to their home sites, they had a mandate to teach, implement, and lead further changes. ACE added new ideas, such as recognition for performance gains; they certiﬁed cells as bronze, silver, or gold, depending on such measures as skills, operational improvement, employee satisfaction, safety, quality, and ﬁnancial success. Impressive increases followed—not only in the cells’ business performance, but also in the enthusiasm with which people came to work and engaged in improvements.

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manager from Otis’s field operations (it was important for internal cohesion that he come from a unit other than Pratt & Whitney). Black chaired the new ACE Council, made up of managers from each division; they developed promotional materials, the training curriculum, and the criteria by which they certified cells as bronze, silver, or gold. By now, the certification criteria had expanded to a broad and comprehensive group of measures, extending beyond productivity and performance improvement to include employees’ enthusiasm and skill, customers’ engagement and satisfaction, and the maturity of the cell’s processes. The Business Operating System

By the early 2000s, the rollout of ACE through the UTC system was well under way, accelerated by several measures. For example, when analyzing the factors that promoted the improvement of the initial ACE gold cells, the ACE Council identified characteristics of the local leaders. The role of local leadership soon became part of the training and criteria for ACE certification. The ACE Council continually looked for collective solutions to their shared problems. A few customers had told Aklilu that they had heard a lot of talk about ACE, but hadn’t yet seen any impact. In 2002, Aklilu brought those remarks to the council. This opened a discussion about the difficulties of implementation; some division leaders were still not fully on board. To better understand this reluctance, the ACE Council adopted the same diagnostic methods they were teaching others. They visited facilities, conducted interviews, commissioned a survey, and analyzed the results. Their investigation found that although ACE efforts often identified unnecessary operations and eliminated waste, there was

indeed little direct benefit for customers. For example, customers heard about UTC lowering its costs, but those savings did not translate into price drops. Analysis of those few cases where customers did benefit showed that it typically did not happen until all the cells that worked on a particular product improved. The investigation also found that a number of facility leaders saw ACE as being limited to tactical value; that is, many leaders sent people to training and promoted ACE, as long as it did not really constrain the way they operated. The members of the ACE Council decided not to abandon the approach, but to double down and raise ACE’s influence further. They emphasized activities such as value stream mapping, which could suggest improvements involving multiple cells, and greater attention to relationships with suppliers. They began talking about a fully implemented corporate-wide operations strategy that would integrate high quality, improved processes, and inventory reductions across all the divisions. They estimated that this strategy could achieve more than $5 billion in annual savings. But the division presidents, although they had agreed to ACE as a common program, opposed the idea of any corporate-wide strategy. Each division operated in different markets, and they saw further integration as a form of greater bureaucracy. The discussion continued at each Presidents Council meeting (and in many informal corridor conversations) for six consecutive months, until October 2002. Then, the division presidents finally agreed to an overall UTC strategy that they called Operations Transformation, with a stated goal of achieving synergies throughout the UTC system. The persistence of the advocates, and their own experience with integration so far, had, in the end, convinced them.

strategy+business issue 72

In 2007, CEO designate Louis Chênevert promised a significant leap in margins, profitability, and cash flow, based solely on the plan to expand ACE.

The Turnback Factor

the late arrival of expected parts or

and collect turnbacks, and valuing

potential safety hazard.

them as starting points for improve-

At UTC, efforts are made in

By making it desirable to identify

materials, or the identiﬁcation of a

ment, UTC addresses a fundamental

ike most other success-

every work area to enable people to

problem that inhibits learning in

ful management initiatives,

most organizations: the fact that

turnbacks. Equally important, the

businesspeople do not like to talk

lence (ACE) program depends on

company is organized to assess and

about mistakes and errors. When

translating innovative concepts into

respond to them rapidly. The work

mistakes are not considered discuss-

day-to-day practice at a relatively

team might address the potential

able, people act defensively to protect

large scale. One major concept for

safety hazard through better training

themselves, which makes them less

ACE is the “turnback.” A turnback is

or instructions, or by changing the

likely to share knowledge and ideas.

a mistake that hasn’t yet happened,

layout of the equipment, or both. The

The turnback process makes it feel

such as a symptom of a failure before

best solutions to turnbacks often

natural to learn from mistakes, and

failure occurs, an inefﬁciency in an

combine short-term preventive mea-

it helps prevent potential problems

operation, or (in the ofﬁcial UTC deﬁ-

sures with more fundamental long-

before they either are noticed by

nition) “anything that inhibits a task

term improvements. UTC’s auditing

customers or cause damage. More-

from being completed as expected.”

group, for example, addressed some

over, tracking the generation of and

Examples of turnbacks are unsigned

of its turnbacks by improving speci-

responsiveness to turnbacks gives

work orders, incomplete or inac-

ﬁcations for procedures (short-term)

UTC a quick and easy way to assess

curate instructions, the realization

and making changes in its Auditor

people’s engagement and each unit’s

that someone is inadequately trained,

Assistant software (long-term).

learning climate.

Operations Transformation had four elements: lean production flow, design for manufacturability, strategic sourcing, and talent development. Operations Transformation defined what they would do, and ACE specified how they would do it. This strategy was delivered to 350 top UTC leaders in January 2003 in a two-day conference in an aircraft hangar in East Hartford. (Similar conferences were subsequently held in Europe and Asia.) When George David opened the meeting, he noted that UTC’s operating margin had gone from 4 percent to 14 percent because of ACE, quality, and supply management efforts. At the end of the two days, after all of the division presidents and operations VPs described their specific achievements, David returned to say that he expected UTC, in the next six years, to achieve 20 percent operating margins and double its inventory turns. He closed the conference by asking all the executives to write him directly, stating what they would do personally to learn and apply the value stream concept. About 40 percent of the attendees put off responding for several weeks; they each received a note from David asking for their commitment. More than any other single move, this mandate made it clear: Every executive was expected to learn and use ACE in

every aspect of the business. Several weeks later, David himself spent a day in training at a Sikorsky helicopter factory. On subsequent visits to UTC facilities, he would look for the management team’s value stream maps, ask questions, and often instruct managers on ﬁner points of the techniques. To promote improvements on a broader scale, UTC made two other radical changes. First, about 300 managers were assigned to supplier improvement. They received specialized training based on ACE concepts and methods. UTC’s supplier improvement program soon became as effective as that of any Japanese company. Second, all the facilities across UTC worldwide were reorganized; top leadership divided the conglomerate into nearly 1,000 sites, each with its own performance improvement goals. These sites typically had at least several hundred employees, and they became the focal point of ACE certiﬁcation; assessment was based on such criteria as leadership, improvement activities within cells, performance and interaction across cells, and reductions in environment, health, and safety problems. More methods were added to the ACE tool set, additional courses were developed, and the ACE curriculum was expanded to include business operations and engi-

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quickly and easily spot and report

UTC’s Achieving Competitive Excel-

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neering tracks for professionals in those fields. Only now did the company fully standardize the ACE methods and certification processes across divisions. The impact was seen even in such traditionally selfcontained parts of the company as engineering, where improvement programs had often been dismissed as superfluous or unnecessary. When the engineering leaders embraced ACE, it had a dramatic effect on budgets; instead of spreading engineering investment more or less evenly across all units to appease unit managers (like “peanut butter,” as critics said), the investment went to places where leaders were confident it would get results. For example, after using ACE methods to improve its processes, the turbine module engineering group gained additional investment—which ultimately led to an initiative to develop higher fuel efficiency, lower weight, and greater reliability for Pratt & Whitney’s engines. The group’s efforts were part of what enabled the development of a new, innovative line of turbo-fan jet engines that have given Pratt & Whitney significant competitive advantage among jet engine manufacturers.

The Stretch Goals

Results related to ACE were impressive enough that in 2004, George David began discussing them in quarterly analyst updates and corporate annual reports. ACE became known within the company as UTC’s “business operating system”—or simply as “the UTC Way.” In March 2007, then chief operating officer Louis Chênevert (slated to succeed George David as CEO) took UTC’s commitment to ACE a step further. Chênevert had been a major supporter of ACE since its inception; at Pratt & Whitney (as operations vice president and president) and at UTC (as chief operating officer), he had promoted and helped develop the program. Now, at a quarterly update meeting for financial analysts, he promised a significant leap in margins, profitability, and cash flow, based solely on the plan to expand ACE. At the time, only 18 percent of the UTC plant sites were ACE gold or silver certified. Chênevert said that number would rise to 70 percent by the end of 2009. The ACE Council’s tracking showed that when sites progressed from bronze to gold certification, they

Exhibit 2: A History of UTC and Its ACE Initiative

Business Events 1975 United Aircraft renamed United Technologies Corporation

1976 UTC buys Otis

ACE Operating System Developments

Robert Daniell

George David

CEO

1986–1994

1994–2008

1986

1988

1990

1986 Otis learns Matsushita’s methods 1988 Yoshiki Iwata demonstrates kaizen

1992

1993

1994

1995

1996

Shingijutsu begins consulting to P&W

P&W North Berwick plant almost closes, revitalized by flexible manufacturing

1992

1993

1997

1998

UTC divests automotive businesses

ACE launches across UTC ACE launches across all P&W

Yuzuru Ito moves to Conn.

1994

1995

1996

Ito University launches

1997

1998

strategy+business issue 72

to be certified; more than 1,000 assessments would be required. Demand for ACE skill training, teaching people to lead improvements, spiked. In 2006, 1,000 people were enrolled in ACE skills certification programs, which mixed course work with on-the-job experience. By the end of 2008, 20,000 UTC associates were enrolled. This increase in training and assessment scale was feasible only because of the ACE Council’s existing experience base. There were enough people qualified in using the methods to teach them to others. But another issue loomed—when sites fell short, the reasons were still often related to supplier performance. Suppliers, on average, accounted for 75 percent of UTC’s product costs. UTC, therefore, took another step in building better sourcing relationships. Launched in 2007, building on the earlier supplier improvement program, was UTC’s Supplier Gold program, which brought ACE training and similar assessment criteria to suppliers. The program was voluntary, but 1,500 suppliers, representing half of UTC’s annual spending, were identified as critical, and were proactively

Louis Chênevert

CEO

2008–present 1999

2000

UTC acquires Sundstrand, forms Hamilton Sundstrand

1999

2000

2001

2002

2003

2004

Fortune names UTC most admired in aerospace

2001

2005

2006

2007

UTC acquires Kidde

UTC acquires Chubb

Operations Transformation ingrains ACE in all UTC practices David begins publicly reporting ACE is ACE results reassessed

Supplier Gold launches

2002

2003

2004

2005

2008

2007

2010

2011 UTC acquires Goodrich

Chênevert targets 70% ACE gold or silver sites by Dec. 2009

2006

2009

2008

Chênevert targets 70% gold or performing suppliers by Dec. 2011

2009

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averaged a 35 percent increase in sales, 60 percent improvement in inventory turnover, 24 percent improvement in on-time delivery, and 35 percent increase in customer satisfaction scores. However, when the people leading ACE in the divisions heard about this UTC promise, they were nonplussed. Some wondered if Chênevert had misspoken. To meet that 70 percent goal, 500 UTC sites would have two and a half years to make the progress that it had taken the first 180 sites nine years to achieve. Becoming an ACE gold- or silver-certified site involved far more than incremental improvement; the sites had to demonstrate performance levels benchmarked to industry leaders. The message was clear: UTC’s executives were behind ACE, and all of UTC’s managers were going to be behind it too. “This was a game changer,” recalls UTC ACE director John Papadopoulos. “The pull, commitment, and desire to get to ACE gold increased dramatically.” The ACE Council had to rapidly mobilize specific people to meet this commitment. Site assessors needed

