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A.G. LAFLEY

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THI S YEAR’ S study of
the incoming class of
chief executives
-- Emily Cavanagh
Program for Leadership Development 2012

I HAD VERY HIGH
EXPECTATIONS.
I CAN TELL YOU
THAT THIS PROGRAM
MET THEM ALL.”
-- Yannick Hausmann
Advanced Management Program 2012

I LEARNED TO
CONNECT THE DOTS
FROM FINANCE TO
STRATEGY TO LEADERSHIP
TO OPERATIONS AND MORE.”
The world’s top executives often need to step outside their organizations to acquire
the skills, knowledge, and leadership to successfully address today’s critical business
issues. The Harvard Business School Executive Education comprehensive leadership
programs are where they convene. clp_info@hbs.edu | www.exed.hbs.edu/pgm/clp/
-- Emily Cavanagh
Program for Leadership Development 2012

I HAD VERY HIGH
EXPECTATIONS.
I CAN TELL YOU
THAT THIS PROGRAM
MET THEM ALL.”
-- Yannick Hausmann
Advanced Management Program 2012

I LEARNED TO
CONNECT THE DOTS
FROM FINANCE TO
STRATEGY TO LEADERSHIP
TO OPERATIONS AND MORE.”
The world’s top executives often need to step outside their organizations to acquire
the skills, knowledge, and leadership to successfully address today’s critical business
issues. The Harvard Business School Executive Education comprehensive leadership
programs are where they convene. clp_info@hbs.edu | www.exed.hbs.edu/pgm/clp/
We chose the title “Captains in Dis-
ruption” for the lead feature story
of this issue—by Ken Favaro, Per-
Ola Karlsson, and Gary L. Neilson
(page 40)—explicitly to contrast
with captains of disruption. In other
words, we’re not talking about the
charismatic CEOs who come into
office roaring about the dangers of
tradition and complacency, promot-
ing upheaval as a turnaround strat-
egy, gratuitously marginalizing and
scapegoating the previous leader-
ship, and then burning out, leaving
their companies in a state of back-
lash and collapse. (The latest promi-
nent example, as I write this, is Ron
Johnson at J.C. Penney.)
The most effective CEOs today
are steady, collaborative chief execu-
tives—those who look for stability
in all the chaotic places. They face
down disruptive events and trends
by planning and preparing for the
time after crisis, and by acting in
harmony with the people of their
enterprise.
Several articles in this issue sug-
gest that the trends are in their favor.
For example, “Portrait of the Incom-
ing Class” (page 52), which tracks
the proportions of planned to un-
planned CEO successions in 2012,
finds that boards of directors on
average are less inclined to fire their
CEOs reactively, and more inclined
to deliberately develop a pipeline of
leadership acumen. A similar point is
made by the former CEO of Procter
& Gamble A.G. Lafley and his long-
time advisor, dean of the Rotman
School of Management Roger Mar-
tin, in “Leading with Intellectual
Integrity” (page 60). While at P&G,
they redesigned the strategic plan-
ning process to cultivate more co-
herent and rigorous thinking among
fast-track executives.
Jon Katzenbach and DeAnne
Aguirre, who lead the Katzenbach
Center (which coordinates Booz &
Company’s research on organiza-
tional culture and change), argue
that the CEO’s most important role
is as a leader of the company’s cul-
ture (page 22). On page 11, CEO
Tom Fanning of Southern Compa-
ny, an innovative power utility based
near Atlanta, explains how he fos-
ters collaboration across functional
disciplines, and how this has led to
many of the firm’s most profitable
and intriguing energy initiatives.
This issue also contains a note-
worthy Thought Leader interview
with David Kantor, the influential
author of Reading the Room (page
90); a list of five principles for “re-
imagining” your digital identity,
from three leaders of the new team
known as Booz Digital (page 34);
a compelling profile of AeroViron-
ment, an idiosyncratic manufacturer
of drones and innovative battery sys-
tems (page 78); an intriguing asser-
tion that driverless vehicle technol-
ogy could transform the long-haul
trucking industry (page 8); and a
look at the consumer-centric busi-
ness model for healthcare (page 68)
that is emerging as hospitals and
healthcare companies address the
disruption facing their industry.
Whether you’re standing be-
hind it, cheering it on, or facing off
against it, disruption can be exhaust-
ing. If you’re a CEO—or a business
leader of any type—you’ve already
learned, at least somewhat, to take it
in stride. After the past several years
of uncertainty, we’re all learning to
do so. Or maybe we’ve just been liv-
ing in disruption for so long that it’s
starting to look like equilibrium.
Art Kleiner
Editor-in-Chief
kleiner_art@strategy-business.com
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Stability in Chaos
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Turning the Tables on Success
Adam Grant
In today’s workplace, what goes around comes around
faster, sinking takers and propelling givers to the top.
The Next Autonomous Car Is a Truck
Peter Conway
The obstacles to adoption are significant, but driverless
technology now in development could transform long-
haul trucking.
Innovating for Energy’s Future
Edward H. Baker and Tom Flaherty
The key to clean, reliable, and affordable energy,
says Southern Company CEO Tom Fanning, is a bold
and balanced approach to R&D.
The Wise Leader
Prasad Kaipa and Navi Radjou
Practical wisdom in business comes from combining
the broad view with the narrow, and opportunity with
constraint.
s+b Trend Watch
Big Pharma’s Potential in Emerging Markets
India’s Leadership Challenge
Gaurav Moda, Anshu Nahar, and Jai Sinha
At many Indian companies, the development of top
management lagged behind the pursuit of technical
excellence.
STRATEGY & LEADERSHIP
Culture and the Chief Executive
Jon Katzenbach and DeAnne Aguirre
CEOs are stepping up to a new role, as leaders of their
company’s thinking and behavior.
STRATEGY & LEADERSHIP
Building a Flywheel Business
Tim Laseter and Jeff Bennett
By linking customers and capabilities, companies can
generate the momentum for sustainable growth.
MARKETING, MEDIA & SALES
Don’t Reengineer. Reimagine.
Jeff Schumacher, Simon MacGibbon, and Sean Collins
To realize the digital potential of your business, bring the
dynamics of a startup to scale.
leading ideas
16
14
6
8
11
essays
34
28
22
17
78
14
68
SPECIAL SECTION: THE BOOZ & COMPANY 2012
GLOBAL CHIEF EXECUTIVE STUDY
Captains in Disruption
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
Even when facing a crisis, some CEOs know
how to anticipate the worst, plan a response,
and navigate to advantage. You can do the same.
“It’s Time for a Change”
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
CEO turnover is trending high, but in a more
planned and stable manner.
Portrait of the Incoming Class
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
The newest CEOs have neither the diversity nor
the global backgrounds that you might expect.
STRATEGY & LEADERSHIP
Research Perspectives
on the New CEO
Matt Palmquist
Academic studies of the recruitment of chief
executives suggest that those from outside the
industry do relatively well, companies pay more
for generalists than for specialists, and “shadow
emperors” hamper performance.
STRATEGY & LEADERSHIP
Leading with
Intellectual Integrity
A.G. Lafley and Roger Martin, with Jennifer Riel
One skill distinguishes the effective CEO: the abil-
ity to make disciplined and integrated choices.
HEALTHCARE
Putting an I in
Healthcare
Gil Irwin, Jack Topdjian, and Ashish Kaura
The days of the disengaged health consumer
are numbered. Consumerization will transform
healthcare systems, involving individuals as never
before in the management of their own care.
The Patient Engagement Framework
INNOVATION
Flight of the
Drone Maker
Lawrence M. Fisher
How a small firm named AeroVironment is
changing the course of airplanes, automobiles,
and warfare.
Factors beyond Their Control



THE THOUGHT LEADER
INTERVIEW
David Kantor
Art Kleiner
An eminent systems therapist
says that learning to recognize
the hidden patterns in
conversation is the first step
toward more effective executive
leadership.
BOOKS IN BRIEF
Toward a Better-Informed Cynicism
Marvin Weisbord
The Practitioner’s Tale
David Warsh
Many-to-Many Manufacturing
Tom Igoe
Skill or Luck?
David K. Hurst
END PAGE: RECENT RESEARCH
The Power of “Independent”
Senior Executives
Matt Palmquist
Top leaders appointed by previous CEOs can help rein
in the incumbent.
Cover illustration by Gérard DuBois
features
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Issue 71, Summer 2013 Published by Booz & Company
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lems and manage heavy workloads.
Takers, who put their own agenda
first, are far less likely to climb the
corporate ladder.
The fall of takers and the rise
of givers hinges on a third group,
whom I call “matchers.” Matchers
hover in the middle of the give-
and-take spectrum, motivated by a
deep-seated desire for fairness and
reciprocity. They keep track of ex-
changes and trade favors back and
forth to keep their balance sheet
at zero, believing that what goes
around ought to come around. Be-
cause of their fervent belief in an eye
for an eye, matchers become the en-
gine that sinks takers to the bottom
and propels givers to the top.
Takers violate matchers’ belief
in a just world. When matchers wit-
ness takers exploiting others, they
aim to even the score by imposing a
tax. For example, matchers spread
negative reputational information to
colleagues who might otherwise be
vulnerable, preventing takers from
getting away with self-serving ac-
tions in the future. On the flip side,
most matchers can’t stand to see
generous acts go unrewarded. When
they see a giver putting others first,
matchers go out of their way to dole
Turning the
Tables on
Success
In today’s workplace,
what goes around
comes around faster,
sinking takers and
propelling givers to
the top.
by Adam Grant
I
n the old world of work, good
guys finished last. “Takers”
(those in organizations who put
their own interests first) were able
to climb to the top of hierarchies
and achieve success on the shoulders
of “givers” (those who prefer to con-
tribute more than they receive).
Throughout much of the 20th cen-
tury, many organizations were made
up of independent silos, where tak-
ers could exploit givers without suf-
fering substantial consequences.
But the nature of work has
shifted dramatically. Today, more
than half of U.S. and European
companies organize employees into
teams. The rise of matrix structures
has required employees to coordi-
nate with a wider range of managers
and direct reports. The advent of
project-based work means that
employees collaborate with an ex-
panded network of colleagues. And
high-speed communication and
transportation technologies connect
people across the globe who would
have been strangers in the past. In
these collaborative situations, takers
stick out. They avoid doing unpleas-
ant tasks and responding to requests
for help. Givers, in contrast, are the
teammates who volunteer for un-
popular projects, share their knowl-
edge and skills, and help out by ar-
riving early or staying late.
After studying workplace dy-
namics for the past decade, I’ve
found that these changes have set
the stage for takers to flounder and
givers to flourish. In a wide range of
fields that span manufacturing, ser-
vice, and knowledge work, recent
research has shown that employees
with the highest rates of promotion
to supervisory and leadership roles
exhibit the characteristics of giv-
ers—helping colleagues solve prob-
Leading
Ideas
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out a bonus, in the form of compen-
sation, recognition, or recommenda-
tions for promotions. Of course,
these responses aren’t limited to
matchers. Givers, too, are motivated
to punish takers and reward fellow
givers. But I’ve found that in the
workplace, the majority of people
are matchers, which means that they
are the ones who end up dispensing
the most taker taxes and giver bo-
nuses. In an interdependent, inter-
connected business environment,
what goes around comes around
faster than it used to.
At Google, for example, an en-
gineer named Brian received eight
bonuses in the span of a single year,
including three in just one month.
He volunteered his time to train
new hires and help members of mul-
tiple cross-functional teams learn
new technologies, and his peers and
managers responded like matchers,
granting him additional pay and
recognition. Consistent with Brian’s
experience at Google, a wealth of re-
search shows that in teams, givers
earn more respect and rewards than
do takers and matchers. As Stanford
University sociologist Robb Willer
notes, “Groups reward individual
sacrifice.”
Interdependent work also means
that employees will be evaluated and
promoted not only on the basis of
their individual results, but also in
terms of their contributions to oth-
ers. This reduces the incentives for
takers to exploit givers, encouraging
them to focus instead on advancing
the group’s goals. As a result, takers
engage in fewer manipulative acts—
which reduces the risks to givers—
yet they still contribute less than
givers. This allows givers to gain
a reputation for being more gener-
ous and group-oriented. And a rich
body of evidence has shown that
these qualities are the basis for sound
leadership.
In fact, when givers become
leaders, their groups are better off.
Research led by Rotterdam School
of Management professor Daan van
Knippenberg has shown that em-
ployees work harder and more effec-
tively for leaders who put others’
interests first. This, again, is a
matching response: As van Knip-
penberg and Claremont Graduate
University professor Michael Hogg
found, “going the extra mile for the
group, making personal sacrifices or
taking personal risks on behalf of
the group” motivates group mem-
bers to give back to the leader and
contribute to the group’s interests.
And a thorough analysis led by
Nathan Podsakoff, a professor at the
University of Arizona, of more than
3,600 business units across nu-
merous industries showed that the
more frequently employees give help
and share knowledge, the higher
their units’ profits, productivity,
customer satisfaction, and employee
retention rates.
By contributing to groups, giv-
ers are also able to signal their skills.
In a study led by researcher Shimul
Melwani of UNC’s Kenan-Flagler
Business School, members of five
dozen teams working on strategic
analysis projects rated one another
on a range of characteristics and be-
haviors. At the end of the project,
team members reported which of
their colleagues had emerged as
leaders. The single strongest predic-
tor of leadership was the amount of
compassion that members expressed
toward others in need. Interestingly,
compassionate people were not only
viewed as caring; they were also
judged as more knowledgeable and
intelligent. By expressing concern
for others, they sent a message that
they had the resources and capabili-
ties to help others.
Today, these signals are ever
more visible: Givers are aided by
the fact that the anonymity of pro-
The strongest predictor of leadership was the
amount of compassion that members expressed
toward others in need. Compassionate people
were judged as more knowledgeable.
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changing the characteristics that we
value in people. Two of the defining
qualities of great leaders are the abil-
ity to make others better and the
willingness to put the group’s inter-
ests first. Because givers today add
increasing value in leadership roles
and interdependent work, hiring
processes can be modified to assess
which candidates are inclined to
contribute more than they receive.
For development, promotion, and
retention, leaders and managers
should focus less on individual skills
and talents, and more on the extent
to which employees use their skills
and talents to lift others up—rather
than cutting them down. The em-
ployees with the greatest potential to
excel and rise will be those whose
success reverberates to benefit those
around them.
Along with investing in people
who are already disposed toward op-
erating like givers, it will be of para-
mount importance to create prac-
tices that nudge employees in the
giver direction. In many organiza-
tions, owing to their tendencies to
claim credit and promote them-
selves, successful takers are more
visible than successful givers. To
make sure that employees are aware
that it’s possible to be a giver and
achieve success, it may be necessary
to locate and recognize respected
role models who embody an orienta-
tion toward others. That way, when
what goes around comes around
faster than it used to, it will be for
the benefit of employees and their
organizations. +
Reprint No. 00175

