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Daniel H. Pink
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Published by Booz & Company
Autumn 2013
Display until November 26, 2013
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No fewer than 39,900 active companies
can trace their roots to Stanford.1
It’s a place you’ve never been,
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A Stanford executive education program is like no other.
It will equip you with the innovation and leadership insights
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Enroll. Re-boot. Transform:
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editor’s letter
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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
[email protected]
leading ideas
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
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
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.
Life in the Matrix
Jon R. Katzenbach and Adam Michaels
As companies evolve away from traditional hierarchies, a
major cultural shift is required.
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.
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
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
Loran Nordgren
Ken Favaro and Amy D’Onofrio
An Uncommonly
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.
How Ready Are You
for Growth?
Cynthia A. Montgomery
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
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
Published by Booz & Company
Art Kleiner
[email protected]
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September 30 – October 2, 2013
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leading ideas
Case for
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
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-
leading ideas
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
[email protected]
is president and CEO of The Nature
Conservancy and a former managing
director of Goldman Sachs.
Jonathan Adams
[email protected]
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
leading ideas
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.
leading ideas
The Big Bite
of Small
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
Snack bars
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
$20 to $49.9 billion
$10 to $19.9 billion
Fruit/vegetable juice
Under $10 billion
Baby food
Sports and energy drinks
Bottled water
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
leading ideas
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
• 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
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
[email protected]
is a principal with Booz & Company’s
consumer and retail practice, and is based
in New York.
Steffen Lauster
[email protected]
is a partner with Booz & Company based
in Cleveland. He leads the firm’s consumer
and retail practice in the United States.
J. Neely
[email protected]
is a partner with Booz & Company’s
consumer and retail practice, and is based
in Cleveland.
leading ideas
often positioned as premium brands
and are priced higher than the
• 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
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
leading ideas
How to
Let 999
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
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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leading ideas
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
[email protected]
is an associate professor of strategy and
entrepreneurship at London Business
strategy+business issue 72
leading ideas
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
Pink’s New
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
leading ideas
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
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
[email protected]
is senior editor for books at
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leading ideas
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
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
Is the Arctic
the Next
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
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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
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How Banks Are Digitizing Their Business
Current State
Target State
client 10
Meet to discuss
financial need
Advisor creates
financial plan and
sends to support
Keys in data,
sends hard copy of
application to client
Scans application
and reviews again
for errors
Meet to discuss
financial need
to client
Advisor creates
financial plan,
uploads client
data (software
catches errors
2 and gaps), and
electronically to
middle office
4 Sets up account with
auto-filled fields from
application. Client
receives automatic
back office
Reviews application
for gaps and errors,
and submits to
middle office
Reviews data 3
and sends
to back office
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,
leading ideas
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.
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
leading ideas
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
[email protected]
is a senior partner with Booz & Company’s
organization, change, and leadership
practice, and is based in Stockholm.
Laurence C. Smith
[email protected]
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 Civilization’s Northern Future (2nd ed.,
Plume, 2011).
This article is adapted from “Demystifying
the Arctic by Stating the Truths,” a report
by the World Economic Forum’s Global
Agenda Council on the Arctic, of which the
authors are members (and Karlsson is
[email protected] work
W H J\
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leading ideas
global sea levels, weather patterns,
and fisheries, remain unclear. This
lack of basic scientific 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 scientific observations—including long-term monitoring and mapping programs, improved computer
modeling, and development of new
technologies ranging from autonomous sampling platforms to satellite
observing systems—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
essay 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
essay finance
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
strategy+business issue 72
essay finance
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-
essay finance
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 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
strategy+business issue 72
essay finance
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?
Your career trajectory
Wharton Executive Programs
for every level
Reprint No. 00206
Catherine Palmieri
[email protected]
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.
There’s an ebb and flow to every career path. Wharton has more than
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Make an impact at titlewave
essay finance
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. +
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
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
essay 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
essay organizations & people
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
strategy+business issue 72
essay organizations & people
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
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
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.,
strategy+business issue 72
essay organizations & people
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
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
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
[email protected]
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
[email protected]
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
strategy+business issue 72
essay organizations & people
“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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Transforming Your Leadership Strategy
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
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
but nondifferentiating
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.
essay strategy & leadership
Exhibit 2: Divesting Capabilities: The Buyer’s vs. the Seller’s View
(competitive advantage)
Competitive necessity
(“table stakes”)
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.