Ito University has 50,000+ people enrolled

2010

2011

feature strategy & leadership 66

approached. Through the metrics used in its own site certification process initiatives, UTC had already collected data on quality, delivery, lean maturity, and customer satisfaction on its key suppliers. It now provided this information to the suppliers themselves on performance scorecards. By the end of 2007, 22 percent of its key suppliers were at “gold” or “performing” levels (roughly equivalent to standards used in ACE gold and silver site certification). Once again, confident in UTC’s abilities, leadership raised the stakes. In February 2009, CEO Chênevert, having conferred and again gained consensus with division presidents, announced the goal that 70 percent of UTC’s suppliers would achieve “supplier gold” or “supplier performing” status (the two highest ratings) by the end of 2011. These were stretch goals for suppliers, but they were needed for UTC to achieve its site goals at the end of 2009. UTC achieved both its site and its supplier goals on time, a significant accomplishment for a $75 billion company. Reflections on Leadership and Learning

UTC has built an array of business achievements on the ACE system. For example, the productivity and facility utilization improvements, along with the positive cash ﬂow unleashed by ACE each year, fund UTC’s organic growth. The broad-based decision making and diversiﬁed expertise built into ACE enable UTC to avoid the additional bureaucracy that usually comes with large corporate initiatives. ACE provides tools and a framework for achieving and assessing results; innovations are not only encouraged but, when effective, studied and promoted more widely. There is an atmosphere of direct candor and engagement. When ACE assessors visit one

of the 1,000 UTC sites, they speak freely with people chosen at random about their view of ACE and improvement and change in general. UTC managers and staff talk openly about the ACE efforts; they may have started off being obligatory, but most people now see their work and business as being all the better for ACE. During the four years spent researching and writing this article, I visited more than 20 UTC sites myself, located in the U.S., Europe, and Asia. No matter which subsidiary or region was involved, the ambiance was the same. I rarely, if ever, heard people complain about being caught up in administrative requirements. Instead, I often observed entrepreneurial activities and a continued drive to improve. What enabled UTC to succeed with ACE? I saw several elements that are often missing in similar corporate efforts, and that emerged over the company’s 28year history with ACE and its precursors (see Exhibit 2, page 64 ). First, leaders at all levels were clearly visible and remained actively involved. At the top, both Chênevert and David behaved in ways that left no doubt that they were behind ACE and all that it stood for. They set their goals through ACE, used its methods, and held themselves to the same standards they expected from others. Throughout the divisions, leaders emerged who supported ACE, often developing new applications or innovative methods at their local sites. Second, consensus was reached through conversation, not coercion. The initiative earned full commitment from all leaders across UTC’s companies by waiting until they were ready to make that commitment. When leaders objected or raised concerns, no action was taken until there was sufﬁcient discussion to achieve some agreement. The councils where the dis-

strategy+business issue 72

The broad-based decision making and diversiﬁed experience in ACE enable UTC to avoid the bureaucracy that comes with large corporate initiatives.

master’s degrees with stock option grants. As of 2011, the company had spent more than $1 billion on this program; employees in more than 50 countries have earned 32,500 degrees since its 1996 inception. UTC is a conglomerate that learns from itself because of the way it connects learning at three levels: the individual’s behavior, the day-to-day workplace, and the strategic direction of the company, as developed in its councils. These practices continue to be nurtured and integrated across the organization, from platform to platform, company to company, and team to team. In the end, this integration is what’s distinctive about UTC. It is what enables the ongoing improvements that sustain UTC’s high performance. +

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cussions took place became, in effect, a parallel structure to the formal decision-making hierarchy. Those discussions were lengthy and inclusive enough to allow people to voice concerns, talk them through, and come fully on board. The thoughtful and deliberative tone and style of the councils also set an example for people’s behavior in other settings. Third, ACE enabled UTC to capture its experience in managing and improving operations, and thus to learn from itself. The specific ACE methods are common, time-tested, quality-oriented techniques like value stream mapping, self-managing teams, kaizen, and preventive maintenance. But UTC deploys them in its own distinctive way, encouraging people to modify or extend them (thus providing a sense of ownership) while insisting on continued communication among the various teams and businesses. As sites are assessed for ACE certification, the assessors identify good practices and share them across UTC’s various organizations, or use them as case studies in their teaching. The methods and the teaching resources are continually updated, and the ACE assessment criteria also change to reflect experience. This constant, attentive approach gives UTC the capability to learn, improve, and change within itself and with its suppliers, partners, and customers. Fourth, UTC explicitly facilitated individual learning and helped individuals act on what they had learned—through informal collective conversation, and also through formal learning opportunities. One of many examples is the UTC Employee Scholar Program, which fully reimburses tuition, books, and fees for any UTC employee taking any college course, without restriction on the course of study. UTC additionally recognizes and rewards people attaining bachelor’s and

Reprint No. 00209

Resources Ann Graham, “Too Good to Fail,” s+b, Spring 2010: Proﬁle of India’s Tata Group, another successful conglomerate with a very different strategic orientation. George Roth, “United Technologies Corporation: Achieving Competitive Excellence (ACE) Operating System Case Study,” LAI Case Study (Nov. 30, 2010, released Mar. 7, 2011): The in-depth case study, representing three years of observation and interviews, on which this article is based. Robert E. Spekman, “United Technologies Corporation: Supplier Development Initiative,” Darden School of Business, July 19, 2001: More detail on the supplier initiative, capstone to the ACE program. James P. Womack and Daniel T. Jones, Lean Thinking (Simon & Schuster, 1996): Describes many of the threads of theory and method underlying UTC’s quality work. Chapter 8 discusses Pratt & Whitney’s advances in the early 1990s. For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership.

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HOW

READY YOU GROWTH ? ARE

Illustration by Fernando Volken Togni

A BOOZ & COMPANY STUDY REVEALS THAT ONLY 17 PERCENT OF COMPANIES ARE POISED FOR A PROFITABLE FUTURE. BY ASHOK DIVAKARAN AND VINAY COUTO

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FOR

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Vinay Couto vinay.couto@booz.com is a senior partner with Booz & Company based in Chicago. He is the global leader of the ﬁrm’s organization, change, and leadership practice, focusing on global organization restructuring and turnaround programs in the automotive, consumer packaged goods, and retail industries.

Since the economic crisis, many companies have been trying to ﬁgure out the best way to reposition themselves for greater performance and success in the future. Clearly the answer involves some combination of growth strategy and cost management. Over the past several years, working in a variety of industries, we have seen ﬁrsthand that companies that do three things together seem to be better positioned for a sustainable course of high performance. First, they create clarity and coherence in their strategy, articulating the differentiating capabilities that they will need to win in the marketplace. Second, they put in place an optimized cost structure and approach to capital allocation, with continual investment in the capabilities critical to success, while proactively cutting costs in less-critical areas to fund these investments. Third, they build supportive organizations. They redesign their structures, incentives, decision rights, skill sets, and other organizational and cultural elements to more closely align their behavior to their strategy, and to harness the collective actions of their people. We call this the Fit for Growth* approach, because it builds competitive muscle while cutting the corporate fat that weighs a company down. At companies that use this approach, cost actions are creative and strategic (as opposed to reactive and tactical), freeing up funds to be reinvested in those parts of the business that are most important for growth (see Exhibit 1). At the same time, an organizational fabric is put in place that guides employees to do the right things day in and day out, helping the entire enterprise build and sustain competitive advantage (see “Is Your Company Fit for Growth?” by Deniz Caglar, Jaya Pandrangi, and John Plansky, s+b, Summer 2012).

Also contributing to this article were Booz & Company principal Jitendra Chhikara, senior associate Ritesh Sharma, and senior manager Marc Johnson.

* Fit for Growth is a registered service mark of Booz & Company Inc. in the United States.

To gauge the effectiveness of this approach, we created a quantitative metric—the Fit for Growth Index—that is built on its three core elements (see “Calculating the Fit for Growth Index,” page 72). We then analyzed almost 200 companies headquartered in Europe and North America, selected from a wide range of industries. Most of these companies are active in markets around the world. We calculated an index score for each of these sample companies, based on an analysis of their basic business attributes (for example, their portfolio of products and presence in critical markets), and the key actions they had undertaken over a 24-month period to improve performance. Finally, we compared the index values for each company with its total shareholder return (TSR) over the same period. By itself, the index provides a simple yet comprehensive check on a company’s readiness to grow. When combined with TSR data, it provides a framework for understanding which actions and attributes are likely to have the greatest impact on performance. We did, in fact, find a correlation: Companies with high scores on the Fit for Growth Index, as a group, scored higher in general performance as well. A closer look at the index reveals that relatively few companies have comprehensively equipped themselves to drive superior growth. In fact, we found five recurring patterns in the scores: five types of companies, each with its own level of readiness for growth (see Exhibit 2). Like all archetypes, these are, of course, simplifications; their purpose is to distill the essential, common characteristics of each cluster, but not every company in an archetype group will display all the characteristics.

strategy+business issue 72

Ashok Divakaran ashok.divakaran@booz.com is a partner with Booz & Company based in Chicago. He specializes in strategydriven transformation for product- and innovation-based companies.

Exhibit 1: Fit for Growth* Framework These three building blocks can be assessed and scored. In combination, they provide useful indicators of whether a company is ready for growth.

Company’s Strategy and Way to Play Articulates how the business creates differentiated value for customers

Resource Alignment

Supportive Organization

• Clearly articulated and coherent strategy

Release Funds

• Systematic investments in differentiating capabilities

• Sustainable and differentiated capabilities for growth

Invest in HigherValue-Added Priorities

• Proactive and tailored cost reduction actions

• Organizational structure that is market-back and tied to the basic characteristics of the business

Strategic Clarity and Coherence

• Presence in critical product, market, and customer segments

Enable and Sustain Reductions

• Coherent and supportive incentives, decision rights, skill sets, cultures

• Lean cost structure in low-criticality areas

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* Fit for Growth is a registered service mark of Booz & Company Inc. in the United States. Source: Booz & Company

Exhibit 2: Five Archetypes of Fitness These profiles of company types are based on recurring patterns evident in the Fit for Growth Index results.