Adam Grant
grantad@wharton.upenn.edu
is Wharton’s youngest tenured professor
and the author of Give and Take: A
Revolutionary Approach to Success
(Viking, 2013).
The Next
Autonomous
Car Is a
Truck
The obstacles to
adoption are significant,
but driverless
technology now in
development could
transform long-haul
trucking.
by Peter Conway
E
ach year, Wal-Mart Stores
Inc. spends hundreds of
millions of dollars deliver-
ing its merchandise across the Unit-
ed States. The 6,000 trucks in the
retailer’s fleet are a common sight on
highways, as are those of the many
other companies that rely on long-
haul trucking to transport their
goods from coast to coast. But what
if that fleet could be cut by one-
third—and be made up of trucks
pulled by slimmed-down tractors
less than half their current size, with
a computer at the helm?
It may be hard to imagine:
trucks guided by GPS, radar, sen-
sors, and software, hauling much of
the nation’s cargo. Yet autonomous
vehicle technology has made head-
lines for years, and experimental au-
tonomous cars are already on the
roads today. Google’s driverless cars
have logged more than 300,000
miles on California and Nevada
highways since 2011. That same
year, Chinese carmaker FAW un-
veiled its own autonomous car,
fessional life is vanishing. In the
past, when we encountered a job ap-
plicant, a potential business partner,
or a prospective service provider, we
had to rely on references selected by
that candidate. When takers burned
bridges with one contact, they could
eliminate that person from their
reference list. But now, online social
networks offer a much richer data-
base of references. Odds are that
through a quick search of our
LinkedIn or Facebook networks, we
can find a common connection with
knowledge of that person’s reputa-
tion. By reaching out to the mutual
contact to obtain an independent
reference on the candidate’s past be-
havior, decision makers can screen
out takers and favor givers. Of the
billion Facebook users around the
world, 92 percent are within four
degrees of separation—and in most
countries, the majority of people are
just three degrees apart.
Such tools have made it tough
for a taker to hide in the shadows.
At Groupon, for example, Howard
Lee was heading the South China
office, and received a slew of appli-
cations for sales jobs. He searched
his LinkedIn network for common
connections, and located quite a
number of them. When he discov-
ered that certain candidates had a
history of self-serving behavior, he
quickly moved on, focusing his time
and energy on candidates with track
records as givers.
Taken together, these trends are
Are you a taker, giver, or matcher?
Visit www.giveandtake.com for
a free assessment of your
self-awareness or to collect
anonymous 360-degree ratings
from anyone in your network.
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in commercial airliners, able to take
off and land without human inter-
vention. Similarly, the operating
system in driverless trucks will eval-
uate the road and surrounding ob-
stacles, such as cars, trees, or people,
hundreds of times a second, and will
decide the best path on which to
proceed to its final destination.
These new technologies won’t
come cheap. It is hard to put an ex-
act cost figure together, given that
much of the technology is still in the
pre–mass production stage. But the
total cost of outfitting a truck with
equipment and software could be
as much as US$200,000. And
although savings will vary from firm
to firm, they could exceed $100,000
per truck annually. Over several
years, the gains would far outstrip
the initial investment and the main-
tenance costs. A significant portion
of both the cost savings and the
efficiency gains would come from
eliminating drivers’ wages from the
bottom line.
Diesel fuel costs would fall,
which it demonstrated on public
roads. Toyota and Audi exhibited
their versions of the technology at
the Consumer Electronics Show in
January 2013.
The use of autonomous vehicle
technology in trucks, however, is
more of a glimmer. There have been
some developments to date, for ex-
ample, computer-guided trucks that
transport ore around mine sites. Yet,
in these and other closed-loop trans-
portation ecosystems, it is easy to
maintain control and address issues
as they arise. The appearance of
driverless trucks on a congested
highway poses many more challeng-
es and will face technical, practical,
social, and political hurdles. But
despite these significant obstacles,
this vision is worth exploring. The
use of autonomous long-haul trucks
(ALHTs) could add up to a multi-
billion-dollar opportunity for com-
panies throughout the trucking val-
ue chain, and in turn, lower prices
for consumers. Although the trans-
formation is still years away, compa-
nies should start preparing for an
automated future today.
A Technology-Powered Vision
ALHTs will have all the fundamen-
tal mechanics of the trucks we see
today, but they will be guided by a
suite of sensors acting together to
paint a digital picture of the road for
a computer positioned where the
driver now sits. These sensors will
provide the data to support an oper-
ating system that one might com-
pare to the most capable autopilots
too—as long as other factors, such
as oil prices, hold constant—be-
cause the technology reduces con-
sumption by optimizing accelera-
tion and braking. The Center for
Automotive Research estimates that
driverless trucks would increase fuel
efficiency by 15 to 20 percent. Acci-
dent-related expenses and insurance
premiums also could decline, be-
cause automated trucks would be
programmed for maximum safety,
eliminating the driver errors that
cause most crashes.
Along with the savings would
come significant productivity im-
provements. Currently, restrictions
on the number of consecutive hours
a driver can stay on the road limit
asset utilization. But the software
controlling driverless trucks never
gets drowsy, and that opens the
door to round-the-clock operations.
Higher asset utilization rates would
reduce the need for capital spending
on additional trucks. Retailers, dis-
tributors, and manufacturers that
ship goods by truck will see addi-
tional benefits as competition among
trucking companies converts the
efficiencies of ALHTs into lower
shipping rates. Retailers, in turn,
could pass those savings along to
consumers. The one-day delivery
radius could also expand, enabling
Although the savings created by autonomous
vehicle technology will vary, they could exceed
$100,000 per truck annually. The gains would
far outstrip the initial investment.
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The Road to Opportunity
There are several different scenarios
for how the adoption of autonomous
trucking could unfold. One is that
driverless trucks appear first in large
industrial environments, where they
can be contained (just like the com-
puter-driven trucks already navigat-
ing mine sites). As with machines in
the early days of factory automation,
these trucks would have limited
range and capabilities. But just as
robots became indispensable to
moving parts and goods around
plants, autonomous trucks could ex-
pand to more open areas and longer
distances as the technology is re-
fined and proven. We may also see
partial adoption. For example, some
companies may opt for “remote-
control trucking,” in which a driver
pilots a truck hundreds of miles
away through a complex environ-
ment of local roads until the truck
gets onto the highway. At that point,
a more basic, less expensive autono-
mous system designed for the rela-
tively simple environment of high-
way driving would take over. This
could be a palatable option for legis-
lators and the public.
Given the obstacles that loom, it
is likely that adoption will be an evo-
lution along these lines. We won’t
see highways dotted with driverless
trucks in the near term. But the eco-
nomics suggest that over the long
term, the industry will migrate
to autonomous vehicles. Trucking
companies that deploy these tech-
nologies most effectively will secure
industry-leading positions, and the
capitalize on new opportunities to
supply billions of dollars of auton-
omous trucking equipment. But
they’ll also see orders plunge for
cockpit gear such as steering wheels
and other components that won’t be
needed if software replaces drivers.
More importantly, if existing trucks
can be retrofitted as autonomous ve-
hicles, the current national fleet
could find itself 30 percent over ca-
pacity, because of the efficiency
gains that can be extracted from ex-
isting vehicles.
ALHTs will also face legal ob-
stacles: Legislation allowing driver-
less vehicles to operate will be need-
ed across the country. California,
Florida, and Nevada have already
enacted rules allowing testing of
driverless vehicles. But a patchwork
of varying state standards would cre-
ate a difficult environment, which
suggests a need for uniform federal
rules of the road. To that effect, the
National Highway Traffic Safety
Administration is working on na-
tional standards, due in 2013 for
cars and 2014 for heavy vehicles. In
addition, autonomous vehicle tech-
nology will have to overcome resis-
tance from a public frightened by
the specter of unmanned trucks
hurtling down highways.
Finally, as we’ve seen with auto-
mation in other industries, such as
manufacturing, the use of driverless
trucks is likely to face opposition
from unions and their political allies
as they are faced with the elimina-
tion of hundreds of thousands of
truck driving jobs.
businesses to offer overnight ground
shipping to more customers.
Society at large will also reap
benefits. If truck driving shifted to
off-peak periods, which is a viable
option in a driverless vehicle, high-
ways would be less congested. They
would also become safer as the acci-
dents involving trucks were reduced
by eliminating human error.
Costs and Compromises
Autonomous vehicle technology of-
fers advantages across the trucking
industry value chain. However, the
pace and extent of eventual adop-
tion will depend to a large degree on
the ability of stakeholders—whether
they’re shippers such as Con-Way
and Allied or manufacturers such as
Freightliner and Mack—to resolve a
range of technical, practical, politi-
cal, and social concerns.
On the technical front, driver-
less trucks could reach commercial
viability within a decade, as the
manufacturers of their supporting
technology components ramp up
production and prices, in turn, fall
as the industry moves down the
cost curve.
These components are still
prohibitively expensive today; for
example, the 600-rpm spinning
light-imaging radar system that
crowns most current autonomous
vehicles costs upward of $70,000.
And ALHT supporters must answer
such difficult questions as how to
refuel driverless trucks and protect
their cargo when trucks break down.
Fuel retailers, repair companies,
highway patrol, and insurers, among
others, will all play a role in finding
the solution.
It’s worth noting that for truck
manufacturers and incumbent sup-
pliers, the impact of autonomous
trucks will be mixed. Many will
If existing trucks can be retrofitted as
autonomous vehicles, the current national
fleet could find itself 30 percent over capacity,
because of the efficiency gains.
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Innovating
for Energy’s
Future
The key to clean,
reliable, and affordable
energy, says Southern
Company CEO Tom
Fanning, is a bold and
balanced approach to
R&D.
by Edward H. Baker and
Tom Flaherty
S
outhern Company is one of
the largest utilities in the
United States. It is also one
of just a small number of electric
power companies with a reputation
for cutting-edge innovation and ro-
bust, proprietary R&D. Under chair-
man and CEO Thomas A. (Tom)
Fanning, the company has been
deeply committed to a wide range of
R&D efforts designed to employ a
diverse mix of fuel resources.
Southern Company’s four oper-
ating companies—Georgia Power,
OEMs and suppliers that provide
the equipment needed by those lead-
ing firms will claim more than their
fair share of the market. The most
transformative addition to the value
chain will be the autonomous vehi-
cle operating system, a software
package likely to cost hundreds of
millions of dollars to develop.
Google, now testing its system on
public roads, may emerge as the sup-
plier of a standard operating system
for the industry. But car and truck
manufacturers are likely already
working to develop this critical
component as well.
Executives at trucking compa-
nies, truck manufacturers, and
equipment suppliers should start
thinking through how they see this
technology emerging, what the im-
plications are for their current busi-
ness model, and what they should
do in response. The best approaches
for each company will vary, but one
thing is clear: Inaction isn’t an op-
tion. Given that heavy truck model
changes occur infrequently, some-
times not for a decade or longer,
ALHTs could be just one design cy-
cle away. +
Reprint No. 00176

Peter Conway
peter.conway@booz.com
is a principal with Booz & Company’s
engineered products and services practice,
and is based in Chicago.
Also contributing to this article were Booz
& Company associates Antoine Cadoux,
Sathya Narasimhan, and Seva Rodnyansky,
and consultant Uppili Rajagopalan.
Alabama Power, Gulf Power (oper-
ating in northwest Florida), and
Mississippi Power—all combine
power generation, transmission, dis-
tribution, and customer engage-
ment. Rather than stifling innova-
tion, Fanning says, the company’s
integrated business model enables it
to make these broad investments in
energy innovation. And in doing so,
it can better serve its customers and
shareholders.
S+B: What drives Southern Com-
pany’s R&D strategy?
FANNING: Energy innovation repre-
sents an enormous advantage for
Southern Company. Our efforts
have simple goals: to preserve fuel
flexibility and increase the value of
energy to our customers. We are es-
sentially fuel agnostic. We don’t
know which fuels are or will be in
vogue, and we don’t bet on them.
We need to invest in “all the arrows
in the quiver”—the full portfolio of
energy resources. About five years
ago, approximately 70 percent of
our energy came from coal and ap-
proximately 11 percent from natural
gas. Now it’s about 45 percent natu-
ral gas and about 36 percent coal.
We don’t profit more off one fuel
over another. We just want to use
the cheapest fuel available for the
benefit of our customers. Because
Southern Company is so integrated,
we can follow this strategy. The
problem with separating generation
from distribution and delivery is
that it sends the wrong economic
signals to the industry’s participants
[by prioritizing profits over opti-
mized costs], without serving the
interests of customers. And if the
interests of your customers conflict
with the interests of your sharehold-
ers, you’ve got a major problem.
Besides cost and effectiveness,
Tom Fanning
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The “pull” side involves regular
meetings between our innovation
people and the marketing and pow-
er generation planning teams. This
allows the innovation team to dis-
cuss the company’s operational chal-
lenges and to identify opportunities.
S+B: What about the role of
external partners?
FANNING: Typically, we work with
other companies on one-off or two-
off projects, to put big money into
big ideas. Examples of this include
our scrubber technology work with
Chiyoda, the development of our
new coal gasification plant in Mis-
sissippi, and the CO
2
filter research
we’ve done with Mitsubishi. The
goal is to share the significant fixed
costs of some of these projects.
Like many other companies, we
partner with and support research at
a number of universities, working
directly with the schools on techno-
logical issues. At our carbon capture
research center, for instance, we di-
vert some of the post-combustion
gas streams from an operating coal
plant into a series of bays in the re-
search shop. Then we invite univer-
sities with strong research proposals
to plug into the gas streams and ap-
ply their technology solutions to
capturing the carbon in the streams.
We pick out the best ideas, and we
get to use some of what they learn
during their experiments.
We also hold regular customer
forums where we show people our
new ideas and gather feedback.
Much of this work involves our IT
we also prioritize environmental and
regulatory R&D. In fact, since the
1970s, we’ve had a proprietary R&D
group working on developing real-
world ways to manage environmen-
tal issues involving coal. Our initial
R&D involved coal liquefaction—
taking coal and turning it into an oil
derivative, essentially.
S+B: So much has changed since
the 1970s: the advent of renewables
and now the new sources of shale
oil and natural gas. How does that
affect your innovation bets?
FANNING: One of our most interest-
ing efforts today involves the gasifi-
cation of coal—transforming low-
grade coal into synthetic gas that
can be used to generate electricity,
with resulting carbon emissions
comparable to [those of] a similarly
sized natural gas plant. We’re build-
ing a clean coal plant in Kemper
County, Miss., that uses the gasifi-
cation technology we developed in a
joint venture with KBR Inc. under
the sponsorship of the U.S. Depart-
ment of Energy, and we recently
announced an alliance to market
this 21st-century coal technology to
power companies worldwide.
In another project, a joint ven-
ture with the Japanese engineering
firm Chiyoda, we’ve developed
scrubbers for removing sulfur diox-
ide from the emissions from our
coal-fired plants. And we created
our own technology for selective
catalytic reduction—a chemical
process used to remove nitrates from
coal-fired boiler emissions. We have
already spent [US]$8 billion on im-
plementing these new technologies,
and plan to invest even more in the
coming years.
Such efforts have given us prow-
ess and proficiency. We’ve been able
to deploy these environmental con-
trol technologies 10 to 20 percent
cheaper than the competition, de-
pending on the plant and the tech-
nology involved. We can also re-
move up to 98 percent of certain
emissions, significantly more than
the average.
S+B: How centralized are South-
ern’s innovation practices?
FANNING: They are very central-
ized, but we try to maintain what
might be called a “push–pull” sys-
tem. The “push” side is headed by
Chris Hobson, the senior vice presi-
dent of research and environmental
affairs and our chief environmental
officer. Chris is involved with our
portfolio of energy solutions for cus-
tomers, whether that’s generation or
transmission. He convenes his own
meetings with people in the operat-
ing companies, which involves both
compliance-related and market-re-
lated issues.
Another entity on the push side
is our R&D group, headquartered
in Birmingham, Ala. We also have a
large facility in Wilsonville, Ala.,
that’s dedicated to our gasification
and carbon capture technologies.
We’re the only power company in
the U.S. conducting carbon capture
research in this manner, on both a
post-combustion and pre-combus-
tion basis. We leverage the full range
of our technology research, assess-
ment, and deployment projects all
around the system. Our scientists
come to us saying, “Here’s some-
thing I’ve got. Where else in the
company can we use it?”
“When tornadoes went through Alabama in 2011,
we could tell immediately which neighborhoods
were out of power, because we could see which
smart meters were still working.”
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organization, which has become an
integral part of how we deliver en-
ergy to customers.
S+B: How do smart grids and smart
metering factor into your delivery
scheme?
FANNING: Southern Company had
about 4.4 million operational smart
meters by the end of 2012, which is
the second-largest smart meter de-
ployment in the United States.
Those smart meters are already re-
ducing the number of vehicles on
the road. In fact, Southern Compa-
ny has avoided approximately 40
million miles of driving since the
program began. It’s good for our
bottom line, for the environment,
and for customers.
There have also been some re-
markable unplanned consequences.
When devastating tornadoes went
through Alabama in April 2011, we
could tell immediately from our
electronic map which neighbor-
hoods were out of power, because we
could see which smart meters were
still working. That enabled us to de-
ploy our restoration crews more ef-
fectively. The use of smart meters
contributed significantly to the
company’s fast response and success-
ful restoration efforts.
In the longer term, smart meters
may be the gateway to the so-called
smart home. But we’re taking a pru-
dent, measured approach. We’re not
going to act hastily, because of cy-
bersecurity concerns. It is better to
move slowly and deliberately, and
get it right. Given how important
our service is to our customers, we
will not expose their personal infor-
mation—and the Southeast electric
network—to threats. This is an im-
portant issue, and we will not take
unnecessary chances simply in a
rush to be first.

S+B: Where do your best new ideas
come from?
FANNING: We look across conven-
tional boundaries. For example,
many people know that one of the
big problems with wind generation
is that it’s an intermittent resource.
We’re developing the next genera-
tion of compressed air energy stor-
age, or CAES. This technology uses
power generated by the wind that
blows during the night to compress
air and inject it into the ground. The
air is then extracted under exceed-
ingly high pressures during peak pe-
riods of the day, using turbines to
generate electricity.
CAES technology has been
around for a while, but we are im-
proving its efficiency by exploring
more advanced cycles that will help
reduce operating costs and make
CAES an economically viable op-
tion for bulk energy storage. This
advanced application of CAES came
from the joint efforts of our carbon
sequestration group and our renew-
ables group. When we put these two
teams together, they said, “Let’s not
just think about sequestering CO
2
underground. Let’s think about how
to use wind energy and compressed
air underground.”
S+B: Do you kill many ideas?
FANNING: Oh, sure. In fact, I would
argue that your greatest indicator of
success is how many ideas you kill. It
proves that you’re developing ideas
and pushing the envelope. And it
proves that you have the discipline
not to pursue just any idea—and
sometimes that’s the hardest part of
all, especially once you’ve started
down the road.
Sometimes we’ll say, “That just
isn’t going to work now, but let’s
keep experimenting with it.” The
original coal liquefaction idea even-
tually morphed into gasification
from the ground up. Then we
blended that with carbon capture
technology, and now we’re on the
way to bringing the concept to real-
ity in Mississippi. It took some time,
but ultimately it emerged into some-
thing really valuable.
Right now, we’re building a
nuclear power plant and a 21st-
century coal plant, converting other
plants to gas, adding environmental
equipment, and developing sources
of renewable energy. That’s a total
commitment of about $20 billion.
A little bit of R&D goes a long way
if it can raise the efficiency of these
assets or reduce the amount of capi-
tal investment needed. Even our
failures have more than paid for
themselves in terms of cheaper en-
ergy, and that’s what matters most
to our customers. +
Reprint No. 00171