Both sides should exercise caution;
otherwise, buyer may end up
overpaying, while the seller risks losing
essential staff or technologies.
Neither seller nor buyer has reason
to proceed.
Competitive necessity
(“table stakes”)
Both sides should exercise caution, or
seller may end up retaining too much,
and the buyer may not gain everything
it needs.
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.
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.
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.
The buyer gains from these capabilities,
and should not have to pay very much
for them.
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.
tially planned to look at were capital
project management, asset management, and activities that fell under
the heading of health, safety, and
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
Source: Booz & Company
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
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
[email protected]
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
[email protected]
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[email protected]
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.
A new Gallup
poll reveals
apathy in the
New posts
daily on
s+b Blogs
A crucial
first step in
analytics is
to decode
the jargon.
Visit for
your index to the best thinking in business
Employees Are
and Mismanaged
Seven principles can help
multinationals sell to a
rising segment of eager
Chinese customers.
AT&T from
Apples to
Ed Whitacre rescued
a couple of iconic
American companies,
but a few years too
late for my family.
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?
feature organizations & people
feature organizations & people
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
Gary L. Neilson
[email protected]
is a senior partner with
Booz & Company based in
Chicago. He focuses on operating models and organizational
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
[email protected]
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
[email protected]
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.
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
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
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
Structures and
Behaviors at
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
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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
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
register clerk named Francelle is
known for her friendliness and pres-
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
[email protected]
is the president of operations and
community management at Walgreens.
Wayne Orvis
[email protected]
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
“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
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this project was one of our best in the
In one of our stores in Texas, a
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
How decisions are made
How people instinctively act or take action
• Governance forums
• Decision rights
• Decision processes
• Decision analytics
• Values and standards
• Expectations and “unwritten rules”
• Behaviors
How people are compelled to perform
How people are inspired to contribute
• Monetary rewards
• Career models
• Talent processes
• Shared vision and objectives
• Individual goals and aspirations
• Sources of pride
How the organization formally processes data and knowledge
• Key performance indicators and metrics
• Information flow
• Knowledge management systems
How work and responsibilities get divided
• Organizational design
Role and responsibilities
• Roles
• Business processes
How people make sense of their work
• Identity, shared language, and beliefs
• Assumptions and biases
• Mental models
How people connect beyond the lines and boxes
• Relationships and collaboration
• Teams and other working
g units
• Organizational influence
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-
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.”
“We will not compromise on what we
“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.
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
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.
“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
Critically important, given the rapid
evolution of the business environment; if
networks are not already in place, they
need to be fostered.
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
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.
“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.”
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.”
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.
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.
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?”
strategy+business issue 72
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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).
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,
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:
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.
feature strategy & leadership
An Uncommonly
feature strategy & leadership
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.
The Otis president might have been expected to push 200 Index (UTC compared to S&P 500)
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
help. Over the next two decades, David and Ito would
become so close that he would eventually say Ito was 0
square footage
like “a second father” to him.
The story of that phone call and its aftermath is re2000
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
strategy+business issue 72
George L. Roth
[email protected]
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.
feature strategy & leadership
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
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
1976 UTC buys Otis
Robert Daniell
George David
1986 Otis learns
Matsushita’s methods
1988 Yoshiki Iwata
demonstrates kaizen
to P&W
P&W North
Berwick plant
almost closes,
revitalized by
UTC divests
across all
to Conn.
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
names UTC
admired in
Transformation ingrains
ACE in all UTC
David begins
ACE is
ACE results
Chênevert targets
70% ACE gold
or silver sites
by Dec. 2009
targets 70%
gold or
suppliers by
Dec. 2011
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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
has 50,000+
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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
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:
feature strategy & leadership
Illustration by Fernando Volken Togni
feature strategy & leadership
feature strategy & leadership
Vinay Couto
[email protected]
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
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
[email protected]
is a partner with Booz &
Company based in Chicago.