Strategically Adrift

Distracted

Capability Constrained

In the Game

Ready for Growth

Low score on strategic clarity and coherence (regardless of scores in resource alignment and supportive organization)

Medium score on strategic clarity and coherence, and low or medium score in both resource alignment and supportive organization

High score on strategic clarity and coherence, and low or medium score in both resource alignment and supportive organization

High score on both strategic clarity and coherence and resource alignment; low or medium score on supportive organization

High scores on all attributes

• Strategy and critical priorities are unclear and not widely understood, even among top management

• Generally middle-ofthe-pack in effectiveness and efficiency, which jeopardizes the longer-term “right to win”

• Category includes many companies traditionally thought of as competent performers

• From a market effectiveness perspective, doing almost everything right

• Differentiating capabilities needed to win in the market are not clearly articulated or exhibit large gaps

• Core elements of strategy and some critical capabilities exist at the “table stakes” level, but are not distinctive enough to serve as a competitive advantage

• Have strong strategies, and a coherent and clearly articulated set of capabilities

• Strategy is clear, differentiated, and well articulated

• Strategy is clear, differentiated, and well articulated, and it has demonstrated resilience to market and environmental changes

• Approach is fundamentally reactive, with strategic decisions easily swayed by external events or competitors’ actions • Susceptible to being outflanked by competitors or being left flat-footed by fundamental shifts in their industry

• Lack of a focused and differentiated strategy makes it difficult to mobilize investment and elevate performance to top-quartile levels

• With strategy unclear, cost structure, investments, and organization are inevitably misaligned and incapable of driving high performance

Percentage of companies:

14%

Source: Booz & Company

• However, execution isn’t keeping pace with intent— critical areas of the business may not be receiving enough investment, and cost structure may be misaligned with strategic priorities • May be held back by inadequate practices, processes, or technologies

• Capabilities are distinctive and well developed, and they drive clear competitive advantage • But are held back from achieving full potential by organizational attributes (e.g., complicated matrix structures, onerous governance processes, high leadership turnover, talent gaps, or a misaligned culture)

• Have a big-picture understanding of what it takes to win, but they need more discipline in execution

49%

20%

11%

• Capabilities are highly advanced and lead the industry • Resources are systematically directed to initiatives and opportunities with the highest strategic and financial returns • Organizational structures support key capabilities, with talent in the right places and efficient decision making • Market success rests on a foundation of coherent, proven, and sustainable fundamentals, rather than on transitory factors such as managerial talent or favorable market conditions

Calculating the Fit for Growth Index

Performance and Readiness

What does this analysis tell us about corporate performance? How does a company’s “readiness for growth” affect its market return? To measure the connection, we assigned each company a Fit for Growth Index score and compared it to the company’s total shareholder return over the two-year period from August 2010 through July 2012. Each company received a normalized TSR score between 0 and 100; 100 represented the company with the highest return in its industry segment, and 0 represented the company with the lowest. This form of calculation insulated the TSR results from external factors that might affect some sectors more than others—for example, higher-than-usual exposure to declines in spending due to the recession. We found a strong correlation between sharehold-

tors together constitute a com-

cost reduction (15 percent), and im-

pany’s execution capability. Thus,

provement initiatives aligned with

a company’s index score is derived

strategy (5 percent)

in equal parts from its strategy

• Supportive organization:

and its executional ﬁtness. These

speed and decisiveness (10 per-

weightings reﬂect our belief that

cent), strong leadership (5 percent),

he index assesses companies

strategy and execution are equally

supportive culture (5 percent)

in three key areas: strategic

important in determining perfor-

clarity reinforced by an aligned group of capabilities; an aligned

mance. The three factors, in turn, were

Our survey sample comprised

resource base and cost structure;

made up of several components,

197 companies in 17 industries.

and a supportive organization.

each with its own weighting. These

Companies were chosen to yield a

Each company received a compos-

subcomponents are:

balanced sample including high,

ite score from 1 to 5 based on its

• Strategic clarity and co-

medium, and low ﬁnancial per-

“ﬁtness” in each of these areas (5

herence: coherent strategy (15

formers in each industry, based on

being the most ﬁt). In calculating

percent), strong capabilities (10

their total shareholder return over

the scores, we weighted the three

percent), strong/coherent product

a two-year period. To supplement

factors as follows: strategic clar-

portfolio (10 percent), presence in

our knowledge of the companies,

ity and coherence at 50 percent,

critical markets (15 percent)

we examined information from

resource alignment at 30 percent,

• Resource alignment: system-

research databases, analysts’

and supportive organization at 20

atic investments in differentiating

reports, earnings call transcripts,

percent. The second and third fac-

capabilities (10 percent), thoughtful

and business periodicals.

strategy+business issue 72

feature strategy & leadership 72

Nonetheless, all of the 197 companies we surveyed can be credibly assigned to one of the archetypes. When we did this, we found that more than threequarters weren’t optimally equipped to win in their chosen space. A sizable majority were either “Distracted” (they lacked a clearly articulated “right to win” and set of differentiating capabilities) or “Capability Constrained” (they had not adequately operationalized a theoretically strong strategy and capabilities set). As might be expected, the number of companies that were “Strategically Adrift”—without a coherent strategy— was smaller; most major companies have developed a basic alignment to the needs of their market. The most telling ﬁnding: Only two categories, “In the Game” and “Ready for Growth,” provided consistently strong performance, and less than one-ﬁfth of the companies (17 percent) fell into either of these two groups.

Exhibit 3: The Correlation of the Index and Performance This diagram shows the comparative placement of 197 sample companies on scales showing performance (two-year normalized total shareholder return on the y-axis) and readiness for growth (the Fit for Growth Index score on the x-axis).

Normalized TSR Score

KEY:

STRATEGICALLY ADRIFT

DISTRACTED

CAPABILITY CONSTRAINED

IN THE GAME

100

READY FOR GROWTH

Limited Brands Capital One Financial BlackRock

Comcast U.S. Bancorp

Whole Foods Market

Time Warner Cable Luxottica Group Diageo Wal-Mart Stores

Fit for Growth Index Score

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Source: Booz & Company

Exhibit 4: Distribution of Normalized TSR Scores by Fit for Growth Index Score Companies with higher index scores (at right) have better TSR profiles. The width of each column reflects the number of companies falling into that index score category.

Normalized TSR

KEY:

LOW

MEDIUM LOW

MEDIUM HIGH

HIGH

107

COMPANIES

19%

16%

42%

Medium High

High

34%

27%

Medium Low

Medium High

31% 45% Medium Low

Medium High

12%

Medium Low

47% Low

27% Low

Low and Medium Low

Medium High

Fit for Growth Index Score Source: Booz & Company

High

er return and levels of development in the key areas that make a company growth-ready. In addition, we discovered a clear “clumping” of archetypes. Those with similar patterns of development also had similar patterns of performance (see Exhibit 3). Although the strength of the relationship varies by industry, our analysis confirms overall correlation. Almost three-quarters of companies with high index scores had high or medium-high TSR scores, and the companies with lower index scores tended to have lower TSR scores (see Exhibit 4 ). Once the link between the index scores and market returns was established, the next logical question became, What specific elements, if any, in the index framework best explain strong performance? To find out, for each of 10 key subcomponents (listed in “Calculating the Fit for Growth Index,” page 72), we grouped our company sample into three bands (low, medium, and high scorers) and calculated the average TSR for each of those bands. This allowed us to determine those subcomponents that had the biggest gap between high- and low-scoring companies. In general, we found distinct differences between the high and low TSR scorers. A few of the subcompo-

features title feature strategy of the & article leadership

feature strategy & leadership

What a “Ready for Growth” Company Looks Like

nents within each of the building blocks (strategic clarity, resource alignment, and supportive organization) appear to have a particularly powerful impact on TSR scores. These are coherent strategy, strong capabilities, systematic investments, aligned initiatives, speed and decisiveness, and strong leadership. It should also be noted that even the high scorers in these areas achieved average TSR values of less than 60 on a scale from 0 to 100. This ﬁnding suggests that there is still room for improvement, even for this strongly performing peer group. Implications for Management

Three messages emerge from our research. First is the clear relationship between the index scores and market performance. Doing well on the attributes of the index matters. Second, the majority of companies we analyzed have some distance to go before they can be considered truly ready for sustainable growth. Only about a

in other areas. Through rigorous,

positioning, and never if the target

forward-looking review processes,

won’t be a good cultural ﬁt.

they are able to keep their strate-

• Supportive organization:

gies relevant, sensing and rap-

“Ready for Growth” companies are

idly adapting to market changes.

organizationally efﬁcient, ﬂexible,

They’re quicker to innovate, are

and lean. They align their power

willing to make calculated big bets,

structures and allocate decision

lthough every company is dif-

and feel no qualms about killing

rights in ways that best serve

ferent, our analysis revealed

investments that aren’t paying off.

strategic priorities and business

a set of common characteristics

• Resource alignment: In the

realities, rather than aligning them

that underpin many of the compa-

area of resource allocation, “Ready

with historical legacies or indi-

nies in the strongest “Ready for

for Growth” companies employ a

vidual agendas. They create nimble

Growth” archetype. Consider these

disciplined process that ensures

mechanisms for governance and

elements across the three building

adequate funding for high-growth,

collaboration across business

blocks of the framework.

core activities. Clear and objective

units. Talent management prac-

investment criteria prevent depart-

tices support key capabilities by

herence: At “Ready for Growth”

ment rivalries and other parochial

moving the best people into pivotal

companies, strategic priorities are

concerns from interfering with the

roles. A coherent culture sets

speciﬁc, actionable, and—most

allocation of funds to top corporate

norms and expectations that reﬂect

critically—widely understood at

priorities. These companies man-

the requirements for success in the

all levels of the company. Leaders

age spending strategically, making

marketplace. An ethos of excel-

make clear choices, striving for

rigorous trade-offs based on cost

lence and continuous improvement

“best-in-class” prowess only in the

transparency and a deep under-

prevails, reinforced by systems

distinctive capabilities that create

standing of how they earn money.

that reward performance.

sustainable competitive advan-

Acquisitions are made only if they

tage, and accepting “good enough”

advance the company’s strategic

• Strategic clarity and co-

strategy+business issue 72

THE MAJORITY OF COMPANIES WE ANALYZED HAVE SOME DISTANCE TO GO BEFORE THEY ARE READY FOR SUSTAINABLE GROWTH.

Consumer Products and the Power of Fitness

organization to deliver on the value

geo and Church & Dwight Company,

proposition that sets them apart

a midsized company best known for

from competitors.

its Arm & Hammer brand, stand out

How, then, do index scores line

for the coherence of their strate-

up with shareholder return in the

gies, the power of their differentiat-

consumer products industry? We

ing capabilities, and their focused

by Deniz Caglar, Jaya Pandrangi,

found a remarkably clear correla-

use of resources and organizational

and Thomas Ripsam

tion (see Exhibit A).

structures to create a right to win in the marketplace.