Edward H. Baker
ekgbaker@yahoo.com
is a contributing editor to
strategy+business.
Tom Flaherty
tom.flaherty@booz.com
is a senior partner with Booz & Company’s
energy, chemicals, and utilities practice,
and is based in Dallas.
“I would argue that your greatest indicator
of success is how many ideas you kill. It proves
that you’re pushing the envelope.”
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never have too much of it in a com-
pany. Smart leaders can see patterns
in seemingly random information,
enabling them to take decisive ac-
tion while their peers are still assess-
ing a situation, and to make the stra-
tegic choices that bring competitive
advantage. But there are two catego-
ries of smartness, both of which
carry benefits and risks. Most exec-
utives favor one or the other, and
that makes it more difficult for them
to lead.
“Business smart” leaders, like
GE’s Jack Welch and Oracle’s Larry
Ellison, are big-picture thinkers who
recognize that opportunities are un-
limited, at least for those ready to
seize those opportunities. They are
competitive, dynamic, and proac-
The Wise
Leader
Practical wisdom in
business comes from
combining the broad
view with the narrow,
and opportunity with
constraint.
by Prasad Kaipa and Navi Radjou
S
martness is the operating
currency of organizational
culture in the 21st-century.
Whether it’s called cleverness, prac-
tical intelligence, or savvy, one can
tive. They relish high-stakes games,
and display an aggressive, winner-
take-all mentality. Bill Gates exem-
plified this form of leadership when
he took Microsoft from a college
dropout’s startup in 1976 to a com-
pany with a market capitalization of
more than US$616 billion by 1999.
But these leaders’ expeditious and
sometimes self-centered approach to
decision making can also cause
trouble. Gates learned this in 1998,
when the U.S. Justice Department
(followed by a number of European
countries) filed an antitrust suit
against Microsoft. By most ac-
counts, this was a rude awakening
for Gates. Under questioning at
trial, he appeared combative and
defensive. Although Microsoft set-
tled the lawsuit in 2001, these events
contributed to the company’s loss
of dominance.
“Functional smart” leaders are
grounded in the concrete, tangible,
and tactical, enabling them to
achieve operational and execution
effectiveness. Like Genentech co-
founder Herbert Boyer and HP
founders William Hewlett and Da-
vid Packard, functional-smart lead-
ers tend to have deep expertise in
narrow domains. They understand
that constraints are unavoidable, but
also know that they can be managed
by those willing to design appropri-
ate solutions. Tim Cook, for exam-
ple, who took over as CEO of Apple
after Steve Jobs’s death, brought a
new level of operational efficiency
and bottom-line productivity to
Apple, honed during his years as
chief operating officer. Functional-
smart leadership may seem like a
safer bet, but these leaders are prone
to repeating poor decisions or pro-
crastinating on tough decisions.
They are more likely to be caught in
the weeds of habitual practice, ne-
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glecting things outside their pur-
view. Cook, for example, in over-
looking the poor working conditions
at Apple’s Chinese subcontracted
factories, damaged Apple’s reputa-
tion and some of its profitability.
Today’s business leaders need to
balance narrow and broad views of
their business and of the world, and
to combine flawless execution with
big-picture thinking. This ability to
navigate swiftly and effectively be-
tween the two forms of smartness
based on the context, coupled with a
focus on a higher purpose and en-
lightened self-interest—the belief
that a rising tide can lift all boats—
is what we call “wise leadership.”
Practical wisdom gives executives
the tools they need to achieve both
professional and personal success:
the flexibility to anticipate disrup-
tive change, the execution capabili-
ties to meet today’s demand, and the
opportunity to build their facility in
ethics and shared values.
Most people, when they start
their careers, have potential for
both business-smart and functional-
smart leadership. But over time, as
they move up the hierarchy, they
tend to favor one or the other. They
take on what psychologists call a
perceptual filter. They see what they
expect to see—they become con-
scious of only one set of possibilities
and accept only one type of behav-
ior. The perceptual filters of business
smartness and functional smartness
are so prevalent and yet so subtle
that it’s hard to recognize the extent
to which they govern behavior. They
shape executives’ world view; al-
though people may have an intellec-
tual or intuitive appreciation for
both types of smartness, they miss
chances to bring them together.
To see the world more clearly,
leaders need to become aware of,
To D
o
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s+b Trend Watch
Pharmaceutical markets in developed
countries may still be quite sizable, but
in 2011–12 they were mostly stagnant—
or worse. Not so in emerging economies,
which are becoming the industry’s best
hope for growth.
–5%
1
5%
10%
15%
20%
25%
30%
35%
10 100 1,000
Venezuela
Saudi
Arabia
Algeria
Thailand
Nigeria
Vietnam
Indonesia
Egypt
Pakistan
South Africa
Ukraine
Japan
U.S.
Germany
France
Spain
Canada
U.K.
Italy
Argentina
Poland
South Korea
Circle size=
2012 population
Source: Matthias Buente, Stephan Danner, Susanne Weissbäcker, and Christoph Rammé, “Pharma
Emerging Markets 2.0: How Emerging Markets Are Driving the Transformation of the Pharmaceutical Industry,”
Booz & Company, 2013, booz.com/pharmawatch.

China
Brazil
Turkey
India
Mexico
Russia
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,


2
0
1
1

1
2
2012 Pharma Market Size, US$ billions (log scale)
The Global Pharmaceutical Market, 2012
Mature
Markets
BRICMT
2nd-Tier
Emerging
Markets
African
Markets
KEY
0
29 million
1.35 billion
down as Microsoft’s chief executive.
He took on the role of chief software
architect, which emphasized func-
tional smartness. In the same year,
he embraced a higher purpose by
establishing, with his wife, the Bill
& Melinda Gates Foundation. Al-
though some people initially ac-
cused Gates of using his charitable
activities to sugarcoat his image, his
foundation is today respected and
appreciated for its highly effective
approaches to combating global
challenges. Gates, the successful but
polarizing figure, has become more
righteous and moral in the eyes of
many people.
Tim Cook was driven by Steve
Jobs’s advancing illness to change
his leadership style. He moved from
a narrow form of smartness to a
more opportunity-oriented perspec-
tive, turning his attention to the big
picture and becoming sensitive to
the changing context in the world
around him. When the factory scan-
dal broke, Cook went to China
to inspect working conditions first-
hand, and he is now striving to
improve conditions there and else-
where. He also started matching
employee contributions to nonprof-
its, encouraging commitment to the
greater good. Although he has not
fully emulated Steve Jobs’s agenda or
style—for example, he pays divi-
dends, which Jobs avoided—Cook
has adopted some important busi-
ness-smart approaches. He discusses
strategy with investors, reaches out
to developers, focuses on top-line
growth, and has defended Apple’s
position as a leading innovator by
winning a patent infringement case
against rival Samsung.
A balanced approach also en-
ables leaders to lead their companies
to sustained growth, even through
trying times. Here we can look to
Ford CEO Alan Mulally as a model
of wise leadership. Long before com-
ing to Ford, Alan Mulally was a gen-
eral manager at Boeing in charge of
developing the 777 passenger air-
craft. Even at that time, he deliber-
ately cultivated a mix of business-
smart and functional-smart actions.
Traditionally, Boeing teams operat-
ed in silos with little collaboration,
leading to project delays and higher
costs. Mulally’s job was to coordi-
nate multiple teams and integrate
their efforts. In every project review
meeting, he began by reminding all
and then set aside, their perceptual
filters. This type of reflection doesn’t
always come by choice—it is typi-
cally forced upon people. Bill Gates
didn’t wake up one morning and
say, “I want to become a wise lead-
er.” He must have been compelled,
by the lawsuit and other factors, to
reconsider his leadership style.
Gates, who had been known for his
intensely competitive personality
and take-no-prisoners strategies,
made a major course correction.
In early 2000, while awaiting the
antitrust court decision, he stepped
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a
s
India’s
Leadership
Challenge
At many Indian
companies, the
development of top
management has lagged
behind the pursuit of
technical excellence.
by Gaurav Moda, Anshu Nahar,
and Jai Sinha
A
significant number of In-
dian companies have expe-
rienced impressive growth
during the past two decades. But
today, many face a daunting side ef-
fect: a nationwide crisis in leader-
ship. In some ways, Indian compa-
nies are victims of their own success.
As one senior HR manager at a large
private-sector conglomerate ex-
plained, “People have been so fo-
cused on growth that they have not
invested in developing [the next gen-
eration of executives]. There is a
strong circle of top leadership in our
businesses, but no tag team.”
Recent survey data supports
this claim. In a 2010 study by
Harvard Business Publishing, an
overwhelming 88 percent of top
Indian companies cited “gaps in
[their] leadership practice” as their
top challenge in coming years.
The 2012 ManpowerGroup Talent
Shortage Survey, a global survey of
employers, reported that 48 percent
of respondents based in India had
difficulty finding qualified candi-
dates for their senior managerial po-
sitions. And Booz & Company (the
teams that they had to factor in the
larger system, the whole plane, when
making narrow decisions; then he
moved to intensive, detailed review
of the technical and design issues.
Mulally took the same decision
logic to Ford. When he arrived in
2006, the company was losing mar-
ket share and brand equity. Mulally
mortgaged all of Ford’s assets to se-
cure a $23.6 billion loan, which he
said was needed to invest in R&D
and serve as “a cushion to protect
from a recession or other unexpected
event.” This decision, made at a time
when the economy seemed healthy,
was widely criticized. But Mulally
defended it on the grounds that “we
have to control our own destiny.”
Two years later, this business-smart
decision allowed Ford, unlike GM
and Chrysler, to avoid government-
funded restructuring.
Around the same time, Mulally
also made a critical functional-smart
decision. Walking through the park-
ing lot at Ford headquarters in De-
troit, he noticed the plethora of Ford
brands, with no common attributes
in shape or style. He set about prun-
ing the Ford model portfolio. This
allowed Ford to concentrate on im-
proving the engineering quality of a
smaller roster of models, to make life
easier for Ford distributors and deal-
ers, and to reuse components across
brands, reaping big savings on sup-
ply chain costs.
Becoming a wise leader is not
always a smooth journey—people
can easily revert to their familiar
smart behaviors. Practical wisdom
requires the unlearning of one’s past
success formulas. Even today, Bill
Gates becomes intense and defensive
when addressing Microsoft’s lack of
growth in the past decade. And Tim
Cook saw a significant decline in
Apple’s market valuation when he
focused more on tangible products
and services than on intangible con-
nections to the marketplace and
end-users. Such struggles are to be
expected. But wise leaders are resil-
ient, and they learn from failure.
They are flexible, enabling them to
maintain this crucial balance: The
business-smart leader can give voice
to aspiration, the functional-smart
leader can appreciate limits and exe-
cute within them—and the wise
leader can do both. +
Reprint No. 00177