He specializes in strategydriven transformation for
product- and innovation-based
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
Release Funds
• Systematic investments in
differentiating capabilities
• Sustainable and differentiated
capabilities for growth
Invest in HigherValue-Added
• 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
• 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
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
High score on both
strategic clarity and
coherence and resource
alignment; low or medium
score on supportive
High scores on all
• Strategy and critical
priorities are unclear and
not widely understood,
even among top
• 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
• From a market
effectiveness perspective,
doing almost everything
• 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
• Have strong strategies,
and a coherent and
clearly articulated set of
• Strategy is clear,
differentiated, and well
• 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
• 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
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
• May be held back by
inadequate practices,
processes, or
• Capabilities are
distinctive and well
developed, and they drive
clear competitive
• 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
• Capabilities are highly
advanced and lead the
• 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
Calculating the
Fit for Growth
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
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
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).
TSR Score
Limited Brands
Capital One Financial
U.S. Bancorp
Whole Foods Market
Time Warner Cable
Luxottica Group
Wal-Mart Stores
Fit for Growth Index Score
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
Medium High
Medium Low
Medium High
Medium Low
Low and
Medium Low
Fit for Growth Index Score
Source: Booz & Company
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-
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What a “Ready
for Growth”
Company Looks
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
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
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
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.
TSR Score
entiated products. Companies can’t
ConAgra Foods
J.M. Smucker
Tyson Foods
American Greetings
General Mills
Campbell Soup
Avon Products
Fit for Growth Index Score
execute such a strategy unless
they optimize costs and tailor their
Molson Coors Brewing
egy that capitalizes on distinctive
capabilities to create truly differ-
Newell Rubbermaid
companies must offer something
elsewhere. This requires a strat-
smart strategies and sharp execu-
customers really want but can’t get
Church & Dwight
open competitive battleground,
tion. To win, consumer products
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
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o test the relationship
Source: Booz & Company
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
[email protected]
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
[email protected]
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
[email protected]
is a partner with Booz & Company based in
Munich. He specializes in strategy-based
improvement of top-line and bottom-line
strategy+business issue 72
feature strategy & leadership
ing, supply chain and distribution
• 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
of the
& article
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
• 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
Online Fit for Growth Index Profiler: For an assessment tool from Booz
& Company designed to help evaluate your company’s readiness for
growth, visit
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:
Best of the
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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
China is also vulnerable
to numerous “ugly
ducklings,” such as
labor unrest and
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
feature strategy+business
strategy & leadership
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
[email protected]
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
What You Should
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
Best of the s+b Blogs
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 `iVˆÃˆœ˜Ê ˆÃÊ >VVœ“«>˜ˆi`Ê LÞÊ Vi>ÀÊ «iÀvœÀmance 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 Lœ>À`½ÃÊ LÕއˆ˜Ê >˜`Ê ÃÕ««œÀÌÊ >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
[email protected]
is the director of research at the National Preparedness
Leadership Initiative and writes frequently about leadership
and resilience.
feature strategy+business
strategy & leadership
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 ˆ˜ÛœÛiÃÊ Ì…ÀiiÊ Ãˆ}˜ˆwV>˜ÌÊ `iVˆÃˆœ˜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-
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
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
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
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
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
[email protected]
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
NORDGREN: Absolutely. It’s very
thought leader
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
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
strategy+business issue 72
Ken Favaro
[email protected]
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
NORDGREN: Maybe the first princi-
thought leader
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
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
S+B: What about influencing
others? Does the theory of unconscious thought suggest a better way
strategy+business issue 72
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.”
thought leader
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
strategy+business issue 72
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?
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
[email protected]
or on +44 (0)1865 422 583
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.
books in brief
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
[email protected]
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
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
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
[email protected]
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
books in brief
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
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
books in brief
Sally Helgesen
[email protected]
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. +
Discuss the biggest
ideas in business
with the best minds
in business…
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on s+b’s awardwinning mix of
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Sign in with
David K. Hurst
[email protected].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.
books in brief
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
Join the
Getting IT and Marketing
Managers to Make Nice
Differing views about technology usage
can hurt a company’s performance.
IT Is from Venus: Aligning the
Worldviews for Firm Performance
Authors: Ming-Hui Huang
(National Taiwan University) and
Eric T.G. Wang (National Central
Publisher: Decision Sciences, vol. 44,
no. 1
Date Published: February 2013
end page
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
Illustration by Elwood Smith
Title: Marketing Is from Mars,
Jack Welch | Sam Palmisano
Carlos Brito | Denise Morrison
Maggie Wilderotter S
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It’s what the CGMA designation stands for
Officially, it’s Chartered Global Management Accountant . Established
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