The survey data also revealed

which components of the index had

between index scores and

the greatest impact on shareholder

Diageo

shareholder return, we looked

return. Gaps between high- and

Diageo is a global alcoholic bever-

closely at the consumer packaged

low-performing companies were

ages company with brands that

goods industry. This industry is a

greatest in factors related to strate-

include Johnnie Walker, Smirnoff,

good proving ground for several

gic clarity and resource alignment.

and Guinness. Diageo sells in more

reasons: It’s a big industry with

Differences between high- and

than 180 countries and derives 40

companies of all sizes that operate

medium-performing companies

percent of its sales from emerg-

in markets around the world. Our

were most pronounced in the sup-

ing markets. These ﬁgures reﬂect

sample comprised 23 companies

portive organization category.

the company’s overarching growth strategy of expanding leading

in the food, beverage, household

For deeper insight, we ex-

products, and related segments.

amined two particularly strong

brands into new markets, using a

Most are multinationals with a

performers that embody the key

tailored approach for each.

broad global presence.

principles of the Fit for Growth ap-

These segments don’t exhibit

Diageo relies on a small set of differentiating capabilities: market-

proach. Global beverage giant Dia-

identical results, but they do share certain broad characteristics relevant to our analysis of the factors that affect long-term performance. Their common foundational elements—such as a similar distribution channel structure—support basic comparability across com-

Exhibit A: The Fit for Growth Index and Consumer Packaged Goods Companies such as Kimberly-Clark, Mattel, and Brown-Forman have demonstrated an ability to produce sustained shareholder value. They also score high on the index. Consumer products manufacturers with low index scores produced lower two-year total shareholder returns. Normalized TSR Score

100

entiated products. Companies can’t

Coca-Cola ConAgra Foods J.M. Smucker

Tyson Foods American Greetings

General Mills Kellogg Campbell Soup

20 Avon Products

Fit for Growth Index Score

1.0

1.5

execute such a strategy unless they optimize costs and tailor their

Diageo Clorox PepsiCo

Molson Coors Brewing

egy that capitalizes on distinctive capabilities to create truly differ-

Colgate-Palmolive

Newell Rubbermaid

companies must offer something elsewhere. This requires a strat-

Mattel

Whirlpool

smart strategies and sharp execu-

customers really want but can’t get

Church & Dwight

Kimberly-Clark

open competitive battleground,

tion. To win, consumer products

Brown-Forman

Anheuser-Busch InBev

make consumer products a widewhere companies live or die by

Constellation Brands

panies. Perhaps most important, relatively low barriers to entry

features title feature strategy of the & article leadership

o test the relationship

Source: Booz & Company

2.0

2.5

3.0

3.5

4.0

4.5

5.0

high; many employees praise Dia-

vation investments focus on break-

channel efﬁciencies, innovation,

geo’s meritocratic culture, strong

throughs in areas of market lead-

and joint business planning with

leadership, focus on results over

ership, such as condoms (Trojan),

customers (known as the “Diageo

“face time,” social responsibility,

and closely follow market leaders

Way of Selling”). Capabilities are

diversity, and work–life balance.

in value niches such as baking soda

adapted to meet the needs of local

(Arm & Hammer). More broadly,

markets. For example, Diageo cul-

Church & Dwight

Church & Dwight fosters a ﬁnancial

tivates a premium image in North

Church & Dwight has assembled a

culture that is highly focused on

America, and emphasizes product

strong portfolio of home-care and

performance, supported by aggres-

innovation to middle-class con-

personal-care brands in both the

sive cost management.

sumers in emerging markets.

premium and value categories. Its

The approach has paid off for

strategy emphasizes identifying

shareholders. Church & Dwight’s

investments to strengthen these

and acquiring niche brands with

TSR has ranked among the highest

key capabilities, in part by seek-

untapped residual equity, such

returns of the consumer products

ing efﬁciencies in other areas. It

as Nair and Pepsodent. Church &

industry for most of the past decade.

reduces costs through careful stra-

Dwight mines this value by giving

tegic sourcing of ingredients and

the brands wide distribution and

other direct materials, operational

prominent shelf space, then cross-

optimization, alignment between

pollinates and extends the brands

its supply footprint and growth op-

into adjacent categories.

Diageo manages costs and

portunities, and the use of value-

This strategy requires superior

enhancing distribution channels in

capabilities in areas such as brand

emerging markets—to name a few

extension, innovation in categories

of its tactics.

in which a brand is the market leader,

Diageo has built a ﬁt-for-

and being a “fast follower” in niches

purpose, efﬁcient, and effective

in which it is a value player. Church

organization. The company’s

& Dwight develops these capabilities

geographic organization maximizes

through resource alignment.

brand value by combining a focus

Investments focus on brand

on individual growth markets with

development and marketing for a

a global marketing support system.

small set of “power brands” that

Employee satisfaction scores are

drive growth at the company. Inno-

Deniz Caglar deniz.caglar@booz.com is a partner with Booz & Company based in Chicago. He focuses on organizational design and cost ﬁtness in the consumer packaged goods and retail industries.

Jaya Pandrangi jaya.pandrangi@booz.com is a partner with Booz & Company in Cleveland. Her work focuses on growth and cost ﬁtness strategy for consumer products and retail companies. Thomas Ripsam thomas.ripsam@booz.com is a partner with Booz & Company based in Munich. He specializes in strategy-based improvement of top-line and bottom-line performance.

strategy+business issue 72

feature strategy & leadership 76

ing, supply chain and distribution

MAKING IMPROVEMENTS REQUIRES A CLEAR-HEADEDNESS ABOUT ONE’S STRENGTHS AND WEAKNESSES.

• A series of targeted organizational interventions to increase speed and quality of decision making

throughout the enterprise In the ﬁnal analysis, most business leaders would

agree that robust strategies, cost and investment management, and ﬁne-tuned organizations are critical to performance. But they may not be aware of how much these factors can reinforce one another if the conditions are right. Mastering all three is the hard part; and our research shows that few companies do so. Making improvements requires a clear-headedness about one’s strengths and weaknesses, an understanding of the links to performance, and the development of a detailed plan of attack to reap the beneﬁts. As is often the case, a good portion of the answer ultimately lies in focus and execution. + Reprint No. 00199

features title feature strategy of the & article leadership

fifth of our sample fell under a strongly positive archetype (“In the Game” or “Ready for Growth”). To close this gap, the other companies would need to fine-tune their strategies, raise their differentiating capabilities to world-class levels, back up those capabilities with judicious cost restructuring and sustained and focused investment, and redesign their organization to be truly “fit for purpose.” Third, the archetypes reveal specific factors that appear to matter more than others in explaining performance. In a world of tough choices, these constitute the logical places where companies should focus their attention first. To chart a path forward, a company can calculate its own index score and determine the archetype that most closely matches its situation. Then, it can develop an action plan, focusing on the highest-return levers, to improve performance. For leaders of most companies—those that fall under the “Distracted” archetype—an action path could include: • A rigorous review of the capabilities needed to achieve a leading position in their industry, versus those that are secondary • A dispassionate assessment of where they stand against these capabilities on two fronts: their level of effectiveness, and their relative levels of funding and investment • An action plan to scale back in the less-critical areas, and a corresponding plan to redirect funds from these areas to more critical needs

Resources Online Fit for Growth Index Proﬁler: For an assessment tool from Booz & Company designed to help evaluate your company’s readiness for growth, visit booz.com/ffgindexproﬁler. Deniz Caglar, Jaya Pandrangi, and John Plansky, “Is Your Company Fit for Growth?” s+b, Summer 2012: Three-part prescription to make companies ready for sustained expansion. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): Chapter 9 describes how to cut costs while growing stronger. Deniz Caglar, Marco Kesteloo, and Art Kleiner, “How Ikea Reassembled Its Growth Strategy,” s+b (online only), May 7, 2012: Interview with Ian Worling, Ikea’s director of business navigation, on the way this highly capable and frugal retailer moved forward after the Great Recession. For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership.

Best of the s+b Blogs feature strategy+business blogs 78

China: The Mother of All Black Swans by John Jullens Low-probability, high-impact events can be catastrophic for companies doing business in the Chinese market.

China pundits tend to come in two ﬂavors: true converts and apocalyptic non-believers. On the one hand, the converts generally say that China’s reemergence as an economic and geopolitical superpower is more or less inevitable. They view it with a sense of awe—and sometimes more than a little fear, as well. History is re-

plete with examples of one country’s dreams becoming another’s nightmares. The non-believers, on the other hand, usually hold that China’s so-called economic miracle is nothing more than a Beijing-led Ponzi scheme that will soon collapse in spectacular fashion under the combined weight of lower export volumes, a major banking crisis, and the bursting of a massive property bubble. In truth, a financial meltdown remains highly unlikely, as China’s central government still has plenty of cash reserves and maintains considerable control over various macroeconomic policy instruments. Politically, too, Beijing has over the last 20 years become adept at containing local unrest and preventing potential spillovers at the national level. At the same time, however, China remains quite vulnerable to an unusually large number of economic, political, and natural high-risk events, including a domestic financial crisis, as well as potential international trade, currency, and military conflicts, a full-blown avian flu pandemic, and, of course, social unrest on par with the Arab Spring. The impact of any of these events could be disastrous, not just for China, but also for the rest of the world. A Chinese financial crisis would not only trigger a domestic economic crash, but also deliver yet another shock to the U.S., Japanese, and European economies—which already face a potentially prolonged period of stagnation. Moreover, such a crisis could destroy social and political stability, increase lingering nationalism and xenophobic sentiments among the Chinese populace, and lead to military conflicts

Photograph courtesy of John Jullens

Read all the latest posts at strategy-business.com/sb-blogs

China is also vulnerable to numerous “ugly ducklings,” such as labor unrest and earthquakes.

in China. Most Chinese firms simply haven’t yet developed the sophisticated risk management capabilities that would be required. Even the advanced ERM systems of foreign multinationals are typically inadequate, because black swans are inherently too complicated and their potential repercussions far too great to be effectively managed through standard crisis management plans and public relations activities. In addition, mitigating black swan events inevitably requires investing in redundancy, which may be difficult to justify while simultaneously trying to deliver quarterly financial results. But by underinvesting, executives could be effectively “betting the company” against events that statistically seem improbable, yet actually occur sur-

prisingly often. To protect themselves, companies need to supplement their everyday ERM activities with a three-step process. 1. Map the extended enterprise. Companies should start by mapping their geographic footprint and operations in China, including supply chains, channel partners, and customers, as well as sources of revenues, proﬁts, and capital—including those tied up in their go-to-market activities. Given the multilayered nature of the Chinese market, it is important to map not only ﬁrst-order, but also second-order and even third-order supplier relationships to fully understand and quantify the impact of a potential disruption, such as lost sales, inventory holding costs, and reputational damage. 2. Create a disrupter list and run “what if” scenarios. Companies should create a comprehensive list of potential black swan events that could result in demand shocks or supply chain interruptions. It is important to initially catalog all events that could have a catastrophic impact before developing a more practical short list that nonetheless still captures the various black swan events that could disrupt the company’s future operations. Simulations and business games can help determine the relative impact of each potential black swan event as well as educate and train key executives. 3. Develop contingency plans. The various scenarios must then be translated into detailed contingency plans for each black swan and prioritized based on their risk exposure, ease of implementation, and cost. Each plan should include the structural changes required to make the organization more resilient (for example, redundancy investments in additional suppliers and higher inventory buffers) as well as emergency plans for managing residual risk (for example, alternative transportation in case of marine, rail, or airport shutdowns). Special consideration must be given to ensuring each plan can actually be implemented within China’s unique institutional environment, given the general lack of transparency, communications restrictions, poor and fragmented emergency response capabilities, and reluctance to accept bad news, especially at the local level. The latter has led to several scandals in recent years, such as the attempted cover-ups and misinformation released in the aftermath of the 2011 Wenzhou high-speed train collision. Finally, remember that protecting your business in China from black swans is an ongoing effort. Of course, companies can never completely inoculate

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with, for example, Taiwan and Japan. A true doomsday scenario would leave a devastated China unable to prop up North Korea, resulting in a chain reaction of uncontrollable events that would eventually lead to a catastrophic war on the Korean peninsula. In other words, a Chinese ﬁnancial crisis is precisely one of the low-probability, high-impact events that Nassim Nicholas Taleb so memorably described as “black swans” in his best-selling 2008 book. In fact, China could very well be the mother of all black swans, due to its exceptionally large size and increasing interconnectivity with other parts of the world. China is also vulnerable to numerous “ugly ducklings,” such as labor unrest and earthquakes, that may not have quite the same global systemic impact of their larger avian cousins—but which could still have a signiﬁcant impact on individual companies. It’s no wonder Taleb himself has admitted to feeling “a little nervous about China.” Unfortunately, few corporate enterprise risk management (ERM) departments have the resources or local understanding to contain a true black swan event

themselves. But they can, and should, carefully assess and evaluate the risks and consequences of such events, so they can better prepare themselves for the (nearly) impossible. + John Jullens john.jullens@booz.com is a partner with Booz & Company based in Shanghai. He co-leads the ﬁrm’s engineered products and services practice in Greater China.

feature strategy+business blogs 80

What You Should Accomplish in Your First 10 Days by Eric J. McNulty It traditionally takes months for new leaders to make a positive impact. That’s simply much too long to wait.