Prasad Kaipa
prasad@kaipagroup.com
is a Silicon Valley–based CEO coach and
advisor and a senior fellow of the Indian
School of Business’s Centre for Leader-
ship, Innovation, and Change.
Navi Radjou
navi@naviradjou.com
is a Silicon Valley–based strategy
consultant and the coauthor of Jugaad
Innovation: Think Frugal, Be Flexible,
Generate Breakthrough Growth (Jossey-
Bass, 2012).
This article is adapted from Kaipa and
Radjou’s book, From Smart to Wise: Acting
and Leading with Wisdom (Jossey-Bass,
2013).
Tim Cook was driven to change his leadership
style, from a narrow form of smartness to a more
opportunity-oriented perspective.
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population has thus far fallen short
of its promise. Nandan Nilekani
points out in his book Imagining In-
dia: The Idea of a Renewed Nation
(Penguin, 2009) that India lacks the
educational institutions it needs,
from the earliest years to the post-
college level. Thus, even though
thousands of Indian university grad-
uates enter the workforce every year,
they are often not “industry ready”
or equipped in the skills of global
business. This has contributed to a
dearth of topnotch candidates and a
growing talent war for those few
with desirable skill sets.
Young talent needs development
and supervision. And as Indian com-
panies have expanded their reach
both domestically and abroad, the
lack of managers capable of provid-
ing this guidance has become more
acutely felt. The founding executives
who built these thriving businesses,
and who made the far-reaching stra-
tegic decisions in the past, are now
approaching retirement. According
to the chief executive of a large pri-
vate-sector financial-services com-
pany in India, the country’s econ-
omy is growing at a faster pace than
the rate at which the leadership pipe-
line is maturing. A decade of rapid
expansion and exponential growth
has left companies in deep need of
talent that is in short supply.
This dynamic is all the more
daunting because operating models
at many Indian companies have
shifted. Traditionally, Indian com-
panies operated in a markedly top-
down manner—the person with the
corner office made the final deci-
sions, and senior managers oversaw
their specific silos. That top-down
model was efficient, but it stifled
creativity and discouraged autono-
mous decision making. Now it is
giving way to a more participative
need, putting both potential growth
opportunities and the continuity of
existing business operations at risk
(see Exhibit).
Several underlying causes have
contributed to this breakdown in
India’s corporate leadership pipeline.
Considered together, they explain
how Indian companies have arrived
at their current precarious position.
Understanding these factors can re-
veal the opportunities that today’s
senior executives can use to set
things right. It can also provide
helpful insight to executives in other
emerging economies, many of whose
companies are also suffering from a
senior executive talent shortage.
Shifting Realities
About 65 percent of India’s 1.2 bil-
lion people are between 15 and 64
years old, and 30 percent of the pop-
ulation is made up of those younger
than 15. This widely recognized
“demographic dividend” should
have given Indian companies a sig-
nificant advantage in the form of a
sizable pool of qualified applicants.
But the country’s youth-dominated
publisher of strategy+business) fore-
cast in a recent in-depth analysis of
India’s top 500 companies that by
2017, 15 to 18 percent of leadership
positions in those companies will be
unfilled—or will be filled by people
underprepared for the jobs. This im-
plies that companies will be missing
almost one of every five leaders they
2012
Projected Gap in
Top Management
2022
5%
15%
10%
20%
2017
Exhibit: The Supply–Demand Gap
India's top 500 companies will experience a
significant leadership shortfall over the next
five years. Although supply will eventually
catch up, a gap will remain unless companies
take action.
Source: Booz & Company analysis, using data from RBI,
the Indian government, Indiastat, and Prowess
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s
approach, more resonant with the
younger generation and more effec-
tive for companies that are too big to
micromanage. But this new operat-
ing model can be effective only if
skilled managers are available to fill
the ranks.
Looking for Leaders
India’s young, underprepared popu-
lation, its rapid economic growth,
and its changing business models are
the most visible contributors to its
leadership deficit. But there is a sub-
tler yet equally powerful underlying
cause: Historically, Indian business
leaders have focused on developing
technology rather than people. As
a senior manager at a large Indian
conglomerate put it, “We have qual-
ity technical experts, but can’t con-
vert them into business leaders.”
Perhaps the most obvious ex-
ample occurs in the C-suite: Few
companies have provided human
resources a seat on the executive
management committee. As a result,
the HR department often has a lim-
ited role (or no role) in the strategic
planning process, leading to a lack
of focus on people matters. As U.S.
companies did in the early years of
the Silicon Valley boom, Indian
companies have prioritized achiev-
As a senior manager at a large Indian
conglomerate put it, “We have quality
technical experts, but can’t convert them
into business leaders.”
ing technical excellence, hiring en-
gineers who’ve been trained to pur-
sue innovation—but not to manage
people and lead organizations. Evi-
dence of this dynamic can be found
in practices prevalent throughout
Indian companies.
Insufficient training for new re-
cruits. Many Indian companies
struggle with new-hire “onboard-
ing” programs. Often, the incoming
class of MBA recruits is not suffi-
ciently integrated into the broader
workforce, and companies put too
much hope too early on these new
hires’ shoulders.
Meanwhile, rotation programs
meant to train the new recruits are
often ill conceived and seen by line
managers as an intrusion into daily
work. “Corporate has assigned two
MBAs to my department for rota-
tion—I don’t know what to do with
them,” said a department head at
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7
1
one midsized Indian company. “My
people are already overworked with
their routine work. We do not have
the time to train these overpaid
young recruits.”
Limited variety of experience at
the top. Without a strong leadership
pipeline in place, star functional
specialists are typically promoted to
top roles. These individuals may
have a background focused within
one domain, and may not have had
the opportunity to develop a broad-
er perspective or set of skills.
This experience gap is not a
problem just for Indian companies;
it is endemic to corporate structures
everywhere. Many global companies
compensate with targeted on-the-
job experiences and in-depth train-
ing, where they bring senior execu-
tives together to help develop one
another’s skills. But Indian compa-
nies have invested little in this type
of executive development. Thus,
when functional specialists are pro-
moted into general management po-
sitions, few are well prepared and
motivated to handle their new roles.
A lack of succession planning.
Rapidly growing industries, such as
those driven by the rise of digital
media, often rely on relatively young
and inexperienced managers to take
on senior positions. By and large,
these individuals have not yet devel-
oped a leader’s perspective. For ex-
ample, the telecom boom over the
past decade has led to a flurry of
flourishing mobile phone brands in
India. But each of these firms has
had to draw upon the company’s ex-
isting pool of players to build its se-
nior team. The growth of that talent
pool has not kept pace with those of
the brands. One regional sales head
for a mobile handset company point-
ed out that “eight to 10 years ago,
there were only three or four handset
brands in the country. Today, there
are over 60. Relatively younger man-
agers have had to step up to take on
top roles in these companies.”
The ultimate result of this lack
of qualified successors? Senior lead-
ers are postponing retirement. In-
stead of developing and executing a
clear succession plan, executives
have been extending their tenure,
lacking confidence that the next
level of management is up to the
task of leading.
The Next Generation
Many Indian executives recognize
the challenges, but are unsure what
steps to take to overcome them. First
and foremost, they need to take a
fresh, holistic look at their leadership
development practices. Their goal
should be to develop a sustainable
leadership pipeline throughout the
organizational pyramid: a well-
rounded leadership team to comple-
ment the required skills at the top,
a team of successors right behind
them, a strong bench of high-poten-
tial individuals identified and devel-
oped in the middle, and a cadre of
young, industry-ready talent. The
pipeline should also include ad-
vancement opportunities for techni-
cal specialists.
This is no small task, and will
require executives and managers to
embrace the idea that training
young recruits is an essential part of
their routine, and will provide the
incentives for them to contribute to
the organization. Companies will
need to invest in replicating and
implementing specific interventions
that have been successful at global
companies (and a small number of
Indian companies), instead of ge-
neric initiatives. This means making
talent management a key compo-
nent of HR strategy, and making
HR a key participant in the firm’s
decision-making processes.
By taking these steps, compa-
nies can fill their immediate gaps
while building the enterprise capa-
bilities necessary to ensure that they
thrive in the long run. But only in
companies whose leaders endorse
this approach wholeheartedly, and
where it can become ingrained in
the company’s culture, will such
changes take hold. Talent is India’s
greatest opportunity, but it is also
one of its biggest challenges. The
same is true for more and more
businesses in other developing re-
gions around the world. In each of
them, it falls to today’s executives to
ensure strong leadership for genera-
tions to come. +
Reprint No. 00178
Gaurav Moda
gaurav.moda@booz.com
is a principal with Booz & Company’s
organization, change, and leadership prac-
tice, and is based in New Delhi.
Anshu Nahar
anshu.nahar@booz.com
is a senior associate with Booz &
Company’s organization, change, and lead-
ership practice, and is based in Mumbai.
Jai Sinha
jai.sinha@booz.com
is the co-head and managing director of
Booz & Company in India, and is based in
Mumbai.
“Eight to 10 years ago, there were only three or
four handset brands in the country. Today, there
are over 60. Relatively younger managers have
had to take on top roles in these companies.”
“S
mart organizations are beginning to recognize that the secret
to engagement is to provide employees ample autonomy, the
opportunity to make progress, and a sense of purpose. Dennis Bakke
brings these principles to life in a modern business fable with ample
lessons for building successful organizations from the ground up.”
— Daniel Pink, author of
Drive and To Sell Is Human
A leadership fable destined to
be a modern business classic.
www.decisionmakerbook.com
Also by Pear Press: NYT Bestseller
www.brainrules.net
Buy 1, Get 1 Free
(Maybe for your boss?)
Email your receipt to
decisionmakerbook@gmail.com.
Ofer only valid in the U. S.,
ends Sept 30, 2013
by Jon Katzenbach and
DeAnne Aguirre
I
t is striking to see how many
chief executives see their most
important responsibility as be-
ing the leader of the company’s
culture. According to Ginni Rom-
etty, CEO of IBM, “Culture is your
company’s number one asset.” Her
counterpart at Microsoft, Steve
Ballmer, has said, “Everything I do
is a reinforcement or not of what
we want to have happen culturally.”
In another typical remark from the
C-suite, Starbucks Corporation
CEO Howard Schultz has written
that “so much of what Starbucks
achieved was because of [its em-
ployees] and the culture they fos-
tered.” Researchers such as former
Harvard Business School professors
John Kotter and James Heskett have
also found consistent correlation be-
tween robust, engaged cultures and
high-performance business results
(as described in their book, Corpo-
rate Culture and Performance [Free
Press, 1992]). But most business
leaders don’t need that evidence;
they’ve seen plenty of correlation in
their own workplace every day.
Recognizing the importance of
culture in business is not the same
thing as being an effective cultural
chief executive. The CEO is the
most visible leader in a company.
His or her direct engagement in all
facets of the company’s culture can
make an enormous difference, not
just in how people feel about the
company, but in how they perform.
Schultz described the CEO’s role
this way in his book Onward: How
Starbucks Fought for Its Life without
Losing Its Soul (Rodale Books, 2012):
“Like crafting the perfect cup of
coffee, creating an engaging, re-
spectful, trusting workplace culture
is not the result of any one thing. It’s
a combination of intent, process, and
heart, a trio that must constantly
be fine-tuned.”
A company’s culture is the col-
lection of self-sustaining patterns
of behaving, feeling, thinking, and
believing, the patterns that deter-
mine “the way we do things around
here.” At its best, an organization’s
culture is an immense source of
value. It enables, energizes, and en-
hances its employees and thus fos-
ters ongoing high performance. At
its worst, the culture can be a drag
on productivity and emotional com-
mitment, undermining long-term
success. Most companies are so large
and complex that the culture acts in
both ways at once. Indeed, the cul-
ture of a large company is typically
made up of several interwoven sub-
cultures, all affecting and respond-
ing to one another.
If you are the chief executive of
a company that is sailing with the
wind and leading in its competitive
race, that’s a sign that your culture
is in sync with your strategy. This
makes your company much more
likely to deliver consistent and attrac-
tive profitability and growth results.
You can tell you have such a culture
because people are confident and
energized. They can justifiably take
pride in the results of their work. As
CEO, your role is to keep the ship
on course and ahead of the competi-
tion. This requires generating regu-
lar behavioral reminders about the
values, aspirations, and engagements
that underlie your company’s success
and reinforce its strategy.
However, if your company is
STRATEGY & LEADERSHIP
Culture and the
Chief Executive
CEOs are stepping up to a new role,
as leaders of their company’s thinking
and behavior.
22
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heading into stormy waters, facing
the kinds of disruptive competition
or unexpected market changes that
affect every industry sooner or later,
then a program of normal reinforc-
ing leadership won’t cut it. A cul-
ture that no longer aligns with your
strategic and performance priorities
needs a lot more attention—from
you and other senior leaders.
Many CEOs understand in
principle that cultures are multi-
dimensional, slow to change, and
troublesome to control—and thus
that influencing them requires care
and thoughtful engagement. This is
particularly true for global compa-
nies led by people of diverse back-
grounds. When confronted with a
cultural challenge in real life, how-
ever, chief executives tend to forget
this principle. Instead, they revert
to conventional managerial tactics,
but with more rigor. They turn up
the volume on the inspirational mes-
sages. They raise the bar and set
stretch goals with new statements
of the vision, mission, values, and
purpose of the company. They bear
down on costs and castigate people
for complacency. They may also see
culture change as primarily a func-
tional responsibility, to be delegated
to experts, either inside or outside
the company. More often than not,
these approaches leave the deeply
embedded cultural behaviors largely
unchanged. Only an enlightened
CEO can break through that kind
of cultural inertia.
A better starting point is a real-
istic recognition of the culture’s cur-
rent status. No company’s collective
practices and beliefs are all good or
all bad. They have evolved over time
for understandable reasons—often
to deal with the challenges or mal-
functions of the past. Moreover,
they are firmly entrenched in mind-
sets and habits. Therefore, it is es-
sential to be rigorously selective and
disciplined in dealing with cultural
issues. There are several things you
can do from your highly visible po-
sition at the top of the hierarchy to
spark and foster the cultural realign-
ments you want to see:
• Demonstrate positive urgency
by focusing on your company’s aspi-
rations—its unfulfilled potential—
rather than on any impending crisis.
• Pick a critical few behaviors
that exemplify the best of your com-
pany and culture, and that you want
everyone to adopt. Set an example
by visibly adopting a couple of these
behaviors yourself.
• Balance your appeals to the
company to include both rational
and emotional cues.
• Make the change sustainable
by maintaining vigilance on the few
critical elements that you have estab-
lished as important.
In all this activity, avoid dele-
gating your culture-oriented actions.
Do as much as you can yourself.
The Power of Positive Urgency
Time and again, we hear execu-
tives cite the importance of having
a “burning platform”—a stress-
producing crisis, whether externally
driven or self-induced—to incite a
high-performance culture. We once
observed a CEO incur several hun-
dred million dollars of unnecessary
debt for the sole purpose of creating
a sense of urgency for his culture
change effort. For many years, we
too subscribed to the conventional
wisdom that burning platforms were
the only way to obtain cultural im-
pact. But no longer.
Certainly we understand the
logic that underlies this point of
view: Companies full of complacent
people will rouse themselves only
in response to crisis. But experience
and common sense argue differ-
ently. Consider what people on real
burning platforms do. They escape.
They barely have time to act, much
less change their mind-sets and hab-
its with a view toward long-term
success. In the business equivalent,
which usually involves a rapid drain
of cash and profitability, your op-
tions will be similarly limited—in
this case, to layoffs, plant closures,
responses to the press and investors,
and other forms of damage control.
Like BP’s recovery efforts after the
Deepwater Horizon spill, Toyota’s
after the Fukushima disaster, or any
plant shutdown made in response to
a sudden loss of business, these trau-
matic activities are typically seen as
a one-time event, not as a way of
building for the future.
There is a much better way
to overcome complacency. As a
CEO or senior executive, the great-
est thing you can do is to marshal
an authentic sense of urgency, but
not one built solely on the logical
reasons that change is necessary.
Consider what people on real
burning platforms do. They escape.
They barely have time to act, much
less change their habits.
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but repetitive and demonstrably
significant. They signal where the
company is going now. For example,
early in the General Motors Com-
pany (GM) bankruptcy recovery
effort of 2009, interim CEO Fritz
Henderson and a handful of his se-
nior executives launched a series of
informal conversations with front-
line leaders, skipping all the levels
of the hierarchy in between. These
examples triggered dozens of imita-
tions, including conversations with
customers, among GM employees
across North America. Similarly,
during a turnaround at the Mobil
Corporation in the mid-1990s, then
CEO Lucio Noto and five of his se-
nior leaders personally conducted
career appraisals of people at various
levels whom they saw as “managerial
bench strength.” This inspired simi-
lar assessment efforts throughout the
company. Southwest Airlines, for its
part, has continually singled out the
same three behaviors: hiring people
who connect emotionally with cus-
tomers and colleagues, volunteering
when help is needed at any level, and
frugality to the extreme.
Unfortunately, there is no mag-
ic formula for finding the right few
behaviors that will make a difference
in your culture. There are, however,
some factors to consider.
First, it is essential to emulate
at least some of these emerging key
behaviors yourself—to be a living
model of the culture you aspire to
lead. People pay rapt attention to
what the CEO does, not just what
the CEO says. You can’t rely on
communications, no matter how
inspiring. You, and ideally a few
other senior leaders, have to step out
by behaving in new ways that both
capitalize on elements in the current
culture and demonstrate a key shift
in cultural alignment.
No two senior leaders are alike;
what works for one doesn’t neces-
sarily work for another. So do not
seek to revamp your leadership phi-
losophy, style, or personality to fit
anyone else’s idea of what a leader
should be. Instead, as former Camp-
bell Soup Company CEO Douglas
Conant put it, “It’s hard for leaders
to realize that it’s not about show-
ing up ‘the way I think I’m supposed
to show up.’ It’s about showing up
in a way that is ‘authentically
me’ and can be helpful” (see “The
Thought Leader Interview: Douglas
Conant,” by Art Kleiner, s+b, Au-
tumn 2012, with video interview by
Jon Katzenbach [online only]).
When Conant first arrived as
CEO at Campbell’s, the company
was beleaguered by poor quality
and newly fierce competitors; he was
hired to turn the company around.
He knew he was not a master of so-
cial conviviality. “Every time I take a
Myers-Briggs test,” said Conant, “it
shows I’m an introvert.” He knew it
would not be easy for him to inter-
act comfortably with a diversity of
Rather, build an emotional sense of
urgency, focusing on the values that
the company cares about collec-
tively: its way of serving customers,
its desire for growth and success, its
positive impact on social and com-
munity issues, and the attraction
and welcome that people felt when
they first arrived.
Every sustainable company cul-
ture is based, in part, on this intrin-
sic attraction to the work—includ-
ing the way it challenges people. At
some point, your employees chose
to be part of the enterprise. For the
most part, they liked (or loved) their
profession, they felt they could ex-
cel, and they wanted to gain the per-
sonal benefits of accomplishment.
As CEO, you need to capitalize on
those feelings, give them voice, and
encourage people to spread them vi-
rally throughout the company. This
may mean discarding some busi-
nesses that don’t fit your strategy,
your capabilities, or your culture.
But it will also mean helping people
expand (or recapture) the pride they
have felt, all along, in their collective
strength.
The Right Behaviors
To help people capitalize on the best
aspects of your culture, you have to
focus attention on the critical few
behaviors that you believe matter
most. These are a few positive sourc-
es of energy, pride, and interactions
that, when nurtured and spread to
scale, will improve company perfor-
mance significantly. As simple as it
sounds, this approach will not only
accelerate the behavior change that
matters most, but also evolve and
align your culture more effectively
than forcing a major and potentially
disruptive culture change effort on a
broadly diverse global organization.
These actions are ideally small
VIDEO FEATURE
Want to Change Your Culture? Run!
Douglas Conant speaks with Booz & Company
senior partner J on Katzenbach about
connecting with people more effectively by
putting on a pair of running shoes.
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1
early adopters of these behaviors,
and working with them directly to
sharpen their influence and deploy
it more effectively, you will gain far
more leverage as a cultural leader.
For example, when Lucio Noto
created those new, informal “skip
level” staff development opportuni-
ties at Mobil, the rumor mill took
notice. People all through the com-
pany began to do the same. These
career appraisals became common
practice at multiple levels across the
globe. Similarly, when Michael Sabia
was CEO of Bell Canada, he started
attending small-group working ses-
sions of “master motivators” at the
front line, and other executives fol-
lowed suit. They wanted to see for
themselves what he was learning.
Rational and Emotional Impact
More than 100 years ago, Mary
Parker Follett wrote about integra-
tion in leadership and organiza-
tional situations. She contrasted
integration with domination (“a
victory of one side over the other”)
and compromise (“each side gives
up [some of what it wants] in order
to have peace”). Integration comes
about when “there is no curtailing of
desire”—both sides in a dispute get
all (or nearly all) of what they really
wish for. We have yet to hear a better
definition for the kind of integration
that a CEO needs if he or she is to
have impact on the culture.
When putting together a busi-
ness strategy or a case for action, it’s
important to integrate the rational
arguments from top leaders with
compelling emotional appeals at
more personal levels. One without
the other is unlikely to sustain cul-
tural alignment. In other words, in
addition to a rational business case
for change and other formal mech-
anisms, it’s important to develop
emotional impact through such
forces as peer approval, the support
of colleagues, and the admiration of
friends and families.
For most business leaders, a
rationally compelling argument is
usually much easier to develop than
an emotionally compelling one.
Executives are used to quantitative
analysis and logical reasoning. They
understand how to send arguments
through well-established formal
channels and programs, and they
know how to delegate assignments
within that system. But emotional
energy gets its strength from one’s
own intuitive insight and the social
support of colleagues. This energy
flows through informal networks
and cross-organizational interac-
tions outside formal channels. The
CEO’s role is to ensure integration
of the formal and informal dimen-
sions, so that the emotional energy
generated for change is reinforced by
a consistent formal accountability
for performance and a willingness
to pay attention to the metrics that
indicate results.
Douglas Conant calls this be-
ing “tough-minded on standards
but tender-hearted with people.”
Early on in his turnaround chal-
lenge at Campbell’s, he realized
that he would have to replace more
than 300 of the top 350 people in
the company because they lacked
the necessary skills. In discussions
and informal conversations, he held
firm to this decision, but also openly
acknowledged that those who were
being replaced were the friends,
colleagues, and teammates of those
who were staying. Those leaving
were treated with respect and given
as much help as the company could
afford. “Even through that horrible
period,” he later recalled, “our em-
ployee engagement scores went up.”
people throughout the organization,
but he had to find a way to do it.
At the time, the Campbell’s
“people strategy” emphasized em-
ployee health, using an American
Heart Association program that
encouraged people to walk 10,000
steps every day. So Conant began
donning a track suit and pedometer
and running around the headquar-
ters building complex in Camden,
N.J., every day. Because of his con-
stantly changing schedule, he ran
at different times every day, and he
made a point of running through
different parts of the complex. Peo-
ple never knew when they would see
him jogging nearby, but they always
knew the reason—he wasn’t check-
ing up on them, he was just getting
his 10,000 steps in. This practice
gave an introvert a highly visible,
easy way to interact informally with
people he would otherwise see only
at formal meetings, and Conant’s
running soon slowed to a walk. “It
got to the point where I was so com-
fortable that people weren’t afraid of
approaching me,” he said. He even-
tually dubbed this practice “man-
agement by wandering around.”
We like this example because it
shows the importance of enjoying
this experience. Most of us will not
do something for long if it makes
us uncomfortable. It also illustrates
the emotional impact that simple
changes in CEO behavior can have
on others.
You do not need very many
senior leaders to start a few critical
behaviors rolling through the com-
pany. Get several well-known execu-
tives to step away from the norms of
the past with you. People through-
out the workforce will rapidly take
notice and do the same, creating an
atmosphere of approval and sup-
port. In short, by seeking out other
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Eternal but Focused Vigilance
Your role as a cultural leader starts
on Day One of your appointment as
CEO. It will not end until the last
day you hold that office. Indeed,
your persistence in emphasizing the
right cultural behavior will continue
to be influential after you have left.
Because cultures evolve in in-
formal ways that are hard to track,
they can easily degrade before many
people are even aware something
bad is happening. Chief executives
in peak-performing companies al-
most never let this happen; they
work hard to keep an eye on the
critical few behaviors over time.
You can either keep promoting the
same few behaviors, as Southwest
Airlines did, or, after the first few
have taken hold, pick a few more to
model and support.
In many great organizations, a
kind of cultural vigilance baton is
passed from each CEO to his or her
successor. At Southwest Airlines, for
example, it passed seamlessly from
cofounder Herb Kelleher to incom-
ing CEO James Parker and presi-
dent Colleen Barrett in 2001, and
then to incoming CEO Gary C.
Kelly in 2004. Each new chief ex-
ecutive is deliberately charged with
keeping the company’s fundamental
cultural identity intact (while help-
ing the company evolve to meet new
competitive and market dynamics).
This rich cultural identity is
part of the competitive advantage
of leading organizations such as
the Mayo Clinic, Apple, Procter &
Gamble, and IBM. When it slips,
because people grow complacent or
lose touch, the CEO is expected to
step in and reignite the enthusiasm
and vigor that were part of the cul-
ture originally—as Conant did at
Campbell’s and as Meg Whitman
appears to be doing at Hewlett-
Packard.
Things Only the CEO Can Do
Most chief executives are master del-
egators. Some believe, as one chief
executive we know puts it, that suc-
cessful delegation is the single most
important skill that a developing
leader needs. “It is the only way a
rising leader can handle increasing
responsibilities, and the best way to
develop subordinates.”
For the most part, we agree—
except when it comes to the CEO’s
cultural impact. The activities de-
scribed in this article should not be
assigned to others. Leaders who del-
egate too much will lose their oppor-
tunity to become role models and
energizers for the culture they want
to shape. For example, you should
be personally involved in selecting
the new behaviors needed by the
company. Your choice should reflect
the company’s strategic and operat-
ing priorities, in a way that others
throughout the company can com-
fortably align with. However, get-
ting down to a few critical priorities
VIDEO FEATURE
Can Great Leaders be Tender and Tough?
Douglas Conant describes why it’s crucial
for executives to be tough-minded on
standards and tender-hearted on people.
will almost always be a judgment
call you need to make, because no
choice will be easy to defend.
Only you can interact with oth-
ers on your own behalf. Only you
can speak regularly for yourself with
people throughout the company, in-
formally and outside normal chan-
nels. When incoming CEO Jack
Rowe launched a turnaround jour-
ney at Aetna Inc. in 2000, he kept in
direct personal contact with nearly
100 leaders in multiple levels and
functions. These informal networks
not only brought him up to speed
on the way people thought about
their work and the practices they
followed, but became viral spreaders
of the culture he wanted to evolve.
Because you, as CEO, have the
final word on most strategic and op-
erational decisions, the most critical
aspects of cultural impact—selectiv-
ity, simplicity, and targeted persis-
tence—are in your domain. More-
over, your role as cultural leader
is, more likely than not, the single
thing you will be most remembered
for. That’s why so many CEOs refer
to culture as their highest priority; it
is the primary vehicle for establish-
ing their legacy. +
Reprint No. 00179
Jon Katzenbach
jon.katzenbach@booz.com
is a senior partner in Booz & Company’s
organization, change, and leadership prac-
tice, and co-leads the firm’s Katzenbach
Center in New York. He is the coauthor,
with Zia Khan, of Leading Outside the Lines:
How to Mobilize the (in)Formal Organization,
Energize Your Team, and Get Better Results
(Jossey-Bass, 2010).
DeAnne Aguirre
deanne.aguirre@booz.com
is a senior partner with Booz & Company
based in San Francisco, and one of the
firm’s foremost experts on organization
effectiveness and change leadership. She
co-leads the Katzenbach Center.
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M
any growth opportunities
look like bottle rockets.
They start with an im-
pressive flash but end with an explo-
sion. Most often, this is caused by
business leaders’ tendency to chase
after the biggest customer segments
or the ones with the highest mar-
gins—typically the same segments
that everyone else chases. Other
leaders get lost in their enthusiasm
for a new product or in their desire
to pursue the next market fad. They
fail to consider whether they are at-
tempting to solve a customer prob-
lem, and how much the solution is
worth. Such strategies may result
in fireworks, but they don’t create a
business of increasing momentum
that provides both the stability and
the energy reserve to drive sustain-
able growth—in other words, one
with a solid flywheel.
Companies that pursue a
flywheel-business model focus on
building the kind of long-term ca-
pabilities that allow them to prevail
against rivals and capture new oppor-
tunities for growth. This gives them
the profits they need to invest more
in capabilities, and the insights to do
so wisely. Along the way, they target
the customers or customer segments
that will help them develop these ca-
pabilities. It is similar to the flywheel
concept from high school physics,
typically demonstrated by a heavy
disc that is difficult to start up, but
that spins easily with limited effort
once it reaches full speed. Over time,
a simple innovative idea becomes
a well-oiled machine, which trans-
lates into a predictable and profitable
business.
Two case studies—Johnson
Controls Inc.’s Automotive Experi-
ence group and Pulte Homes—show
how company leaders embraced the
flywheel concept to unlock strategic
growth opportunities.