What would it take for your next CEO to deliver a

spectacular ﬁrst 10 days in ofﬁce? A fast-track entry where direction is surely set, critical changes decisively made, and initial steps boldly taken. Having lived

through several CEO transitions looking upward, I know they can be treacherous. The “first 100 days” as a measure of executive effectiveness was first used in 1933. Franklin Roosevelt was elected president of the United States. It was the Great Depression. People were desperate for action. FDR shepherded a number of bold experiments through Congress in those first months, and the legend was born. Ever since, this arbitrary time period has become a de facto transition standard in politics and out. Ten years ago, author Michael Watkins offered a new and slightly abbreviated twist in The First 90 Days. Watkins claimed that it takes about six months for a newly hired executive to become a netpositive contributor. However, he argued, a combination of steps taken by the individual and the company through the transition could cut that in half. Watkins’s formula has demonstrated its effectiveness for thousands of leaders. But given our world today, 90 days is far too generous a period for a new CEO to begin producing value. They should be doing it by day 10. Preposterous? Impossible? Markets are exponentially faster than they were in 1933. Product introductions come rapid fire. Changeable consumers switch brands in an instant. Shouldn’t leader transitions speed up as well? Plenty of experts think so. I started this conversation with Kelvin Thompson, founder of MontaRosa and an old hand at C-level recruitment. He said that the faster a new CEO takes meaningful action, the less likely he or she is to become enmeshed in the status quo. Thompson, in turn, floated the 10-day transition by six current and former CEOs at large global firms. Although they were mixed about whether 10 was the right number—they seemed more comfortable with 30 to 45 days—they universally agreed that there was room for significant gains in the time from entry to impact. How would a First 10 Days approach work? It starts with the board. If the board of directors is leading the hiring process, its members must understand the issues. Do they really know what the

Photograph courtesy of Eric J. McNulty

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Not every decision needs to wait for someone to be formally in ofﬁce.

cisions could include a declaration of general strategic direction, moves among senior personnel, or the launch of a new initiative. Marissa Mayer’s decision to no longer support BlackBerry devices at Yahoo came at the six-month point but could well have come much sooner as a signal that she expected the company to focus on the most forward-looking technologies. The goal is to blast through legacy roadblocks, set the organization in a firm direction, and energize activity from top to bottom. UÊ >V Ê ìV Ã Ê ÃÊ >VV «> i`Ê LÞÊ V i>ÀÊ «iÀv Àmance expectations, indicators, and accountability for successful follow-through. These should apply to the CEO and his or her direct reports and can be cascaded throughout the organization. The goal is to foster urgency without chaos. UÊ / iÊ L >À`½ÃÊ LÕÞ Ê > `Ê ÃÕ«« ÀÌÊ >ÀiÊ V i>À°Ê / iÊ board must back the CEO’s early decisions and show active support for any outside advisors who will be part of the initial process. Solidarity during this crucial time is critical. Bold activity by a new leader in the first 10 days can serve as a turbocharger to existing operations or a defibrillator that brings a faltering organization back to life. A 10-day plan is not a substitute for a full and thoughtful transition into a big new role, but it can be an essential element of one. + Eric McNulty eric@richerearth.com is the director of research at the National Preparedness Leadership Initiative and writes frequently about leadership and resilience.

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new CEO will inherit? Do they assume that the rest of the senior team will stay? Are they looking for wholesale change or a steady hand to stay the course? In answering these questions for themselves and establishing their point of view with candidates during the process, the board can dramatically reduce the CEO’s learning curve. It continues with the process. Thompson says that if you accept the premise that significant action is expected within 10 days, you’d structure the hiring process differently. The brief given to the executive search firm will be thorough, challenging, and demanding. There will be an openness to unconventional candidates. The interviews will be equally arduous. They should be a real test of whether a candidate is the right person to run this company at this time. Asking each serious candidate for a detailed analysis of the company, its strategy, opportunities, and impediments, and his or her specific plan for the first 10, 90, and 180 days is useful and appropriate. It also requires that the candidates be given enough information and access to the right people in order to formulate such a plan. The hiring focus will shift from general analysis of “fit” to a specific discussion of what’s to be done and which candidate can best move quickly and decisively to do it. The result should not just be the right hire, but the right hire ready to get moving right away. It ends with resources for a rapid start. Not every decision needs to wait for someone to be formally in office. If key suppliers or personnel need to be replaced, see if action can be taken prior to the CEO’s first day. The longer one waits to make changes, Thompson advises, the messier and more painful they tend to be. Early changes also clear the deck for the new CEO to focus on the future right away. What would a 10-day plan look like? Although it will vary from firm to firm, each plan should have these common elements: UÊ / iÊ « > Ê Û ÛiÃÊ Ì ÀiiÊ Ã } wV> ÌÊ ìV Ã Ã°Ê Granted, three is an arbitrary number but it is one that will allow the incoming CEO to demonstrate knowledge of the business, surety of direction, and bias for action—without coming across as reckless. These de-

THOUGHT LEADER

The Thought Leader Interview: Loran Nordgren The cofounder of unconscious thought theory explains how taking a break and distracting the mind can lead to higher-quality decision making.

thought leader 82

ould you boost the quality of decision making and innovation at your company by encouraging a more structured form of intuition? Loran Nordgren thinks you could. Indeed, the associate professor of management and organizations at Northwestern University’s Kellogg School of Management argues that adopting new approaches to how we process thought is the remedy that will free organizations from the shackles of traditional strategic planning. Nordgren, who grew up in Chi-

cago, cofounded a body of work called unconscious thought theory with Ap Dijksterhuis, a professor at Radboud University in Nijmegen, Netherlands, while getting his Ph.D. in social psychology at the University of Amsterdam. Based on in-depth studies of the impact of different ways of merging analytical thinking and strategic intuition, this theory proposes, in effect, that some forms of thought processing consistently lead to more beneﬁcial choices and more effective problem solving.

As Nordgren’s crossover from psychology to business school might suggest, unconscious thought theory is ﬁnding a receptive audience among pragmatic, day-to-day decision makers. Over the past two decades, many managers have come to recognize that decisions made solely through rational analysis, especially in conventional strategic planning exercises, tend to lead to failure. That realization opened a door through which a large number of right-brain boosters and intuition specialists squeezed in to promote themselves, with even spottier results. It’s understandable that many business leaders throw up their hands and say, “It doesn’t matter what process we use to make decisions. Let’s just muddle through.” Unfortunately, those outcomes are also unreliable. Nordgren and his colleagues have sought a more deliberate way to combine rational and intuitive decision-making processes. This makes the research inherently interdisciplinary; as Nordgren notes, it stands “at the intersection of experimental psychology, behavioral economics, and neuroscience.” The optimal approach they discovered, and conﬁrmed through a long series of re-

Photograph by Brett Nadal

BY KEN FAVARO AND AMY D’ONOFRIO

search studies, seems simple at first glance. They advise setting aside periods of time to let the unconscious parts of the brain process information. Go for a walk. Sleep on it. Turn off your attention. (Their most influential paper, published in Science in 2006, is called “On Making the Right Choice: The Deliberation-Without-Attention Effect.”) But putting the approach into practice, which has been the subject of Nordgren’s more recent research, requires some sophisticated and often counterintuitive design of the decision-making and strategy formation experience, and a unique way of thinking about (and welcoming) distraction. We sat down with Nordgren in Booz & Company’s New York offices in June 2013—first in a workshop session on enterprise strategy, and then in a follow-up interview. The conversations flowed naturally together; both were focused on the implications of Nordgren’s approach to the practice of strategy. S+B: What is unconscious thought theory? NORDGREN: It’s really a general the-

S+B: And that third way is...? NORDGREN: It’s a combination of

conscious and unconscious thinking. The processes of the mind can be divided up in a lot of different ways, but one very useful distinction is between conscious and unconscious mental processes. I often use an iceberg metaphor to describe the mind. Conscious processes are those that people observe, above the waterline. People can access them introspectively. For example, when writing a letter to someone and choosing a word, you are aware of your thinking process. Below the waterline, there are many unconscious mental processes, such as those that regulate breathing, sensory perception, and the storage and retrieval of memory.

These processes are part of you, but you’re really a stranger to them because you can’t observe them; you can’t communicate with them. You have no introspective access to them. For a long time, scientists and philosophers viewed the conscious thought processes, above the surface of consciousness, as the really important stuff. They said that while basic behavior gets regulated behind the scenes, the things that make us uniquely human—the higher-order functions—are conscious, deliberative processes. However, we know from contemporary neuroscience and cognitive science that a lot of things that were once thought to be higher-order functions are really unconscious. One example is learning. Suppose you got into a really contentious interaction, let’s say a fistfight, with a man who is an amnesiac—someone who can’t form new memories. When you meet him the next day, he will have no conscious awareness of you, no matter how hard you press him to remember, no matter how many times you say, “Have we met before?” But if we could measure his heart rate, or other relevant physical responses, we would see indicators of a sense of threat. The unconscious still remembers. It has coded the negative interaction. There’s a fascinating literature called person perception: the study of how people evaluate others. You tend to do this very, very quickly— within minutes of meeting a person, you’ve already sized him or her up. More than 90 percent of the evaluations you make are based on just two dimensions. The first is your perception of people’s competence. Do they seem to know what they’re talking about? Are they on time and reliable? The second is warmth: es-

thought leader

ory of how the mind works. It tries to explain how people form decisions, where new ideas come from, how problems can be solved effectively. The empirical work focuses on the processes of thought that take place when people choose among alternatives, and when they come up with new ideas. When you ask people how they approach the most important executive decisions that they have to make—and especially how they expect to get the best results from the decision—you ﬁnd out that people gravitate toward one of two approaches. Some are basically ratio-

nalists. They think that the best decisions, the most innovative ideas, and the most effective solutions to problems come through a systematic, rational, deliberative process. Other people say that the best solutions are intuitive. There’s wisdom in your gut feeling. This is the continuum most of us have in mind when we think about the decision process. I teach a decision-making session at Kellogg’s executive education program, and I start off by asking, “How do you approach decisions?” Without my having to bring it up, most people put themselves somewhere on this continuum. Most tend to be rationalists, but a sizable minority favor the intuitive approach. But there’s actually a third way that we can think about decisions, a way that doesn’t neatly ﬁt on this continuum. And this third way, at least in many situations, will lead to more innovative ideas and more effective solutions.

Amy D’Onofrio amy.donofrio@booz.com is a Booz & Company associate in New York, aligned with the enterprise strategy practice.

sentially, how much do you like them? Elements like posture and all kinds of other things that you might say don’t matter to you will inform that judgment. Value of Unconscious Thought S+B: Doesn’t this depend on context? A shirttail being out could be evidence of slovenliness in one context, but evidence of genius in another. NORDGREN: Absolutely. It’s very

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contextualized. Exuberant joy might seem like warmth in some contexts, but if you’re with a group of jaded hipsters, that kind of sincerity won’t be appreciated. So Ap Dijksterhuis and I started wondering, if unconscious operations do so much mental heavy lifting, can we harness that power in the decision-making process? That initial insight led to our work on unconscious thought. We have concluded from our empirical studies that unconscious thought is always involved in decision-making processes. Even when your conscious attention is involved, the mental processing of information—evaluation, weighing, aggregation, consolidation, and so on—occurs while

Also contributing to this article were Booz & Company partners Matthew Egol and Elizabeth Powers, senior executive advisors Shaun Holliday and Nadim Yacteen, chief marketing and knowledge ofﬁcer Thomas A. Stewart, and head of global media and communications Margaret Kashmir.

your conscious attention is directed elsewhere. Let’s say you’re at your desk, analyzing a major decision. You get partway, and then you take a break: You go to a meeting, or start daydreaming, or “sleep on it.” Your mind continues to work on the problem subconsciously. When you return to it consciously, your thinking will have advanced. The information will have been consolidated and restructured, even though you don’t notice it. S+B: Do you mean that before making a decision, it’s a good idea to take time off and allow the unconscious to weigh in? NORDGREN: In most cases, yes, but

it depends on the nature of the choice. This is the more provocative claim of unconscious thought theory. In many cases, decisions made in a way that combines conscious and unconscious thought are superior to those made deliberatively. Consciousness is like a ﬂashlight in a dark room. It can sharply focus attention onto a particular issue or a narrow subset of information. But it has very constrained capacity. Try counting backward by threes while simultaneously putting

together your grocery list for the week. You can’t do it; the processing capacity of conscious thought is so small that it is rapidly overwhelmed. Unconscious thought, on the other hand, has a much higher processing capacity. This makes it particularly good at broad comparisons of large amounts of information, where some has more natural weight than others. If you’re choosing between two consumer products that are more or less the same—two oven mitts, say, with different colors—conscious attention alone will be adequate. For a more complex decision, you want to give your unconscious an opportunity to get involved. Ap and I have tested this idea in many situations, both in the ﬁeld and in the lab. In one experiment, for instance, we gave people information about four apartments in the Jordaan neighborhood in Amsterdam, and asked them to pick one apartment to recommend. Each apartment has positive and negative attributes—qualities like size, being next to the train tracks (and thus noisy), or having a desirable view of the canals. Choosing the apartment is a complex activity, and the quality of the choice can be tracked: By any

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Ken Favaro ken.favaro@booz.com is a senior partner with Booz & Company and global head of the ﬁrm’s enterprise strategy practice. He is based in New York.

S+B: Where does motivation ﬁt in? If people care more about the

decision, do they do better with unconscious thought? NORDGREN: Yes. Unconscious

thought tends to do better when the stakes are high. One aspect that relates to the issue of motivation is that most unconscious processes are driven by goals. These are consciously formed goals.

didn’t violate the rules, and we wanted to see who selected those. Consistent with what we’ve seen elsewhere, those who favored unconscious thought were generally much better at choosing the apartments with better attributes. But those who relied on conscious thought were better at avoiding the

“Those who engage in an incubation process—conscious, rational study followed by distraction and delay— outperform those who just analyze.” For example, when we give people information on the apartments, we can provide different types of distraction. When we give them the counting-back tasks, which overwhelm the conscious mind, they perform at a higher level than if they weren’t distracted. But when we distract them by giving them a goal— telling them that they’ll have to make a choice within 10 minutes— we see a higher level still. The Relevance for Business S+B: Isn’t the act of “using” your unconscious thought itself a conscious act? How do you set that up without polluting the process with conscious thought? NORDGREN: We addressed this

problem in one experiment where we asked people to act as real estate agents. “Your job,” we told them, “is to select the best apartment for your client.” We gave them rules in terms of pricing or features—the bedroom had to be on the ﬁrst ﬂoor, for example. There were only two apartments with the best attributes that

rule-breaking apartments. In other words, the rule violation aspect undercut the advantage of unconscious thought. But the people who ﬁrst thought consciously and then were given the goal with distraction still outperformed the others by far. S+B: Why is it important for businesspeople to know about this theory? NORDGREN: The decisions that ex-

ecutives make are invariably complex decisions where they have to weigh many different factors, integrating large amounts of information. These decisions are precisely the ones where unconscious thought proves particularly useful. But unconscious thought also has limits. For example, it does not know how to handle ephemerals. Math equations aren’t going to be solved this way. Conscious thought is also superior for the kind of information gathering that leads to an effective decision. And it is good at detecting rule violation—the sort of “if-then”

thought leader

objective measure, one of the apartments has more positive attributes than the others. We’ve conducted this experiment in many different ways. We ask people to choose for themselves or for someone else. We give some people a lot of information and time to study it. We give others only a short amount of time, not enough to study the information. We ask some subjects to decide while counting backward by threes into a microphone, so they’re distracted. The results have been fairly consistent. In general, people who spend time thinking over the options and studying them tend to do better than people who take no time, and who rely on an immediate gut feel. But a third group does better still. The best deciders study the information but then have their attention distracted. For example, if we give people information about the apartments, and ask them to take their time and think about it, and then, after a delay, we distract them, we see increased performance. We’ve had similar results in other domains—for example, in betting on World Cup matches, expert predictions, making a car purchase, hiring people, or asking people to come up with innovative ideas. If the amount of expertise is basically the same, then those who engage in an incubation process—conscious, rational study followed by distraction and delay, during which unconscious processing kicks in—outperform those who just analyze. The unconscious is simply better at aggregating all the pros and cons associated with a decision, and dealing with that complexity.

S+B: How would you use these insights to design, say, a strategic planning process—which is (after budgeting) probably the second most hated exercise in large companies? NORDGREN: Maybe the ﬁrst princi-

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ple is to only engage in that kind of effortful process when a decision needs to be made, as opposed to when the calendar has turned over and a new strategic planning review is on the schedule. Another big implication for decision making is to have a two-step process, separating the information acquisition phase, when conscious thought is emphasized, from the decision phase. First, you have a structured, facilitated discussion where you gather information—ideally, canvassing people ahead of time. I’m a huge advocate of the private collection of information. If you want to tap into the unique expertise in the room, you should try to get information from the relevant people in advance, before some sense of a majority viewpoint is created. Then, when you meet, you apply conscious thought to these logic problems by establishing criteria and weighing trade-offs. What would success and failure look like? What attributes of the decision need to be in place for it to be successful? You eliminate unacceptable alterna-

tives—what we call “rule-breaking” alternatives. If you’re looking at business schools, you might say tuition has to be lower than a certain figure. You eliminate those that are too high. You want a very explicit disconfirming climate so that people are comfortable with dissent. Once that information is considered, before making the decision, you need a period for people to sleep on or incubate the ideas, to give the unconscious mind what it needs to participate. You need to set a goal and take a break—to force a delay and some distraction. For instance, you might say, “We’re going to stop for dinner now. We’ve narrowed our five options down to three. Come back tomorrow, and we’ll make a decision in the morning.” That would lead to better decisions than weighing the pros and cons and going straight to a vote. You could also try to structure group meetings to really take advantage of the process: Get together, discuss ideas as a group, and then have a period of distraction or come back the next day. Innovation and Influence S+B: Earlier, you mentioned idea formation. What does the theory say about practices for encouraging innovation? NORDGREN: Both conscious and

unconscious thinking are essential for generating good ideas. A big part of innovation is analysis: thinking through problems, detecting hidden ﬂaws in a plan, articulating problems in the status quo, and detecting what it is you’re doing now that could be better is really the domain of conscious deliberation. But in generating new ideas and coming up with creative solutions

and creative insights, our research suggests that allowing for some distraction is, again, better than pure analytics. These two modes of thought can work in harmony. You want to develop a culture in which innovation is valued. That requires creating a climate where people feel encouraged to suggest new ways of doing things. They should not be punished for coming up with new ideas, particularly ideas that after some scrutiny might turn out to be not great. You also need a leader who explicitly works on innovation and validates it. The unconscious is goal driven, and this reinforces the goal of coming up with new ideas. That reinforcement will naturally trigger the unconscious. There are a number of structured techniques for running innovation sessions. You’ll often see the most successful ones have a structured process that is not purely analytical. This typically involves an orientation toward visual design, which is at least partly intuitive. Finally, opportunities for delay and distraction are important because people are struggling to conceive an idea. When they pause to look out the window, and then return to the struggle, a better idea is more likely to pop into their mind. Now they can scrutinize it. Does it meet their criteria? If not, they know they need to come up with something better, and they’ll look out the window again. In an ofﬁce climate where the expectation is to generate fresh, innovative ideas, this approach is going to be particularly powerful. S+B: What about inﬂuencing others? Does the theory of unconscious thought suggest a better way

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logic problems that come up when we’re trying to evaluate a set of alternatives. “If the rent is that high, we can’t afford it. If we shut down that project, it’s going to have these negative consequences.” The focus of our most recent research has been on getting the best of both modes of thought. How do you leverage their strengths?

“One of the tricks of inﬂuence is the ability to walk in with an inﬂuence goal but appear to have a decision-making goal.”

to communicate a decision to other people after it’s been made, and helping them see the reasons to buy into it? NORDGREN: Coming up with ratio-

S+B: Suppose you can’t tap into the unconscious. Is there a way to improve conscious decision making—say, by breaking a complex issue down into three or four smaller issues? NORDGREN: The problem with that

approach is that it disrupts natural

weighing. If you think of consciousness like a spotlight, it’s always illuminating a subset of the information. Imagine that you’re looking at a car and deciding whether to buy it or not. If you evaluate each part of it separately—kicking the tires, checking the dashboard, clocking the acceleration—the data shows that your weighing of that information will be relatively poor. If the last thing you look at is the trunk size, your decision might hinge on that, when, in reality, trunk space might be a relatively unimportant factor. Why Not Sleep on It? S+B: What led you to your own interest in this ﬁeld of research? NORDGREN: I came into experi-

mental psychology at a time in which a new ﬁeld was emerging called the new unconscious. Its mission was to understand the extent to which behavior is guided by processes outside of conscious awareness. When I started my Ph.D., this ﬁeld had considerable steam. A lot of fascinating work had come out of it, about the way people’s goals get primed outside conscious awareness. That intrigued me, and it seemed it might apply to the one realm that

thought leader

nales for a decision is easy, because people are natural-born rationalizers. If someone stimulated a part of your brain to make you laugh, and then asked, “Why are you laughing?”—even if you didn’t know why, you would immediately have a plausible reason. You’d say, “Oh, it’s because I remembered this funny thing that happened to me once.” That’s one reason that unconscious processes are a little elusive to study. As soon as people have an inkling of what the right choice is, they’re armed with conscious reasons that support that decision, even if they arrived at it unconsciously. In our work with MBA students, we talk about the difference between an inﬂuence goal and a decision-making goal. When you don’t have a preconceived idea about the right course of action, you might bring people with varied functional expertise into a room. You try to bring their unique expertise to the surface, to arrive at the best alternative. That’s a decision-making goal. When you have a vision of

where you want to go, and you go into the meeting looking for buy-in, that’s an influence goal. You would do very different things to reach each of those two goals. Of course, if you’re really trying to influence people, it harms you to be seen as having an agenda. One of the tricks of influence is the ability to walk in with an influence goal but appear to have a decision-making goal. Even when everyone knows you have an influence goal—say you’ve been brought in to cut costs—you want to do what you can to assuage their concern that you only have one type of goal in mind. So you might say something like “You all know I’ve been brought in here to cut costs, but you also need to know I have a bigger goal: to make decisions for the long-term health of the company. And there are different ways to do this. What are your ideas?”