Collaborate with Suppliers
Revenues at Johnson Controls Inc.
(JCI) in 2012 were US$42 billion,
nearly half of which came from the
largest of its three global business
units, the Automotive Experience
group. But this group is relatively
new. For most of its 110-plus-year
history, JCI developed control sys-
tems for the regulation of tem-
perature in buildings, gradually ex-
panding in the 1960s to centralized
systems integrating control of tem-
perature, fire alarms, lighting, and
security. In the late 1970s and early
’80s, it expanded even further from
its core building controls business.
The Automotive Experience
group began in the early 1980s as
the Automotive Seating group. At
that time, the automotive indus-
try was embracing outsourcing to
eliminate the burden of United Auto
Workers (UAW) wages. From 1982
to 1984, leading seat frame and
foam manufacturer Hoover Univer-
sal Inc. had built six seat assembly
facilities to serve nearby customer
vehicle assembly plants. JCI rec-
ognized the outsourcing trend and
acquired the Automotive Seating
group from Hoover, along with the
Ferro Manufacturing Corporation,
a seat mechanisms manufacturer,
and continued to add plants capable
of providing full seat systems to the
Detroit Three.
Realizing that wage arbitrage
offered no competitive advantage—
any competitor could also hire
STRATEGY & LEADERSHIP
Building a Flywheel
Business
By linking customers and capabilities,
companies can generate the momentum
for sustainable growth.
28
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non-UAW laborers—JCI sought to
build a sustainable flywheel busi-
ness. Although the term lean had
not yet consumed the psyche of the
automotive industry, former Hoover
plant manager John Daly, the newly
appointed vice chairman of JCI, rec-
ognized its potential. He challenged
his managers to embrace Japanese
manufacturing methods and target-
ed the Toyota Motor Corporation as
a customer that could help the com-
pany achieve its goal.
In October 1985, Daly informed
his Georgetown, Ky., plant workers
that a team from Toyota would be
visiting in three weeks. Although
the plant was viewed as JCI’s best in
terms of internal housekeeping—an
important consideration in Japa-
nese manufacturing—it followed
U.S. manufacturing performance
standards, which did not match Ja-
pan’s. Die changes took four to eight
hours, so an average production run
lasted 20 days to amortize the setup
cost. Inventory levels exceeded a
month of supply, and equipment ran
only 40 percent of the time. Despite
making nascent efforts at statistical
process control, the company re-
mained focused on volume, leading
to substantial rework.
In anticipation of the Toyota
visit, the Georgetown plant manager
sought to temporarily cut inventory
by nearly 70 percent, to a mere 10-
day supply. He rented nearby ware-
house space and hauled away any
inventory he thought he could func-
tion without until after the plant
tour. Later, he visited a seat supplier
in Japan and learned that even 10
days was excessive by Toyota stan-
dards: The supplier held so little in-
ventory that it did not even require
forklifts to move materials around.
Perhaps Toyota saw a diamond
in the rough, or maybe JCI just got
lucky—but shortly after the JCI
plant visit, Toyota announced that
it would build an assembly plant in
Georgetown. Over the coming year,
Toyota visited JCI regularly, and
the Georgetown plant attempted to
showcase new improvements every
time. Plant leaders started by creat-
ing a welding cell staffed by cross-
trained workers. Next they attacked
die change times, reducing them to
half an hour on their own and even-
tually to a mere 17 minutes with the
help of a Toyota kaizen expert. By
the time Toyota production began
ramping up in 1988, the dedicated
Toyota seat assembly area within the
Georgetown plant operated with a
mere 7.5 days of inventory, and by
1989 at full scale it held less than a
day’s worth.
Over the next four years,
Georgetown was the only Toyota
supplier among the corporation’s
entire U.S. supply base to receive an
award every year and was selected
as one of four “showcase suppliers”
to demonstrate the potential of the
Toyota production system to other
U.S. companies. Equally impor-
tant, the lessons of Georgetown had
spread across other JCI Automo-
tive Seating group plants—includ-
ing the additional dozen seat plants
serving vehicle manufacturers in the
United States. At this moment, JCI
had completed the first turn of the
flywheel; it had developed the ca-
pabilities to be a world-class seating
manufacturer in the emerging “just-
in-time” environment.
The company then sought
to become a full partner in design
through delivery. Chrysler appeared
to be the logical customer to fuel
this second rotation of the flywheel.
Although it had acquired the Amer-
ican Motors Corporation—and the
indomitable Jeep brand—in 1987,
Chrysler remained subscale in com-
parison to its U.S. competitors, and
was looking to outsource engineer-
ing as well as manufacturing. In
1989, JCI jumped at the chance
to take responsibility for the entire
seat system in Chrysler’s new Neon
model. The innovative compact car
designed under Lee Iacocca’s guid-
ing hand proved to be a huge com-
mercial success for Chrysler—and
for JCI, which now had the momen-
tum to build its design capability.
JCI’s next step was to establish
deeper relationships with the De-
troit Three and other automotive
manufacturers by creating dedicated
“customer business teams.” These
new cross-functional groups sought
to expand their scope of responsibili-
ties for their respective automotive
customers. For example, by 1992,
JCI had more than 500 product en-
gineers—having started with only a
handful at the time of their acqui-
sitions in the 1980s. While the in-
dividual teams focused on serving
the specific needs of their respec-
tive OEMs, a common R&D group
sought to leverage the company’s
growing expertise across vehicle pro-
grams by designing materials and
components that could be incorpo-
The Neon was a huge success for
Chrysler—and for JCI, which could
now build its design capability.
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rated into many different designs.
In 1994, JCI opened a new
research and development center
capable of doing its own prototype
testing, expanding its design capa-
bilities even further. Independent
of the OEMs, the company also be-
gan examining car customer views
regarding seating. Through sophis-
ticated conjoint analysis, JCI devel-
oped deep consumer insight into
preferences among features, such
as motorized versus manual adjust-
ments and seat heaters. Rather than
simply accepting design guidance
from the customer’s vehicle program
manager, the customer business
teams came armed with data to help
them make the inevitable design
trade-offs that influenced the entire
car. The second revolution of the
flywheel was complete.
The third rotation began with
JCI’s acquisition of Prince Automo-
tive (which made auto interiors) in
1996. Now the company could le-
verage its growing capabilities across
a larger proportion of the vehicle. It
provided instrument display clus-
ters, dashboards, sound-cushioning
headliners, and trim, in addition to
the safety and comfort-critical seat
system. Having gained control of all
the key aesthetics of a car’s interior,
JCI opened a new technology center
in 1998 complete with an “idea fac-
tory” and “comfort lab.” It expand-
ed its conjoint analysis to consider
trade-offs among extra cupholders
and dashboard features. JCI could
now help a program manager make
the right decisions throughout the
car interior.
JCI continued to increase the
momentum of its flywheel by ex-
panding its product and geographic
scope. In 1998, it added to its port-
folio an automotive interior part
producer, the Becker Group, with
70 percent of its revenues in Europe,
and the Italy-based Commerfin
SpA, a maker of door systems. Tak-
ing another page out of the Japanese
playbook, in 1999 JCI launched a
keiretsu-like partnership with Gene-
tex, Jabil, and Microchip Technol-
ogy to develop integrated electron-
ics for car interiors. And in 2000,
it expanded into Japan by acquir-
ing Nissan’s stake in Japanese seat
manufacturer Ikeda Bussan. By
2005, JCI had renamed the business
unit the Automotive Experience
group. It was now a global flywheel
business with annual revenues of
nearly $19 billion.
Create Scale in New Markets
In 1950, unable to afford an archi-
tect, a startup contractor named Bill
Pulte used a plan from the Detroit
Times’ Home of the Week section to
build his first house—which he sold
for $10,000. By today’s standards,
that may sound cheap, but the me-
dian home price in Michigan that
year was only $7,500. Over the next
decade, his company, which is today
called PulteGroup Inc. (of which
Pulte Homes is a subsidiary), oper-
ated like every other builder in the
country. It built individual, custom-
designed homes for a particular price
niche in a local market—in Pulte’s
case, the high-end home market of
the Detroit suburbs.
But Pulte recognized an op-
portunity to create a flywheel busi-
ness of national scale by offering his
high-quality craftsmanship at more
affordable prices through modular
design and prebuilt components.
In 1959, Pulte shared his vision for
the future in the plans for Concord
Green in Bloomfield Township,
Mich., the company’s first subdivi-
sion project. He priced the homes
at $29,000—well more than double
the $12,000 median price in Michi-
gan at a time when median family
income ran less than $6,000—and
tapped the aspirational dreams of a
growing upper middle class.
Pulte created a superior alterna-
tive to the then dominant models
of suburbia. From experience, he
understood that the custom model
incurred additional costs for the
buyer and uncertainty for the seller
beyond the true value of the fin-
ished product. He also saw the flaws
of the mass-produced subdivision
model pioneered by Abraham Levitt
and his sons, William and Alfred.
Launched in 1947 to target soldiers
returning from World War II, the
Levitts’ original planned commu-
nity in New York consisted of 2,000
rental homes employing a common,
single-floor house plan. The homes
could be built at the astonishing rate
of 30 per day. By 1949, they had
expanded the quality of the homes
and introduced a new “ranch-style”
design for sale at $7,990, well below
the statewide median of $10,152. It
was offered in five models defined
by only slight differences in window
placement and exterior colors. By
1951, what had become known as
Levittown encompassed more than
Pulte created a flywheel business
by offering high quality at affordable
prices through modular design.
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material suppliers, not just local dis-
tributors. He continued to innovate
during the 1970s, turning his focus
to the baby boomer market. For ex-
ample, Pulte’s in-house architectural
team introduced the “quadromin-
ium,” a single structure made up of
four two-bedroom units with sepa-
rate entrances and garages priced
at a mere $20,000 per unit (only
slightly above the median home
price in 1970), targeting first-time
buyers with kids. These new capa-
bilities provided the momentum for
the third rotation of the flywheel, as
Pulte built additional national scale
across a wider range of price points
and markets.
Bill Pulte also recognized a
potential disadvantage his business
model had in comparison with that
of entrenched local builders, who
could ensure quality through per-
sonal relationships with subcontrac-
tors for electrical work, plumbing,
and the like. To offset this disadvan-
tage, in 1980 the company created
“Pulte University” near its head-
quarters in Bloomfield Hills, Mich.,
and began training construction
workers from around the country.
Over time, the university was ex-
panded to include high-performing
managers as well. By the end of the
1980s, Pulte was selling homes in 17
markets in 11 states at prices ranging
from $50,000 to $600,000.
Continuing to bear in mind the
now middle-aged baby boomers,
in the 1990s Pulte developed com-
munities in Arizona, California,
Florida, Michigan, New Jersey, and
Virginia, targeting “active adults”
age 55 and older. (A merger in 2001
with Del Webb Corporation, a
builder of retirement communities,
solidified this market.) The compa-
ny entered the Fortune 500 in 1999
and won recognition from J.D. Pow-
er & Associates for its high customer
satisfaction, praise it continued to
garner for five straight years. Along
the way, Businessweek named it one
of the 50 top-performing companies
and Money magazine declared it a
30-year “super stock.”
Today Pulte operates in more
than 65 markets in 29 states and the
District of Columbia, generating
$4.8 billion in annual revenue—
roughly a third of its peak revenues
in 2005 before the housing crash.
Despite being hit hard by the col-
lapse of the bubble, Pulte survived,
while other builders did not, by con-
tinuing to look for new markets and
honing its design tools. In 2009, the
company acquired Centex Corpora-
tion, a leader in the entry-level home
market. And in 2011, Pulte drew on
consumer research to introduce its
trademarked “Life-Tested” designs,
which offer innovative features to
meet the needs of modern families.
That same year, Pulte ranked as the
country’s largest home builder (in
terms of revenue), and one poised
to grow during the housing market
recovery.
The Perpetual Motion Machine
Both JCI and Pulte created sustain-
able, multibillion-dollar businesses
that have proven resilient despite the
misfortunes of the automotive and
construction industries. They built
their flywheels in different ways,
but still provide common lessons for
other companies.
First, both recognized the stag-
nation inherent in the status quo,
and sought to create a step change
in customer value by questioning
conventional wisdom or practices.
JCI sought to become more than
a simple contract manufacturer le-
veraging nonunion wage rates, and
Pulte sought to break the trade-off
17,000 homes—organized in huge
subdivisions full of nearly identical
“boxes.”
At Concord Green, Pulte sought
to achieve the scale economies of the
low-end, mass-production approach
while providing the variety demand-
ed by the more discerning upper-
middle-income customer. His mod-
ular designs eliminated the need
for expensive architects but, unlike
the Levitts’ homes, provided gener-
ous variation in design throughout
the subdivision. The company also
built design tools to allow homebuy-
ers to customize where it mattered
most, in the interior. Customers
could choose from a wide range of
paint colors, flooring, countertops,
and lighting and plumbing fixtures.
The unique capabilities Pulte devel-
oped for the Concord Green project
powered the first rotation of Pulte’s
flywheel, enabling the company to
reach an underserved market.
After receiving an overwhelm-
ing response to the concept, Pulte
expanded to other markets: Wash-
ington, DC, in 1960, Chicago in
1961, and Atlanta in 1968. In this
second turn of the flywheel, he broke
the paradigm of construction as a lo-
cal business. Under the old model,
relevant scale occurred at the local
level, through builders’ ability to get
better pricing and scheduling pref-
erences with local subcontractors
and suppliers. The new paradigm
of modular designs and selective
customization applied across mar-
kets, making national scale in home
building meaningful.
Pulte’s national expansion en-
abled him to invest in improving his
company’s capabilities in developing
design tools and customer under-
standing—building more houses
with more options while increas-
ing scale by using national building
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between customization and cost that
constrained other homebuilders.
Second, both companies identi-
fied key capabilities that would en-
able them to compete successfully,
and targeted a customer or customer
segment that could help them fur-
ther develop those capabilities. Im-
portantly, they targeted neither the
largest customer segment nor the
customer that could pay the most
per unit. Rather, they sought out an
underserved market that would help
them learn and refine their alterna-
tive business model. In some cases,
they added capabilities and market
access through M&A: Both compa-
nies realized that a well-functioning
flywheel is not only an engine for or-
ganic growth, but can also provide
the strategic logic for acquisitions.
Third, JCI and Pulte both had
a “big-picture vision” for their com-
pany’s growth, and simultaneously
understood the need to work with a
customer to learn the myriad small
details that no amount of planning
or conceptual thinking could un-
cover. Toyota helped teach JCI how
to implement lean manufacturing,
and Concord Green provided the
opportunity for Pulte to interact
with hundreds of customers to build
the design tools needed to change
the customization–cost paradigm.
Finally, for both companies, the
entire picture might not have been
clear from the beginning. But each
had a line of sight to the next fly-
wheel revolution—that sense that
this could be bigger than a single-
customer initiative. They leveraged
their growth to fund further invest-
ment ahead of the competition. JCI
used its scale to invest in consumer
research and expand its interior port-
folio, whereas Pulte used its consum-
er knowledge to capture purchasing
scale and enhance its design tools.
Each nurtured specific competitive
advantages to add momentum to
its flywheel.
These four characteristics—
step change in value, clear target
segment, scale in new capabilities,
and line of sight to the next revo-
lution—are also found in other fa-
miliar flywheel businesses. Consider
Walmart, which spent its early years
targeting towns that then domi-
nant Kmart had concluded were
too small. The company recognized
the possibility of a step change in
value in towns where the existing
alternatives were high-priced local
stores with limited merchandise or a
suburban mall a dozen miles away.
By growing for more than a decade
under the radar screen, Walmart
achieved the scale to develop the IT
systems and logistics network for
which the company is now famous.
Did Sam Walton foresee Walmart’s
becoming the largest company in
the world (by revenue)? Probably
not, but he certainly did sense that
his “everyday low price” model and
the efficient supply chain behind it
offered innovations to better serve
millions of people in the type of
middle American towns that he un-
derstood so well.
There is great power in link-
ing customers and capabilities this
way to create a flywheel effect. But
it is important to remember that
flywheels can be deceptive, lead-
ing to false confidence and hubris.
We’re reminded of an article in a
rural newspaper of our youth featur-
ing the supposed inventor of a per-
petual motion machine. Made of an
intricate collection of hand cranks,
gears, and chains connected within
a menagerie of dozens of old oil
drums, the device clearly powered
a massive flywheel that would con-
tinue to spin the cranks for a long
time once the operator had used the
gearing to gradually build it up to
top speed. Inevitably, the machine
stopped as gravity and friction took
their inescapable toll. But the inven-
tor was undeterred, closing the in-
terview with conviction: “I think I
just need a couple more barrels.”
Flywheel business models do
not achieve perpetual motion, but
instead require continued tending
to maintain the momentum. Times
change, and flywheels are by defini-
tion hard to adapt and difficult to
control—leaving a business vulner-
able to the entry of a disruptive tech-
nology. In times like these, it can
be tempting to revert to old habits,
pursuing bottle rockets. Our advice:
Don’t even try to course correct.
Even companies with well-oiled ma-
chines should continually look for
the next flywheel business, always
seeking step-function changes by
linking a new set of capabilities and
customers. The original flywheel
inevitably winds down, but compa-
nies that have planned ahead will
have a new one up and running to
take its place. +
Reprint No. 00180
Tim Laseter
lasetert@darden.virginia.edu
is a professor of practice at the University
of Virginia’s Darden School and other
leading business schools. He is the author
or coauthor of four books, including
The Portable MBA (Wiley, 2010). Formerly
a partner with Booz & Company, he has
more than 25 years of business strategy
experience.
Jeff Bennett
jeffb@amphoraconsulting.com
is the founder and managing partner of
Amphora Consulting. Formerly a partner
with Booz & Company, he is an expert
at helping companies think strategi-
cally about growth opportunities. He has
facilitated discussions on strategy and or-
ganization at university executive education
programs and at more than three dozen
leading corporations.
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transform your thinking
Oxford Scenarios Programme
Dates:
30 Sep – 4 Oct 2013 or
28 Apr – 2 May 2014
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?
Scenarios planning explores ‘what if’; to prepare
against uncertain times. Use this programme to
learn scenarios processes and test the robustness
and implications of strategic decisions against
several alternative future environments.
To learn more about how to
transform your thinking contact
caroline.williams@sbs.ox.ac.uk
or on +44 (0)1865 422 583
www.sbs.oxford.edu/scenarios
by Jeff Schumacher, Simon
MacGibbon, and Sean Collins
W
hat does it mean to be-
come digital? Compa-
nies in all industries are
building online businesses, enabling
new customer experiences, experi-
menting with “big data,” and seek-
ing advantage in a digitally enabled
business environment. They have
tried reengineering their practices;
they have set up new technological
platforms for customer engagement
and back-office efficiency. But these
efforts have not yet had the impact
that they should. Instead of reen-
gineering, they need reimagining.
They need to conceive of their busi-
ness freshly, in line with the capabil-
ities that digital and business tech-
nologies can give them, connecting
to customers in ways that have not
been possible before.
Reimagining your business
means creating many of the condi-
tions of a startup—the sense of free-
dom, flexibility, and creativity—but
at the scale and with the discipline
of a large enterprise. You bring to-
gether cross-functional teams who
can ideate, bring to life, and execute
a truly digital user experience. You
take a customer-centric approach to
everything your company does—in-
cluding innovation, user experience
(UX) design, marketing, promo-
tions, sales, operations, and custom-
er service. You convey a distinctive
brand identity and emotional con-
nection that’s present in storefronts,
websites, smartphones, connected
devices such as high-tech fitness
wristbands—and forms of interac-
tion still being conceived. You use
big data and analytics in all their
forms to deploy insights from cus-
tomers in real time, designing and
marketing products and services
that respond instantly after sens-
ing and analyzing what people do
online (and off). Reimagining your
business also means continually
measuring and testing the impact
of these products and services, and
learning from the results.
In the digital world, time really
is money. Companies no longer have
the luxury of carefully developing
requirements for new products and
services or for bureaucratic stage-
gate approval processes. Nor can
your digital presence be bolted onto
your company’s current way of oper-
ating. Instead, it must be a natural
reinforcement of your company’s
brand, its positioning in the market,
its core value proposition, and the
capabilities you already have. The
digital presence must also be a viable
contributor to the business, with sig-
nificant revenues and profits accru-
ing almost from Day One.
Admittedly, the first steps in
this transition aren’t easy. Becom-
ing digital requires a new way of
thinking. Moreover, the exact set
of capabilities needed to get there
will vary from company to com-
pany. Nike Inc.’s direct engagement
of consumers, linked closely to the
development of new apparel and
fitness-related devices, involves a
completely different approach from
Aetna Inc.’s rethinking of its patient
and customer experiences. But there
are five basic principles of digitiza-
tion that any company can follow to
help reimagine its business and drive
growth: Empathize with end-users,
expand the brand and the value
proposition, design for three years
out (but build for today), build new
structures and teams, and use digital
technology to energize your culture.
MARKETING, MEDIA & SALES
Don’t Reengineer.
Reimagine.
To realize the digital potential of your business,
bring the dynamics of a startup to scale.
34
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Empathize with End-Users
To unlock the value enabled by
digital technology, companies need
to focus first on delivering great ex-
periences to customers. Don’t just
build connections between custom-
ers and your company. Enable them
to engage with one another. In the
process, habitually capture insights
about what customers think of your
products and services, what matters
to them, and what consistently irri-
tates and enthralls them. Then feed
these insights back into your inno-
vation practices as well as customer
service, marketing, advertising, and
promotions.
To see and understand your
customers’ problems, you must be
able to fully empathize with the
end-users of your company’s sys-
tems. Develop an ongoing sense
of what your company’s products,
services, and brand look like from
their point of view. The word em-
pathy derives from the Greek words
for in and feeling. Digital technolo-
gies give companies a way to empa-
thize, or to adopt others’ feelings as
their own. They can provide a much
closer connection between you and
your customers than the marketing