“Sleep seems to be very important for consolidation and memory— for taking complex information and restructuring it.”

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S+B: What are some of the most common mistakes that business leaders make when they’re trying to either drive a group to a decision or make one themselves? NORDGREN: One is forcing a deci-

sion to be made right after the discussion, as opposed to pausing for delay and distraction—a period of incubation to allow the mind to sift through the information, sort it out, and make sense of it. Another mistake is placing too great an emphasis, before a decision is made, on the need you will have to justify your rationale to others.

When people feel forced to scrutinize their reasons up front, it has ways of disrupting the decision. An example of this is found in wine tasting. Judging the quality of wine is a subjective experience and a complex judgment. When we ask people in studies to deconstruct that preference—to not only say which is their favorite but give their criteria for picking a favorite—it disrupts the quality of the decision. People end up choosing wines that are objectively seen (to the extent this can be objective) as being of lesser quality. Instead, allow people to make a general evaluation and then talk about their reasons afterward. Another mistake is not having clear, explicit goals for any decision that everyone agrees is important. For some people the goal might be to do the best job possible, while for others it might be to avoid investing too much time in this endeavor. If people don’t agree, trouble arises. Another mistake is overlooking sleep. Sleep seems to be very important for consolidation and memory—for taking complex information and restructuring it. We’ve done in-

teresting studies where we look at how well people organize all their different ideas. After sleep and periods of unconscious thought, ideas seem to take more orderly shape. S+B: Is high-quality decision making that simple: “Let’s sleep on it”? NORDGREN: I’m not suggesting that

any of this is a magical or effortless process. In many cases, people associate the word “unconscious” with mysticism and unreliability—something they can’t explain. But we think it can be explained, and even measured. Nonetheless, when we’re leading a decision-making session, we don’t always tell people, “We’re going to pause right now to tap into the unconscious mind.” We just say we’re stopping for a bit of incubation time—time to integrate what we’ve heard. When they’re prompted to take the time by someone who does it authoritatively, people tend to recognize that the decision will be better as a result. + Reprint No. 00210

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seems most governed by conscious forces: decisions, reasoning, and the higher-order mental functions. I got my Ph.D. in psychology and had never considered joining a business school faculty, but there has been a movement at Kellogg to bring in people from other disciplines: social network theory, sociology, “big data” analysis, and so on. Once you’re there, you ﬁnd the connections to business. I think it’s a great way to bring new ideas into the MBA curriculum.

transform your thinking Oxford Scenarios Programme Strategic decisions often assume a ‘given’ context around the organisation, but what if the conditions of this context change - would these decisions be correct? Under what conditions could these assumptions be wrong and what new opportunities would yield from different assumptions?

Dates: 30 Sep – 4 Oct 2013 or 28 Apr – 2 May 2014

Scenarios planning explores ‘what if’; to prepare against uncertain times. Use this programme to learn scenarios processes and test the robustness and implications of strategic decisions against several alternative future environments.

To learn more about how to transform your thinking contact caroline.williams@sbs.ox.ac.uk or on +44 (0)1865 422 583

www.sbs.oxford.edu/scenarios

Books in Brief

by Cynthia A. Montgomery Strategic Transformation: Changing while Winning, by Manuel Hensmans, Gerry Johnson, and George Yip, Palgrave Macmillan, 2013

he Ship of Theseus,” an ancient Greek paradox, tells the story of a boat that’s moored at dock after a long battle. One by one, all of the ship’s planks are replaced with new ones. Eventually, the discarded planks are used to build a new ship. As it is built, a question emerges: Which ship is Theseus’s ship? Further, if the ship’s identity has shifted, at what point, with which plank, did the change occur? Plutarch described a variant of this paradox as “the logical question of things that grow.” It’s a story that resonates with managers who have transformed their companies. As they are often quick to point out, however, their plank-changing rarely happens at a dock. It happens on the high seas, in hurricane winds and under torrential downpours as captain and crew work feverishly to keep the ship aﬂoat.

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The book Strategic Transformation: Changing while Winning, by Manuel Hensmans, Gerry Johnson, and George Yip, addresses corporate rebirth à la Theseus’s ship: It investigates whether it is possible for companies to transform themselves, enhance their competitiveness in fundamental ways, and become something new while they are still in safe harbor and without the impetus of crisis. It’s an important question, one to which managers and scholars alike crave an affirmative answer. The authors, a trio of business school professors, supply it, though not as decisively as one might wish. Much of the book’s original contribution is drawn from an empirical study of large U.K. firms. The early chapters lay out the research methods that were used to identify firms that had long periods of strong financial performance coupled with evidence of meaningful transformation. The initial analysis begins with 215 firms; of these, only 28 clear the financial hurdles. The requirement that there be evidence of transformation further reduces the list to six companies, and then to four “successful strategic transformers” (SSTs): BP, Cadbury Schweppes, Smith & Nephew, and Tesco. BP is

then dropped from the list (apparently because the authors thought they could not get the access to the company they would need), and the study is left with just three SSTs. These firms are then matched with “comparator” firms that did not transform themselves, and the paired comparisons become the spine of the analysis. Despite the authors’ efforts to stay true to the rigors of the scientific method, some critical junctures in their case are not transparent and some disaffirming evidence arises that is difficult to ignore. One might question, for example, whether it is appropriate to compare Cadbury

Illustration by Noma Bar

Strategic Change without Tears

Schweppes, a confectionary/beverage company, to Unilever, a larger and much more diversiﬁed ﬁrm. Or whether Tesco’s triumph over rival J. Sainsbury, which occurred in the later part of the research period, is due to subtle organizational processes and attitudes built up over a long period or to a visionary, charismatic leader—in this case, Sir Terry Leahy. The authors eschew the latter possibility but fail to thoroughly discredit it as an explanation. Most unnerving of all, one could question whether all three SSTs that emerged

tion while also rebuilding for the future. It’s the gold at the end of the rainbow. In particular, the points about selecting and developing a different next generation of management, ensuring that decision making allows for dissent, and being mindful of the risks that come with size and dominance could have helped many ﬁrms I’ve worked with, even if the ideas are far easier to appreciate in theory than to implement in practice. Here is where the journey through the early chapters pays off, the weak links move to

Strategic Transformation investigates whether it is possible for companies to transform themselves without the impetus of crisis. the background, and the broad strokes emerge. If this effort could be recast, I would like to see this book positioned as a thought piece, inspired by the authors’ own careful observations and reﬂections, as well as those of others, rather than as a scientiﬁc study. Cast as science, it has shortcomings that are hard to get by. But cast as thoughtful commentary, Strategic Transformation has much more to offer. +

Cynthia A. Montgomery cmontgomery@hbs.edu is the Timken Professor of Business Administration at Harvard Business School. She is the author of The Strategist: Be the Leader Your Business Needs (HarperBusiness, 2012) and was featured in a Thought Leader interview in s+b’s Spring 2013 issue.

by Rob Norton The Alchemists: Three Central Bankers and a World on Fire, by Neil Irwin, Penguin Press, 2013

ow that five years have passed since the failure of Lehman Brothers turned the financial crisis of 2007–08 into a full-blown market panic, it’s useful to look back at the lessons learned. Washington Post reporter Neil Irwin, in his new book, The Alchemists: Three Central Bankers and a World on Fire, provides an excellent insider’s account from the policy perspective, but not—at least for this reader—much optimism about the future. (The title refers to medieval alchemists’ quest to turn base metals into gold. Modern central bankers have discovered a better trick: creating money out of thin air.) Irwin was assigned to cover the U.S. Federal Reserve in August 2007, just as the wheels began to come off the mortgage-backed securities market and the mayhem began to build. He was thus perfectly situated to report on the crisis and its aftermath, and he has made the most of his opportunity. The Alchemists is a deeply researched and painstakingly reported account of what went wrong, and how the world’s top three central bankers— Ben Bernanke at the Fed, JeanClaude Trichet at the European Central Bank, and Mervyn King at the Bank of England—struggled to keep the global financial system from capsizing. The Alchemists begins with a nicely told history of central banking that will be helpful to most readers. The world’s first central bank, Sweden’s Stockholms Banco, went

books in brief

from the exhaustive process actually fit the bill: Cadbury Schweppes had several periods of uninspiring performance and de-merged in 2008, and Cadbury itself was acquired by Kraft in 2010. Is that a sign of strength or an indication that the firm lacked the scale to thrive on its own in a competitive global marketplace? Further, since the book’s publication, and following the eurozone crisis, Tesco appears to be faring worse than J. Sainsbury in the U.K. supermarket business. In a larger sample, these issues might not be so concerning, but with only three SSTs, they represent two-thirds of the study. The book’s high point (and it is a high point) comes in the final chapter, where the authors put forward 10 proposals for “playing the long game,” that is, successfully maintaining a certain course of ac-

The Wizards of Money

parts were slower to act, and their economies have paid the price in slower recoveries. The other large lesson that should have been learned from the Great Depression was that governments can limit the downside of a

counts, for example, how then White House Chief of Staff Rahm Emanuel (now the mayor of Chicago) responded, shortly after President Obama took office in January 2009, when a staffer told him that it could take weeks to draft a financial reform bill. Emanuel, Irwin relates, said, “Sit down and start fucking typing.” The book answers many questions authoritatively, but some of the biggest and most important ones are outside The Alchemists’ scope. One is how successful central bankers will be in unwinding the current era of cheap money without unleashing inflation or causing recession. Another is how Europe will be able to preserve its common currency while serving the needs of its economically diverse members. Finally, it’s difficult to put The Alchemists down

In 1866, economists learned that a central bank can stop a market panic. But future central bankers failed to learn from the experience. recession by boosting government spending. U.S. policymakers did some of this, beginning with the unpopular US$700 billion Troubled Asset Relief Program in late 2008. But by historical standards, it wasn’t a very big intervention, and little has been done since, as politicians pushed instead for lower government spending. European nations, even more disastrously, embraced austerity from the beginning, which has put them right back at the threshold of recession. Irwin’s reporting enlivens what can easily be a dry subject. He re-

without asking whether enough reregulating of the banking industry has been done to ensure that it won’t all happen again. +

Rob Norton rob@robnorton.com is a freelance writer and editor, and an adjunct faculty member of Columbia University’s Graduate School of Journalism. Previously, he was executive editor of s+b and Fortune magazine.

strategy+business issue 72

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belly-up in the middle of the 17th century, marking the first, but far from last, time a monetary policy blunder ignited a business downturn. The feckless central banker, Johan Palmstruch, was sentenced to death, although the sentence was later commuted. It wasn’t till the mid-19th century that monetary policy came into its own, during the panic that followed the failure of the London bank Overend, Gurney & Co. in 1866. As the money market froze up, threatening the British economy, the Bank of England flooded the banking system with money, ensuring that banks could continue to fund businesses. This innovation was highly successful; the crisis passed somewhat quickly, and economists learned that a central bank, acting boldly, can stop a market panic and limit the consequent losses in economic activity. But future central bankers failed to learn from the Bank of England’s experience. After the stock market crash of 1929, as Irwin goes on to relate, the Federal Reserve failed to act aggressively to protect the banking system, provoking the Great Depression. The world was lucky that Ben Bernanke was running the Fed when the panic of 2008 began. A monetary economist and former Princeton professor whose field of study had been the Great Depression, Bernanke immediately recognized the gravity of the situation, and applied the lessons of 1866 with energy and imagination. He orchestrated a series of monetary policy maneuvers, which have continued since, to keep the banking industry working and interest rates low enough to enable economic recovery. Bernanke’s European counter-

Feminine Values Ascending by Sally Helgesen The Athena Doctrine: How Women (and the Men Who Think Like Them) Will Rule the Future, by John Gerzema and Michael D’Antonio, Jossey-Bass, 2013

University Press) showed how decades of flawed academic research had resulted in the widespread perception that women, in addition to lacking leadership skills, were deficient in morality and ethics in comparison with men. The robust research tradition that started with Gilligan, along with changes in the nature of technology, the economy, and demographics, appears to have given at least a theoretical edge to leadership ideals of context and collaboration over the decisive, topdown approach associated with hierarchies and traditional male leadership models. The widespread nature of this shift is documented by the authors of The Athena Doctrine: How Women (and the Men Who Think Like Them) Will Rule the Future, who begin by associating inclusive and cooperative approaches to leadership and organization with the Greek goddess of civilization and culture. These values contrast with those of Athena’s brother Ares, the dominant and aggressive god of war. The authors then set off on a world tour in search of examples of “Athena values” in action. Most of these examples—including social entrepreneurship, community building, social marketing, financing cooperatives, bottom-up support networks, and a host of other good works—prove to be engaging and inspiring, although sometimes less than convincing as proof of the authors’ thesis because of their anecdotal nature and their lack of scale. The most compelling chapters in the book focus on countries in which systemic disruptions have spurred grassroots efforts to institute systemic change: Iceland in the wake of the financial meltdown, Israel after the intifada, Japan follow-

books in brief

ost of us are not happy with the state of the world. At least that’s what John Gerzema and Michael D’Antonio conclude from their surveys of 64,000 people in 13 major countries. The surveys revealed widespread dissatisfaction among the respondents—who were chosen to mirror national populations— with how power is concentrated, resources are allocated, and decisions are made in their home country. What are the drivers of this pervasive discontent? Government, the economy…oh, and apparently men. “A clear majority of people around the world are unhappy with the conduct of men,” declare brand consultant Gerzema and journalist and author D’Antonio. These unhappy people include 79 percent of respondents in Japan and South Korea and two-thirds of all respondents in the U.S., Indonesia, and Mexico; the rate of dissatisfaction was nearly equal among men and women. How should men act? Like women, according to the survey results. For example, 66 percent of respondents think that “the world would be a better place if men thought more like women.” A majority of the men surveyed expressed this view, and Japanese men reported the highest levels of conviction (79 percent). In addition, 65 percent of respondents from all 13 countries believe that having more female

leaders in government would prompt a rise in trust and fairness, and a decline in scandal and wars. “Thinking like women” is, of course, a highly ambiguous concept, so the authors then asked half of their global sample to identify 125 behavioral traits as masculine, feminine, or neutral. Perceptions turned out to be fairly consistent across countries and cultures. Respondents pegged traits such as dominance, aggression, decisiveness, ambition, and analytical orientation as masculine, and traits such as being communityoriented, social, supportive, intuitive, cooperative, empathetic, and patient as feminine. Members of the other half of the sample were asked to correlate these different traits with leadership, success, morality, and happiness. In all four domains, feminine traits were ranked as more highly correlated than masculine traits. Morality and happiness showed the strongest relationship. Clearly, we’ve come a long way since 1982, when Carol Gilligan’s highly inﬂuential In a Different Voice: Psychological Theory and Women’s Development (Harvard

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Sally Helgesen sally@sallyhelgesen.com is a contributing editor of s+b. She 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; BerrettKoehler, 2010).

A Robot Ate My Job by David K. Hurst Metaskills: Five Talents for the Robotic Age, by Marty Neumeier, New Riders, 2013

hat is a human? Why do we work? What makes us happy? These are three of the 10 existential questions superimposed over the full-page photographs that Marty Neumeier chose as the opening for his new book, Metaskills: Five Talents for the Robotic Age. Neumeier, director of transformation for brand consultancy Liquid Agency and publisher of the seminal but now-defunct design magazine Critique, thinks that this is a particularly apt time to pose such questions. Like other commentators, notably Clayton Christensen, Neumeier notes that technological advances are commoditizing work. He says that we are on a “robot curve,” in which creative work at ﬁrst is skilled, then becomes merely rote, and ﬁnally, with the help of algorithms, turns robotic. This process has a socioeconomic hourglass effect: As well-paid skilled work disappears, the rich get richer, the middle class gets squeezed, and the ranks of the poor expand. How can today’s skilled workers escape this squeeze? First, they should become design thinkers. In Neumeier’s view, traditional business thinking has only two steps: you know something, and you put that knowledge into action by doing something. Design thinking adds “making,” a crucial middle step of “imagining and prototyping solutions that weren’t on the table before.” Thus, “design can bring back value where it has been sucked com-

pletely dry by commoditization,” Neumeier says, quoting Steelcase Inc. president James Hackett. Second, according to Neumeier, today’s workers can protect their future by developing five metacognitive skills, or “metaskills.” These metaskills are (1) feeling, which the author defines as empathy, intuition, and social intelligence; (2) seeing, which is the ability to think systemically; (3) dreaming, which is applied imagination; (4) making, which is the key to design thinking; and (5) learning, which is the ability to acquire new skills. Neumeier devotes the main body of the book to describing the metaskills, which he compares to the five fingers of the human hand. Learning is the prehensile thumb, which allows us to better grasp each of the other skills. Unfortunately, it is here that the author’s own grasp of his themes starts to slip. There are nuggets of wisdom buried in these five core chapters. The chapter on feeling and the role that aesthetics plays in it offers fresh perspectives. The author suggests, for example, that objects and experiences can be appreciated on three levels: content, or what they are

strategy+business issue 72

ing the Fukushima Daiichi nuclear disaster, and Colombia recovering from the worst of the drug cartel wars. Although the authors’ examples of the efforts to rebuild damaged economies, ecologies, and infrastructures may seem at first to lack coherence, it soon strikes the reader that this may be precisely the point. After all, haven’t many of the large-scale interventions made throughout the 20th century proven destructive of community and sustainable livelihood in application? In fact, the concept of making something bad a little better rather than seeking one heroic solution seems to define the essence of The Athena Doctrine, and is indeed demonstrative of a less arrogant and elite-centric leadership model than the usual. It also provides an interesting counterpart to the “shock doctrine” described by Naomi Klein in her book of the same name, which details how the chaos that follows financial and economic disasters can be exploited by those seeking to impose control on struggling communities via clean-slate solutions. Gerzema and D’Antonio offer examples that are admittedly scattershot, but in doing so, they may provide us with a viable and valuable approach to creating change. +

about; form, or the ways in which they are embodied; and associations, or why they matter to us. And in the chapter on dreaming, the 10 strategies for “triggering new ideas,” with their emphasis on metaphor, pictures, and paradoxes, would be helpful to any would-be creative

down the factory,” “change the subjects,” and “ﬂip the classroom”), with little appreciation of exactly how we will get from here to there. For this reason, Metaskills works better as an aggregation of interesting ideas than as a synthesis that adds up to more than the sum of its

We are on a “robot curve,” in which creative work at ﬁrst is skilled, then becomes merely rote, and ﬁnally turns robotic. parts. Ultimately, Neumeier’s arguments and recommendations do not do justice to his lofty themes and stirring conclusions. +

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David K. Hurst david@davidkhurst.com is a contributing editor of s+b. His latest book is The New Ecology of Leadership: Business Mastery in a Chaotic World (Columbia University Press, 2012).

strategy+business is published by the global management consulting firm Booz & Company. www.booz.com

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thinker. But at times the discussion of the metaskills degenerates into a series of rather disconnected directories that are described variously as “principles,” “archetypes,” “metacommandments,” “tests,” “strategies,” and so on. And they are mainly statements of intention or desired outcomes. We need such statements, of course, but announcing them is the easy part. What is missing is examples of the design component: the imagining and prototyping of the new approaches needed to create the outcomes. Neumeier concludes with a call to action. “We’re not human beings; we’re human becomings,” he says. “We’re not the sum of our atoms; we’re the potential of our spirit, our vision, and our talent.” He goes on to argue that if we are to live up to this potential, we must stop “feeding our children to the factory” and sacriﬁcing them to “the gods of mass production.” He then calls for a transformation of our education system aimed at better preparing young people for the Robotic Age. But again, he’s presenting good intentions and desirable outcomes (“shut

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Getting IT and Marketing Managers to Make Nice Differing views about technology usage can hurt a company’s performance. BY MATT PALMQUIST

IT Is from Venus: Aligning the Worldviews for Firm Performance Authors: Ming-Hui Huang (National Taiwan University) and Eric T.G. Wang (National Central University) Publisher: Decision Sciences, vol. 44, no. 1 Date Published: February 2013

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Do your IT and marketing managers need marriage counseling? Could be, says this study, which finds that many companies would improve their financial performance by getting the groups to stop squabbling. Previous research suggests that marketers typically believe technology should have an external focus, especially on finding new customers. IT departments, on the other hand, tend to argue for putting the right internal technology in place. Accordingly, the authors examined how each group viewed two important technologies, customer relationship management (CRM) and knowledge management (KM). CRM focuses on the front end to foster meaningful relationships; KM concentrates on the back end to ac-

quire, analyze, and protect vital data. The authors surveyed 329 marketing and IT managers at 259 firms in the finance, manufacturing, and service sectors. They also collected four years of financial data to track the effect of the two groups’ attitudes on long-term performance. After controlling for several factors, the authors found that marketers had virtually no regard for KM initiatives, whereas IT managers held them in high esteem. And although both sides recognized the benefits of CRM, they did so for very different reasons. Marketers perceived it as a way to boost market share and add revenue. The IT group believed CRM enhanced internal efficiency. These discrepancies, which resulted in an uneven deployment of CRM and KM capabilities, reduced effectiveness, growth, and profitability at the 70 companies for which the authors had responses from both IT and marketing managers. But companies can turn this conflict into a competitive advantage. The trick is to embrace and manage their divergent world views, the authors write, by emphasizing the importance of market position to

the IT department and the value of technology’s reach to marketers. Until the teams sit down and compare notes on particular projects, however, the yawning gap in perceptions only threatens to widen further. But there is hope. The IT–marketing marriage has long thrived at tech-driven companies, by virtue of how entwined their two functions are. The authors cite Dell Inc.’s early creation of a cross-departmental “blog resolution” team that was trained to offer both customer service and technical support. Not every marriage will be made in that kind of heaven. But a company will pay a price if its marketers and techies continue to live apart. Bottom Line: Addressing the conﬂict-

ing viewpoints of marketing and IT can help improve performance—by expanding the marketing possibilities of technology-driven data and by creating a culture supportive of IT initiatives. + s+b Recent Research Online See more coverage of research papers— including our complete archive—at strategy-business.com/recent_research.

Illustration by Elwood Smith

Title: Marketing Is from Mars,

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