methods of the past did. When con-
sumers have problems that need to
be solved, or aspirations that your
company might satisfy, you are now
equipped to meet that challenge
proactively.
Esurance Inc., an online insur-
No one likes to buy insurance. The
design of Esurance’s business and
the technology that enables it are
aimed at mitigating its pain points.
ance company backed by the Allstate
Corporation, has taken the idea of
customer empathy to heart. It uses
digital technology to enhance the
car insurance experience from quote
to claim, reducing the customer’s
stress while saving time and money.
No one likes to buy insurance. It’s
expensive and often seems unneces-
sary, and the process of obtaining
it can be thoroughly confusing.
Worse still, the moment of truth
when it becomes valuable—when
customers actually have to make a
claim—may be fraught with pain,
uncertainty, and the frustration of
not knowing how long the repair
process will take. The design of Es-
urance’s business and the technol-
ogy that enables it are aimed at miti-
gating these pain points.
Esurance accomplishes this by
increasing transparency and remov-
ing confusion and ambiguity. The
experience begins with getting a
quote online in minutes; the com-
pany displays its best offer as well
as quotes from leading competitors.
Esurance also makes its claims pro-
cess user-friendly, with mobile apps
that simplify the process and keep
customers updated in real time. If
an insurance holder is in a car ac-
cident, he or she can file a claim
from the scene with a smartphone,
capturing the necessary details and
uploading photographs of the colli-
sion. The app also provides recom-
mendations for vehicle repair shops.
Once the car is in the shop, the app
sends customers daily photos of the
repair process.
Thanks to its end-to-end focus
on the customer experience through
digital technology, Esurance is en-
joying rapid growth, large gains in
customer satisfaction, and improved
financial results. It is also providing
a learning lab for Allstate, which will
apply the insights from Esurance’s
experiments as it develops strategy
for its core business.
Expand the Brand
The second basic principle of digi-
tization involves expansion of the
brand. Companies that are expert at
branding don’t simply incorporate
a logo and visual identity into their
physical products. They consciously
run their business with their brand
in mind. They know that every de-
tail, from the design of their head-
quarters to their products’ place-
ment on a store shelf, helps define
the way customers see them. That’s
equally true of digital capabilities.
The brand must guide not just the
message, but also the ambiance, fea-
tures, and emotional impact of your
online and mobile touch points.
So put the meaning and value
of your brand at the center of your
digital design. In doing this, look
across your entire value chain—
from R&D to product design to
manufacturing to marketing and
sales—for digitally augmented op-
portunities to relate the brand and
its value proposition to every level
of operations. Don’t think narrowly
about traditional ways to market and
sell products. You no longer merely
advertise. You immerse people in the
experiences you create.
Consider Nike, long considered
among the world’s greatest brands.
Several years ago, the sportswear
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company created a special unit,
Digital Sport, using the company’s
brand and innovation talent to re-
imagine what it could do for its cus-
tomers. Out of this came a strong
investment in Nike-branded media,
including sports-oriented videos,
websites, and “zines.” Another key
component was the Nike+ group
of products and services—a digital
ecosystem of apps, sensors, and re-
lated devices that track athletic per-
formance. The Fuelband, for exam-
ple, is a wristband that gathers data
from motion detection, enabling
people to maintain records of their
“NikeFuel points,” tracking the
benefits they gain from workouts,
sports, and other physical activity.
Millions of consumers have signed
up with Nike+, giving the company
a huge new source of data to mine,
reinforcing its core footwear and ap-
parel businesses, and creating a sub-
stantial new revenue stream through
a variety of new digital products.
Design for Three Years Out
The third principle of digitization
involves taking the long view, even
as you build for today. You can no
longer succeed with a digital strat-
egy based only on today’s technol-
ogy and competitive environment.
Nor is it enough to merely ideate
about future developments. Com-
panies must take actions now that
prepare them for the disruptive op-
portunities and evolving platforms
of the next few years. What technol-
ogies might be available then? How
will customers be using digital in
their lives? Where will your industry
be, for example, in terms of respon-
sive use of data, digital fabrication
(parts and devices made on the fly),
cloud-based interoperability, or new
forms of supply chain coordination?
Do you have the capabilities now to
make use of those technologies in
creating new customer experiences?
And what new capabilities will you
need once those technologies be-
come reality?
3M Company is already an-
swering these questions. The com-
pany—which makes a wide range
of innovative products and materi-
als, including tapes and adhesives,
electronic devices, medical sup-
plies, films and fabrics, cleaning and
car-care products, and industrial
components—is developing a road
map of its future by building the
world-class capabilities it will need
over the next several years. The ef-
fort began with a focus on combin-
ing content, search optimization,
and social media to capture data on
consumers’ feelings about 3M prod-
ucts. The company then developed
the analytics needed to make use of
that data. 3M maintains a Facebook
“do-it-yourself ” page, for instance,
where woodworking aficionados
post photos of the cribs they build
for their grandchildren or the hand-
made tables they sell on the Web.
Contributors are motivated, in some
cases, by the chance to promote
their own work, accompanied by
comments like, “We are staying safe
with [3M’s] goggles, gloves, masks,
and using lots of sandpaper.”
Based on these kinds of experi-
ences with its early adopters, 3M is
building out its e-commerce capa-
bilities for the future. The sales and
marketing departments are creat-
ing additional content. Customer
service is using analytics and data
to identify customer problems and
solve them rapidly—for example,
telling people how to recycle their
Post-It notes (put them out with the
office paper pickup; the recycling
process removes the glue). And in
general, the company is boosting in-
novation by ramping up collabora-
tion—including collaboration with
outsiders.
New Structures and Teams
The fourth principle recognizes that
becoming digital isn’t just a matter
of rearranging the lines and boxes
on your org chart. It involves fos-
tering a startup’s way of working
through new structures and teams,
and changing your incentives, rules,
and decision rights accordingly. Just
as important as these formal mecha-
nisms are their informal counter-
parts—the personal networks, com-
munities of interest, information
flows, and behavioral norms—that
link the people in your company
who can imagine and build new
digital capabilities.
In a truly digital enterprise, you
will often find that new cross-func-
tional, multidisciplinary teams need
to be formed and assigned solely to
conceive and build successful digital
customer experiences. These teams
bring together specialists in strategy,
R&D, UX design, industrial design,
Millions of consumers have signed
up with Nike+, giving the company
a huge new source of data to mine,
reinforcing its core businesses.
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marketing and branding, sales, and
IT to work collaboratively. The di-
versity of talent and perspective is
vital when it’s time for the team to
move its digital DNA back to the
main body of the company, chang-
ing the culture from the inside out.
Health insurer Aetna recently
created a new business unit called
Healthagen. It has operations based
in San Francisco, far from the
company’s headquarters in Hart-
ford, Conn. Essentially a startup,
this new group was charged with a
mission: to tackle the fundamen-
tal issues of value and transparency
in healthcare. The unit isn’t simply
trying to address customers’ pain
points. Instead, its goal is to empow-
er consumers, improve the quality
of care, and reduce overall costs.
Aetna has identified digital capa-
bilities and user experience as game
changers. It is investing more than
U$1 billion to acquire and build a
comprehensive collection of health
management and health IT solu-
tions. Under one roof, Healthagen
has assembled a multidisciplinary
team of strategists, consumer insight
specialists, digital product manag-
ers, user experience and user inter-
face designers, and IT architects. It
is adopting distinctive innovation
methodologies that rapidly bring
new ideas to life and test them with
users and stakeholders.
This new group is prototyping
an application for parents of new-
born infants that can help families
bring their babies home as soon as
possible. All too often, new parents
don’t feel ready and armed with the
right support to take their infant
home. This app lets them leave the
hospital sooner, because it provides
educational content, support, and
live video chat with nurses when
needed.
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WhExecEd_Strat+Bus_Summer2013_CoreStrength.indd 1 3/29/13 3:04 PM
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Energize the Culture
Tackling the culture is the final
digitization principle. The toughest
part of becoming digital is creating
the cultural norms and ways of do-
ing things that enable sustainable
change, especially at very large com-
panies. These changes are likely to
be extreme. Thinking and behaving
with an orientation toward custom-
ers represents a major leap from the
product- and channel-centric ap-
proach on which most corporate
cultures have been built.
The sporting-goods retailer
Sports Authority took on this task in
2010 by redesigning the branded ex-
perience from the consumer’s point
of view and building the necessary
digital “omni-channel” capabilities.
The new behavior that went along
with these capabilities then sparked
a culture change. Rather than sim-
ply letting its e-commerce efforts
stand alone, the company focused
on maximizing the entire business
through digital capabilities—re-
imagining its advertising, shopping,
and delivery experiences. It was criti-
cal to use digital capabilities to drive
store traffic, not just online rev-
enues. Sports Authority teamed up
with Google to create virtual online
inventories for customers of the mer-
chandise in each store; it optimized
store websites to gain better search
response; and it experimented with
digital partners such as Shopkick (a
mobile app that provides rewards
and offers when customers walk
into retail stores) and Foursquare
(a location-based social networking
app that helps people engage with
nearby retailers). The company also
deployed additional omni-channel
capabilities in many stores, includ-
ing ship-from-store systems (which
turn stores into local distribution
centers for pickup and delivery).
One key to changing Sports
Authority’s culture was allowing
customers to buy on any channel
they preferred—whether digital or
in-store—and then compensating
store managers for all e-commerce
sales in the zip codes of their trade
area. At the same time, the retail
chain raised its revenue targets, and
required units to report on the direct
and indirect sales impact of every
channel in weekly business reviews.
The new approach proved that
a vibrant digital presence could re-
vitalize all aspects of a company’s
business, including its non-digital
channels. It produced a shared sense
of purpose among store-based and
online staff, a willingness to experi-
ment in order to boost sales across
all channels, and a “fail fast” culture
that is eager to learn from risks and
experiments.
The ultimate goal of reimagin-
ing your business is to transform it
into a more customer-centric enter-
prise. This is an exhilarating process
for most companies, once it begins
in earnest. It brings together busi-
ness and functional leaders, em-
ployees and customers, global and
local managers, and the seemingly
disparate practices of analytics and
creative ideation. Companies that
move from reengineering to reimag-
ining will be in a far better position
to benefit from the new world of
digitization. +
Reprint No. 00181
Jeff Schumacher
jeff.schumacher@boozdigital.com
is the managing director of Booz Digital.
Based in Los Angeles, he specializes in
digital strategies for companies in con-
sumer markets. Previously, he was
executive vice president and chief market-
ing officer of the Sports Authority.
Simon MacGibbon
simon.macgibbon@boozdigital.com
is a senior director with Booz Digital in San
Francisco. He helps companies design and
realize transformational customer experi-
ences through digital capabilities and data
analytics.
Sean Collins
sean.collins@boozdigital.com
is a senior director with Booz Digital in Los
Angeles. He helps CXOs define and execute
digital growth strategies.
Also contributing to this article was Booz &
Company partner and Booz Digital senior
director Matthew Egol.
Booz Digital is a full-service team of
strategists, designers, and technologists
focused on the relationship among ideas,
digital platforms, and transformational
businesses.
One key to changing the culture at
Sports Authority was compensating
store managers for all e-commerce
sales in the zip codes of their area.
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Followus:
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A L L
D I G I TA L
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Sooner or later, every corporation will face disrup-
tion. It may be the result of a decrease in its competi-
tive advantage, a shift in the regulatory environment,
or some catastrophic event that affects its ability to op-
erate. No matter what the underlying cause, the chief
executive is the person most accountable for managing
the disruption. He or she must recognize its dynamics,
anticipate its likely effect, develop a response, manage
that response, and sustain the necessary changes. If the
CEO is not directly involved in guiding his or her com-
pany through the storm, the entire company is likely to
suffer—and, in extreme cases, disappear entirely.
There is no single formula for managing a disrup-
tion, because it can come in any number of forms. Any
event that has the potential to adversely affect a com-
pany’s business model or ongoing operations is disrup-
tive. Some disruptions involve shifts in the dynamics
of competitive advantage for an industry, stemming
from a variety of causes—technological breakthroughs
that favor new rivals, global changes in labor arbitrage,
shifts in cost structure, or new rivals entering markets
from adjacent sectors. Some are instigated by regula-
tory upheaval, such as the structural changes to the U.S.
healthcare market set in motion by the Affordable Care
Act. Virtually every CEO of a hospital system in the
U.S. is confronting a major disruption to its business
model as a result (see “Putting an I in Healthcare,” by
Gil Irwin, Jack Topdjian, and Ashish Kaura, page 68).
There are also event-specific disruptions, such as eco-
nomic downturns, idiosyncratic geopolitical and natu-
CAPTAINS
IN
DISRUPTION
EVEN WHEN facing a crisis, some
CEOs know how to anticipate
the worst, plan a response, and
navigate to advantage. You can
do the same.
by Ken Favaro,
Per-Ola Karlsson,
and Gary L. Neilson
DISRUPTION
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Ken Favaro
ken.favaro@booz.com
is a senior partner with Booz &
Company based in New York.
He leads the firm’s work in en-
terprise strategy and finance.
Per-Ola Karlsson
per-ola.karlsson@booz.com
is a senior partner with Booz
& Company based in Stock-
holm. He serves clients across
Europe and the Middle East on
issues related to organization,
change, and leadership.
Gary L. Neilson
gary.neilson@booz.com
is a senior partner with Booz &
Company based in Chicago.
He focuses on operating
models and organizational
transformation.
Also contributing to this article
were Booz & Company senior
partner Alan Gemes and senior
manager Josselyn Simpson,
and s+b contributing editor
Edward H. Baker.
ral events, and unforeseen internal company events such
as sudden major trading losses or public scandals.
The severity of these events can vary considerably,
as can the duration. Some disruptions, like the rise of
the Japanese auto industry in the 1970s that eventually
crept up on U.S. and British carmakers, are so gradual
that, like a frog in a pot of water, company leaders may
never realize they are slowly boiling to death. Others are
sudden and devastating, like the 2011 floods in Thai-
land that crippled the country’s hard-drive manufactur-
ing sector and revealed extreme vulnerabilities in the
industry’s supply chain.
Since the mid-1990s, disruptive events have become
increasingly difficult to deal with. Technological evolu-
tion, ongoing globalization, two huge financial bubbles,
the rapid pace of change in emerging economies, the de-
regulation and re-regulation of a number of industries,
and waves of political turbulence in some regions have
made the world a more challenging place to do business.
For example, banks and financial institutions have had
to rethink their business models after the financial cri-
sis. And retailers and many parts of the media industry
have seen their revenue streams fall away with the rise of
new, technologically enabled competitors.
Yet even in the worst disruptions, some companies
do better than others. These companies have leaders
who recognize the crisis and act accordingly, either in
advance or in time to recover. Some of the most cele-
brated cases are those of IBM, which shifted to business
services before the rest of the computer industry did;
BMW, which rebounded decisively from near-bank-
ruptcy in the late 1950s; Ericsson, which reinvented it-
self in 2002–03 after nearly being driven out of business
by sudden competition from Asia; and Lego, which re-
built its supply chain and regained profitability after its
retail channels dramatically changed.
In this article, based in part on our research on
chief executive performance, we consider the steps that
many CEOs are taking to become effective captains
during disruption—captains who can not only manage
through it, but turn it to their advantage. We have also
directly observed CEOs managing disruption at a num-
ber of companies, and have drawn on interviews with
two people who understand the issues in depth. Antony
Jenkins took over as CEO of Barclays PLC to manage
the bank through its response to the LIBOR rate-fixing
scandal that struck in the summer of 2012. Clayton
M. Christensen, the professor and management author
who first charted the dynamics of disruption in The
Innovator’s Dilemma: When New Technologies Cause
Great Firms to Fail (Harvard Business School Press,
1997), has explored a variety of disruption dimensions,
including the personal impact in his new book, How
Will You Measure Your Life? (with James Allworth and
Karen Dillon; HarperBusiness, 2012).
To act effectively as captain of their company in a
time of disruption, CEOs must lead in three ways. First
is preparation: The CEO must make sure his or her
company anticipates potential disruptions and puts in
place the capabilities that will be needed when the time
comes. Second is response: When a disruptive event
occurs, leaders must develop the appropriate strategic
and operational plans, which could include focusing
on fewer products and services, engaging in large-scale
business transformation, reorganizing the company’s
structure, initiating mergers and acquisitions, launch-
ing a new wave of innovation, or making a change in
leadership. Finally, there is implementation: CEOs need
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inherent in the subprime mortgage market soon discov-
ered that their confidence was overstated.
The key to the problem, says Clayton Christensen,
lies in the nature of data itself. “How can you make
sense of the future,” he asks, “when you only have data
about the past? That’s the role of theory, to look into the
future.” In other words, you have to think through the
reasons that the pattern of behavior in the data in this
case appears to be different. Christensen adds that in
most companies, top executives do not have access to
candid insights from people at all levels—perspectives
that they need if they are to plan for future disruptions.
“Data is heavy. It wants to go down, not up, in an or-
ganization,” he says. “Information about problems thus
sinks to the bottom, out of the eyesight and earshot of
the senior managers.”
In Christensen’s view, chief executives (and other
senior leaders) can compensate for these limitations only
by learning to ask better questions. “Instead of looking
at the data about today’s performance, I [need to] keep
my attention on the questions I need to ask so I can
catch the issues of the future…. For instance, if you’re
concerned about disruption, you ask: ‘Which competi-
tors are threatening me and which am I more likely to
threaten?’ Disruption is a question about who’s going to
kill whom.”
It falls to the CEO to ask questions this way, and to
oversee the enterprise-wide thinking required to assess
potential disruptions. Executives within business units
and functional silos tend to focus on making progress
toward their unit’s business objectives, and not to think
deeply about longer-term threats to the whole company.
Only the CEO can ensure that the company is taking a
multifaceted approach to sensing and recognizing trou-
ble. Chief executives must be willing to lead the effort
directly, drawing on past methods of gauging risks and
disruptions, while also admitting that the old ways of
doing business are no longer adequate.
Plan and Respond
Once a potential disruption has been recognized as a
real threat, it is time to develop a plan and initiate the
first wave of reaction. The wake-up call will likely hap-
pen in one of two ways: Either the company’s leaders
will realize that it is vulnerable to a potential disruption
and thus needs to be shaken up proactively or an event-
driven disruption will occur, and the leaders will see
that the company must respond immediately.
Sometimes a CEO must plan a response to a sud-
to set the response in motion and carry it out sustain-
ably, ensuring that their company reaches the end goal.
Anticipate and Prepare
For every company in every industry, the first stage in
managing disruptions is to learn to anticipate them and
recognize their signs before they hit. You can’t predict
every future challenge. But you can think about the
kinds of disruptions that might be particularly devastat-
ing to your company, and prepare accordingly, shaping
the degree of preparation to the nature and likelihood
of the risk. Even environmental and natural disasters
can be—and must be—prepared for. It’s particularly
important for companies to pay attention to risks that
they feel shielded from because of their own compe-
tence and capabilities. These can even include environ-
mental and natural disasters. For example, though the
earthquake that caused a tsunami to hit Japan in March
2011 was one of the strongest ever recorded anywhere,
more than 75 deadly earthquakes have been recorded in
Japan since 1900. Should Toyota have been able to an-
ticipate and prepare for the effect an earthquake might
have on its highly concentrated network of suppliers in
northeast Japan? Perhaps the company’s confidence in
its just-in-time manufacturing system blinded it to the
vulnerability of its supply chain. Might your company
be similarly vulnerable to the disruption of strengths
that you have built up over time, and that you currently
take for granted?
Anticipating disruption goes beyond the conven-
tional practices of risk management. Virtually every
company now employs a process to assess and address
risk. These practices typically concentrate on day-to-
day risks, those run in the ordinary course of business,
including credit and foreign exchange risk, data secu-
rity issues, and operational risks inherent in managing
large-scale projects.
For truly disruptive events, many companies adopt
a similar approach at a larger scale: They build analytic
models assigning a probability and potential loss value
to various kinds of risks, and then design preparations
for each of them depending on their likelihood and
potential for loss. Several recent events, however, have
highlighted the limitations of this approach. Highly
improbable events do occur, and failure to anticipate
them—or even to imagine them—can be devastating.
A further limitation lies in the relative strength of the
risk models themselves. The financial firms that con-
cluded in the mid-2000s that they had tamed the risks
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profitability. We needed to think more broadly about
the stakeholders we serve. The existential crisis helped
me in this regard.”
Jenkins emphasizes the need to involve all stake-
holders in asking the right questions and finding the
right way forward. In managing the reaction to the
LIBOR scandal, he spoke with politicians, the media,
consumer groups, and regulators, in addition to bank
employees. The day after the new strategy was made
public, in February, he hosted a stakeholder breakfast.
Some of the comments he heard were not easy to take,
but it showed that he was willing to engage. “You have
to meet stakeholders with humility, be prepared to lis-
ten, and then lay out a clear plan,” he notes. “And be
willing to talk to those who do not necessarily agree
with you.”
According to Jenkins, the precepts for leading a
large company through a highly disruptive crisis are
straightforward: Make sure you have a clearly defined
objective and a compelling reason for it, develop a vi-
able and credible plan for reaching that objective, and
relentlessly and authentically pursue it. So far, so good:
The day after the announcement of the new strategy,
Barclays’ stock price rose 9 percent.
When planning a response to disruptive events, all
chief executives should bear in mind several principles:
1. The CEO is the single most critical player in craft-
ing and carrying out a response. The CEO must take
immediate responsibility for the situation and be will-
ing to hold him- or herself accountable for the ultimate
success of the company’s response. For example, at Bar-
clays, Jenkins knew he had to personally make clear his
lack of tolerance for the kinds of activities that had led
to the bank’s problems.
den, unexpected disruption. When the LIBOR rate-
rigging scandal broke in mid-2012, Antony Jenkins
was the very successful head of the retail and business
banking division of Barclays, then the U.K.’s second-
largest bank. After both the bank’s chairman and its
CEO resigned, Jenkins took on the role of CEO. He
knew that the entire organization had to confront the
scandal along with the pain that executives and staff felt
about how Barclays was being portrayed in the press. At
the same time, the financial-services industry as a whole
was still navigating the collapse in trust that had fol-
lowed the crisis of 2008–09—along with the reversal
of globalization, heavier regulation, and a more adverse
macroeconomic environment. This was a new and dif-
ficult situation for every bank.
Upon his appointment, Jenkins immediately made
it clear to the bank’s 140,000 employees that short-term
thinking and a focus on immediate profits—attitudes
that had contributed to the LIBOR scandal and to
aggressive tax practices in the structured capital markets
division—would no longer be tolerated. (Barclays an-
nounced the closure of the structured capital markets divi-
sion in February 2013.) He carried out a strategic review of
the bank’s business units, which numbered more than
70. He then developed an overall strategy and new
direction for the bank called TRANSFORM (Turn-
around; Return Acceptable Numbers; and Sustain For-
ward Momentum).
“While there are many great things about Bar-
clays,” Jenkins says, “the organization had had a cata-
clysmic experience. As a result, people were prepared to
listen. The staff recognized that the environment had
fundamentally changed and that we needed to respond.
We could no longer focus exclusively on short-term
In most companies, top executives
do not have access to candid
insights from people at all levels—
perspectives they need if they are
to plan for future disruptions.
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the organization, executives can waste time defending
their past behavior and actions.
When communicating the need for change, CEOs
should describe the path ahead as clearly as possible,
including the specific steps that will get the company
through to the other side. For example, a few of the U.S.
healthcare companies facing the disruptive changes of
healthcare reform have developed a strategic commu-
nications process in which they explicitly lay out—for
investors and employees alike—the decisions that must
still be made in executing their strategy for managing
disruption. On a regular basis, these executive leaders
formally review the company’s choices and progress, ask
their board to approve major changes, and reevaluate
their components.
3. CEOs must make cogent decisions about the team
of top executives. They must give people a chance to
come on board with the new system and remove those
who resist. If anyone visibly resists the changes, it soon
becomes evident—to them and everyone else—that
they are now at the wrong company. This process can
be designed in ways that treat everyone, including those
who exit, with respect. Nokia CEO Stephen Elop kept
the senior leadership team largely intact, but set up an
initiative, called the Challenger Mind-Set, in which
executives were given a chance to show how well they
could adapt. It was clear that those who could not per-
form would be better off elsewhere. Changes in top
management must of course be made carefully, but even
one or two visible changes can dramatically reinforce
people’s awareness that the situation is serious.
4. It is often important to choose a small team of top
decision makers to lead the response. Paradoxically, the
more profound the changes planned, the faster they
need to take place. A small team of top leaders can ma-
neuver more nimbly than a large group.
Implement and Sustain
All too many companies, when faced with business cri-
ses, have initiated appropriate responses but have then
been unable or unwilling to carry them to comple-
tion. When that happens, the issues that scuttled the
response remain unaddressed, and the company will
Whether the cause of the disruption is internal or
external, foreseeable or entirely unpredictable, it is up to
the CEO to set the pace of change. Sometimes it is nec-
essary to short-circuit things; to force action, decisions,
and transparency. After the first swift reaction, things
may slow down a bit as decision makers deal with the
long-term consequences of the disruption, but the com-
pany should still retain most of its momentum.
2. It is critical to begin breaking down human inertia.
Complacency in the face of change comes naturally to
any large organization. The chief executive must explain
the situation and describe the new agenda in simple,
clear terms. He or she must find simple but compelling
messages to show that the old ways of being successful
won’t work anymore. The changed nature of the game
must be communicated to all stakeholders, both inside
and outside the company, in a way that galvanizes this
particular culture.
When Stephen Elop became CEO of the Nokia
Corporation in 2010, he wrote a note, now famous
within the company, in which he likened Nokia’s situ-
ation to standing on a blazing oil platform. The com-
pany faced not just a fairly new competitor with Ap-
ple’s iPhone, but a rapidly rising new product category,
the smartphone, which Nokia had not found a way to
counter. “We have to go faster, and harder, and more
aggressively now than we’ve ever gone before,” he said.
Employees, he added, have two choices: Either jump
into the water, even if it’s 100 meters deep and freezing
cold, or get burned. The note was controversial because
some felt it pushed Nokia toward too much change,
too quickly—but aggression was its point. It provided
a clear statement that the company would be fearless in
facing up to its dire competitive situation.
At the same time, a CEO should make clear that
the company needs to be forward-looking, and declare
a kind of amnesty for past activity. Decisions made and
actions taken in previous years may have made sense at
the time, but they must change as the situation chang-
es. A new marketplace requires different ways of doing
business, and it won’t work to simply carry on with leg-
acy practices (and, in some cases, legacy products or ser-
vices). If this requirement isn’t understood throughout
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ultimately be even less prepared to face the next crisis.
Ultimately, to implement a plan and sustain a company
during disruption means looking closely at both the or-
ganizational design and the company’s culture. It’s up
to the CEO to make sure that the structure and the cul-
ture are ready for the necessary changes and set up to
support the new strategies and each other.
Organizational redesign. In most cases, response to
disruption necessitates a shift to a more nimble, focused,
and strategically aligned organizational structure—one
that encourages other people to change, rather than
trapping them in outmoded processes or approval gates.
The new structure must enable people to cooperate ful-
ly across internal boundaries, even if that runs counter
to long-standing patterns of communication or control.
One example of this type of redesign is Amedisys
Inc., a provider of healthcare to patients in their homes.
The Amedisys business model had long been built
around payments from Medicare and other insurance
companies. With pressure on Medicare prices squeezing
profits considerably, Amedisys CEO Bill Borne, who
founded the company and designed its original business
model, decided that it would have to change. Amedi-
sys should be paid for outcomes rather than offering a
menu of narrowly defined services.
To pilot the new approach, Borne and the Amedi-
sys top team created a “pirate ship”—an organizational
unit kept separate from the mother ship, set up to pro-
totype and offer a broader range of care for its clients.
With any such skunkworks efforts, it is important to
think through the separation in advance; how soon,
and how thoroughly, can the insights and operations of
the pirate ship be brought back to the main vessel?
Ultimately, the kind of organizational change typi-
cally needed to respond to disruption must be an on-
going effort. Says Barclays’ Jenkins, “It is about being
continually dissatisfied with what you are doing. What
is the next thing to drive for? There will always be a
next phase. It is about constantly challenging and creat-
ing an organization that is never satisfied.”
Culture change. As difficult as organizational rede-
sign may be, truly changing a large company’s culture
in response to a disruption can be even tougher. But it is
no less important. In the case of one large car company
facing declining sales and a weak cash position, top ex-
ecutives had devised both a new strategy and a new op-
erating model, but didn’t know what to do about their
culture. They knew it had to be changed: It was slow
and bureaucratic. The CEO set up a team of several of
his best executives, who started defining the company’s
cultural priorities: speed, willingness to take risks, and
greater accountability.
The CEO understood that the only real way to
change a company’s culture is by changing behavior. He
began by asking his top team to make decisions in days
and weeks, not months or years. They didn’t announce
the change; rather, they just practiced the new behav-
ior themselves, and it spread. Because the top 50 or so
senior executives had become very isolated—the com-
pany had as many as 15 layers in its hierarchy—they
began interacting informally with people lower down in
the structure who actually knew what worked and what
didn’t. The result was a much clearer picture of how the
company operated, with the added benefit that the peo-
ple involved became zealots about the need for change.
The company made sure to act quickly on the best ideas
generated through the process.
At Barclays, Antony Jenkins faced a tough task
when he became CEO: to restore the bank’s public
reputation and renew its internal culture. Though he
had spent time at Citibank between 1989 and 2006,
he began his career at Barclays in the early 1980s.
Despite his time away, he considers himself an insider,
which he feels has been a singular advantage since be-
coming CEO. In his view, it would have been incred-
ibly difficult to come in from the outside and try to
change Barclays. As an insider, he was already familiar
with the strategic and cultural challenges facing the
organization, and having the opportunity to “road-test”
different approaches in individual business units was
a significant benefit in taking on the CEO role.
“I was able to prototype what I believed in, first at
Barclaycard and then at retail and business banking,”
he says. “This became the foundation for my thinking
about how to change the larger organization.”
Using his earlier experience, Jenkins developed a vi-
sion of a “go-to bank,” and turned it into action in the
TRANSFORM program. The program was then ap-
proved by the board of directors, and presented publicly
in February 2013. Now the challenge will be to sustain
momentum and to run the bank to serve the interests of
all its stakeholders.
Promoting cultural change, in Jenkins’s view, is
feasible. “Leadership drives culture, and culture drives
organizational performance,” he says. “Organizations
look at how you behave, not what you say, and you can’t
do it if you are not authentic and relentless. Do what
you believe is right and do not get distracted by all the
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CEO] Andy Grove really got the concept of disruption.
His famous phrase, ‘Only the paranoid survive,’ was
a statement about how to [anticipate and] respond to
disruption.”
For any CEO who leads a company successfully
through a disruption, that success will likely become
his or her defining moment. If you are a chief executive,
that’s the hidden opportunity disruptions provide. The
next disruption to your company could be the event
that most determines how you will be regarded and
remembered as a leader. +
Reprint No. 00182
voices outside commenting on your plan.”
In this implementation phase of managing through
a disruption, what CEOs do is at least as important as
what they say. Too many leaders in crisis simply send
memos from on high, rather than determine a course
to do things differently. There is also a risk in trying
to frighten people into changing their ways—the burn-
ing platform sometimes just scares them into freezing
instead. Finally, CEOs confronting disruption need to
reach out to people throughout the company who can
help them cross-organizationally, and do so through
informal interactions. Cross-organizational interaction
is by far the biggest accelerator of change (see “Cul-
ture and the Chief Executive,” by Jon Katzenbach and
DeAnne Aguirre, page 22).
The Defining Moment
The Great Recession gave the CEO of virtually every
company around the world a strong taste of the im-
pact of a deeply disruptive crisis. Some chief executives
thrived, making their company stronger than ever.
Others simply muddled through. Still others watched as
their company succumbed to the trauma.
The best CEOs understand that disruptions will hap-
pen, and that no company can insulate itself completely
from their effects. But they also know that in any crisis
there can be an opportunity. Companies that survive
major disruptions are likely to come out even stronger,
and better able to anticipate and prepare for the next
one. As Clayton Christensen notes, it’s difficult to think
this way, because leaders are always tempted toward
complacency. “Almost all of them,” he says, “probably
including me, tend to stop asking good questions—
or else their successors do. For example, [former Intel
Resources
Amy Bernstein, “Yossi Sheffi: The Thought Leader Interview,” s+b,
Spring 2006: MIT’s leading supply chain expert says business leaders
have to figure out how to bounce back from the unthinkable.
Christopher Dann, Matthew Le Merle, and Christopher Pencavel, “The
Lesson of Lost Value,” s+b, Winter 2012: A study of companies with
shrinking shareholder returns shows that strategic risk—self-induced
disruption—is the number one cause.
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “CEO Succession
2011: The New CEO’s First Year,” s+b, Summer 2012: Last year’s study
focused on guidance for the incoming captain of the company.
Art Kleiner, “The Discipline of Managing Disruption,” s+b [online only],
Mar. 11, 2013: The interview with Clayton M. Christensen where the
quotes in this article first appeared.
Gary Neilson and Julie M. Wulf, “How Many Direct Reports?” Harvard
Business Review, Apr. 1, 2012: During the past 20 years, the CEO’s aver-
age span of control has doubled, giving fresh relevance to the question,
How much should the chief executive take on?
For more thought leadership on this topic, see the s+b website at:
strategy-business.com/strategy_and_leadership.
For any CEO who leads a company
successfully through a disruption,
that success will likely become his
or her defining moment.
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CEO TURNOVER is trending
high, but in a more planned
and stable manner.
by Ken Favaro,
Per-Ola Karlsson,
and Gary L. Neilson
“IT’S TIME
FOR A
CHANGE”
The past year was a busy one for companies looking for new
leaders. Fully 15 percent of the world’s 2,500 largest public
companies made a change at the top in 2012. This number,
375 companies, was the highest total since 2005, and the
second highest in the 13 years’ worth of data we’ve gathered
since 2000. Given all this turnover activity, you might expect
higher levels of chaotic, reactive behavior. But almost three-
quarters of the companies planned their succession events
carefully, an increase of more than 50 percent since 2006.
GE
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These numbers represent a sharp contrast to the
succession activity during the depths of the Great Re-
cession; in 2010, for example, the rate of turnover was
only 11.6 percent (see Exhibit 1). In other words, these
results suggest that companies have moved toward more
overall leadership stability, not less, in the past few years.
Companies in general may be more willing to make
changes at the top deliberately, in a more systematical-
ly planned fashion, in search of increased competitive
advantage rather than recovery from a crisis. Whether
these choices prove to be the right ones is harder to
judge, of course, but if experience is any guide to future
results, the attention to planned succession will pay off.
Insiders and Outsiders
Another indicator that companies were looking for real
change in 2012 was the proportion of CEOs hired from
outside the company. Overall, the 2012 crop of new
CEOs included a larger percentage of outsider recruits
than past years did. The share of new insider CEOs
dropped considerably, from an average of 80 percent be-
tween 2009 and 2011 to just 71 percent in 2012. A full
30 percent of companies that made a planned change in
their CEO hired an outsider in 2012, compared with an
average of just 18 percent in the previous three years.
Meanwhile, the number of outsiders brought in as a
result of forced changes stayed about the same as in
2009–11, at just under 30 percent.
Clearly, more companies feel sufficiently stable to
take a risk on a leader they may not know well. But at
the same time, they are carefully evaluating the potential
risks that come with hiring someone from outside. And
they may well be mitigating the risk by hiring outsid-
ers from the same industry—just 44 percent of outsiders
joined their new company from a different industry.
As in previous years, the size of the company cor-
related with different CEO succession patterns. Among
the 250 largest companies with new CEOs, just 17 per-
cent of CEOs were hired from outside the company,
compared with 31 percent of their counterparts among
the 2,250 smaller companies. This suggests that smaller
companies were more willing to take a risk than their
larger brethren (see Exhibit 2). Larger companies had
a higher proportion (25 percent) of CEOs who came
from a country different from where their headquarters
were located. Smaller companies still tended to choose
leaders from close to home—only 18 percent came
from another country. The largest global companies
also favored more CEO recruits with international ex-
perience (perhaps because of the opportunities a larger
company can offer its insiders). Indeed, 52 percent of
the new CEOs at large companies had experience in
other regions, compared with only 44 percent from
smaller firms.
Regional Differences
Significant differences in turnover rates were found de-
pending on where companies were headquartered. The
rates of CEO turnover among companies based in ma-
ture economies around the world all hovered around the
overall average of 15 percent in 2012 (see Exhibit 3). But
only 8.1 percent of Chinese companies brought in new
CEOs last year, whereas almost a quarter of companies
based in Brazil, India, and Russia chose new leaders.
Unsurprisingly, financial performance also plays
a role in the nature of CEO turnover events. Among
Exhibit 1: Chief Executive Turnover, 2000–12
CEO turnover in 2012 was higher than in all in other years except 2005,
and planned turnovers were at the highest level we have seen.
Worldwide CEO Turnover by Succession Reason
4%
8%
12%
16%
20%
2000 2005 2010
Planned
Forced
Merger
Source: Booz & Company
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1
U.S./
Canada
14.3%
Exhibit 3: Reason for Succession by Region
In 2012, the succession rates varied by region; China showed the lowest
turnover rate and Brazil, Russia, and India the highest.
Forced
Planned
M&A
CEO Turnover Rate by Type
of Succession, 2012
2.6
2.7
9.0
Western
Europe
14.7%
0.8
3.3
10.6
Japan
15.3%
0.9
2.2
12.2
Other
16.0%
2.6
13.4
China
8.1%
0.5
1.9
5.7
Brazil,
Russia, India
23.9%
4.2
4.2
15.5
Other
16.2%
0.4
2.5
13.3
MATURE ECONOMIES EMERGING ECONOMIES
1.4
2.8
10.8
15.0%
GLOBAL
Source: Booz & Company
Forced
Planned
Exhibit 4: Performance Quartiles
Companies with lower shareholder returns tend to hire outsiders more
often on the whole and to have more forced turnovers.
Insider
Outsider
Second
78%
22%
Lowest
39%
61%
Insider
Outsider
PERFORMANCE QUARTILE, 2009–12
Incoming CEO
Incoming CEO
Highest
82%
18%
Third
86%
14%
Source: Booz & Company
Ken Favaro
ken.favaro@booz.com
is a senior partner with Booz &
Company based in New York.
He leads the firm’s work in en-
terprise strategy and finance.
Per-Ola Karlsson
per-ola.karlsson@booz.com
is a senior partner with Booz
& Company based in Stock-
holm. He serves clients across
Europe and the Middle East on
issues related to organization,
change, and leadership.
Gary L. Neilson
gary.neilson@booz.com
is a senior partner with Booz &
Company based in Chicago.
He focuses on operating
models and organizational
transformation.
Also contributing to this article
were Booz & Company senior
manager Josselyn Simpson
and specialist Jane Kim, and
s+b contributing editor Edward
H. Baker.
Exhibit 2: Incoming CEO Profiles by Company Size
The 250 largest companies worldwide hired relatively large percentages of insiders, candidates with cross-regional experience, and CEOs who were not
citizens of the country in which the company is headquartered.
TOP 250 BOTTOM 2,250
Percentage
of 2012
incoming
CEOs
Incoming CEOs of the largest companies (by market capitalization) are more often...
83%
T
O
P
69%
B
O
T
T
O
M
INSIDERS
Hired from within
the company
25%
18%
FOREIGNERS
Different nationality
from where company
is headquartered
52%
44%
GLOBALLY EXPERIENCED
Worked in a world region
other than that of HQ
68%
54%
INDUSTRY INSIDERS
Joined the company
from the same industry
37%
24%
LIFERS
Never worked at a
different company
Source: Booz & Company
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companies that had a CEO turnover between 2009 and
2012 and were in the lowest quartile of performance as
measured by total shareholder return over the outgoing
CEO’s tenure, 39 percent had forced out their CEO,
compared with just 18 percent among companies in the
top quartile (see Exhibit 4). During the same period,
companies in the bottom quartile also hired outsiders at
significantly higher rates than the top-performing com-
panies—27 percent versus 19 percent—no matter the
cause for the change in leadership. Other analysis cov-
ering these years showed that in general, insider CEOs
have led their companies to better overall returns.
All in all, our analysis of CEO turnover in 2012
among public companies makes clear two distinct and
in some ways contradictory trends. On the one hand,
companies in most geographies are more willing to
make changes in their top leadership as they look for
faster growth in a stabilizing economy and business
environment. On the other hand, most companies, es-
pecially the better-performing ones, are planning those
changes carefully, and sticking with insiders in hopes of
maintaining their strong results. +
Reprint No. 00183
Methodology
B
ooz & Company’s 2012 Chief
Executive Study identified the
world’s 2,500 largest public compa-
nies, defined by their market capi-
talization according to Bloomberg on
January 1, 2012. Our research team
members then identified the subset
of those companies that had made a
change at the top, and cross-checked
the data using a wide variety of print-
ed and electronic sources in many
languages. We also used Bloomberg
to determine which companies had
been acquired or merged in 2012.
We investigated each company
that appeared to have changed its
CEO for confirmation that a change
had occurred in 2012, and sought
out additional details—title, tenure,
chairmanship, nationality, profes-
sional experience, and so on—for
both the outgoing and incoming chief
executives, as well as any interim
chief executives.
We accepted the information
provided by the companies them-
selves on most data elements, except
to confirm the reason for an execu-
tive’s departure. For that, we turned
to outside press reports and other
independent sources. Finally, Booz
& Company staff around the world
separately validated each succession
event as part of the effort to learn the
reason for specific CEO changes in
their regions.
To distinguish between mature
and emerging economies, Booz &
Company followed the United
Nations Development Programme
2012 ranking.
For data on the companies’ total
shareholder returns during a CEO’s
tenure, we also turned to Bloomberg,
and included reinvestment of divi-
dends, if any. We then adjusted that
data to reflect differences in regional
markets (measured as the difference
between the company’s return and
the return of the local regional index
over the same time period) and an-
nualized it.

13 Years of CEO Succession Data
Explore CEO turnover rates by geography, industry,
and year.
VIEW MORE
INTERACTIVE GRAPHIC
The 2012 Chief Executive Study Overview Video
Additional insights from the authors on this year’s
unprecedented number of planned turnovers and on
who the incoming CEOs are.
VIDEO FEATURE
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For the most part, they are familiar faces. The ma-
jority of them were promoted from within the company
they now run. Less than half of the new chief executives
have spent any time at all working outside their com-
pany’s home region. And almost all of them are middle-
aged men.
This snapshot of the 2012 incoming class of chief
executives puts to rest, at least for this year, the notion
that the CEO candidate most likely to be hired is the
one with the highest level of global diversity. The data
also offers an indication of growing leadership stabil-
ity at the top of large companies, and our conversations
with CEOs have frequently confirmed that point of view.
The most notable characteristic of the 2012 class
members is their collection of resumes. Of the 300 new
CEOs at the world’s largest 2,500 companies, about 30
percent came from outside the companies that hired
them. This is a significant increase (45 percent) over the
level of the previous three years, for which an average of
20 percent were outsiders. Interestingly, the entire in-
crease is attributable to companies where the transition
to a new CEO was planned, not forced (see Exhibit 1,
page 54). This trend toward outsiders seems a bit para-
doxical in light of another finding from our study: As in
the past, insider CEOs typically lead their companies to
better financial returns than do outsiders.
Just because a larger portion of 2012’s class of
CEOs come from outside the company, however, does
not mean that they bring a different regional perspec-
tive. Fully 81 percent of incoming chief executives, I
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PORTRAIT OF
THE INCOMING
CLASS
THE NEWEST CEOS have
neither the diversity nor
the global backgrounds
that you might expect.
by Ken Favaro,
Per-Ola Karlsson,
and Gary L. Neilson
CLASS
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1
both insiders and outsiders, are natives of the country
in which the companies hiring them are headquartered
(see Exhibit 2). As you might expect, that number var-
ies depending on geography. For Chinese companies in
2012, all incoming CEOs came from China. For Japa-
nese companies, they all came from Japan. For western
European companies, just 58 percent of the new CEOs
in 2012 came from the country where their companies
are based. Another 33 percent came from another Euro-
pean country.
A similar geographic insularity is indicated by CEO
work experience. Less than half of incoming CEOs have
ever worked in regions outside where their companies
are headquartered, a proportion that declines to less
than 20 percent in both China and Japan (see Exhibit
3). At companies in the U.S. and Canada, the propor-
tion of new CEOs with global experience was right at
the global average, whereas western Europe had the
highest proportion, at 60 percent. Given the critical im-
portance of taking a global perspective on business in
the 21st century, these numbers seem surprising. One
cause may be the increasing levels of connectedness
through global travel and telecommunications, which
make it possible to be a global CEO without having to
work around the world or live in more than one coun-
try. In addition, at the C-suite level, the common “lan-
guage” of business—the mutual understanding of en-
terprise strategy and management—is always prevalent,
Ken Favaro
ken.favaro@booz.com
is a senior partner with Booz &
Company based in New York.
He leads the firm’s work in en-
terprise strategy and finance.
Per-Ola Karlsson
per-ola.karlsson@booz.com
is a senior partner with Booz
& Company based in Stock-
holm. He serves clients across
Europe and the Middle East on
issues related to organization,
change, and leadership.
Gary L. Neilson
gary.neilson@booz.com
is a senior partner with Booz &
Company based in Chicago.
He focuses on operating
models and organizational
transformation.
Also contributing to this article
were Booz & Company senior
manager Josselyn Simpson
and specialist Jane Kim, and
s+b contributing editor Edward
H. Baker.
Exhibit 1: More Outsiders
Insider
Outsider
Incoming CEOs in
planned successions
2012
70%
30%
2009–11
82%
18%
The proportion of new CEOs
hired from inside dropped in
2012, because of a large increase
of outsider CEOs in planned
successions.
Source: Booz & Company
U.S./
Canada
Western
Europe
Japan Other China Brazil,
Russia, India
Other
MATURE ECONOMIES EMERGING ECONOMIES
Exhibit 2: Nationality and HQ Location
New CEOs around the world are most often citizens of the country
their company headquarters are in—and in Japan and China, they are
all citizens of the country where they work.
Same Country
Different Country, Same World Region
Different Country, Different World Region
Nationality of incoming 2012 CEOs and location of company’s headquarters
100%
2%
100% 85% 89%
4% 4%
84%
9%
7%
58%
33%
9%
74%
24%
11%
7%
Source: Booz & Company
2%
GLOBAL
81%
9%
10%
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U.S./
Canada
Western
Europe
Japan Other China Brazil,
Russia, India
Other
MATURE ECONOMIES EMERGING ECONOMIES
Exhibit 3: Global Experience
Only 45 percent of the incoming CEOs in 2012 had experience working in a
region other than that of their company’s headquarters.
Incoming 2012 CEOs have had experience working in a world region
other than where company is headquartered
55%
45%
40%
60%
83%
17%
44%
56%
85%
15%
62%
38%
53%
47%
GLOBAL
45%
55%
YES
NO
Source: Booz & Company
fostering communication even when executives speak
different languages.
The way that companies bring their new CEOs
on board has changed significantly over the years. In
2012, 29 percent of the companies in a planned chief
executive transition followed an apprenticeship model, a
model in which the outgoing CEO remains or becomes
chairman and thus can help “apprentice” the incoming
CEO. Of the companies that chose this model, 85 per-
cent chose an insider as CEO, far higher than the num-
ber that chose outsiders. The data suggests that these
companies are seeking continuity through their chief
executive transition.
The variation among companies from different re-
gions choosing the apprenticeship model is noteworthy.
In Japan, in keeping with the country’s tight-knit ways,
and where 80 percent of turnover events in 2012 were
planned, 69 percent of new CEOs saw their predecessor
stay on as chairman. By comparison, just 15 percent of
new CEOs at companies in Europe were mentored by
the previous CEO.
By the same token, the percentage of companies ap-
pointing their new leader as both chairman and chief
executive stood as high as 48 percent 10 years ago. Since
then, however, the proportion has declined significant-
ly, leveling off at around 12 percent since 2009. As we
have observed in past studies, the willingness to concen-
trate power at the top appears to be more prevalent in
North America. Fully 20 percent of new CEOs at com-
panies in North America were also appointed chairman
in 2012, a significantly higher proportion than in any
other region. In Japan, by contrast, no new CEO also
held the chairmanship.
How Leaders Lead
Despite their widely varying backgrounds, nationalities,
and career paths, virtually all new chief executives we
have spoken to over the years agree on one thing: This
job is different from all other executive posts. The sense
of responsibility increases by an order of magnitude,
and the decisions carry much more weight. Prepara-
tion is key, but not every new CEO is given that luxury.
In any case, whether or not the succession is planned,
the new CEOs must lead—moving quickly to gather
together the best team possible, making clear to all
stakeholders his or her vision for the company’s future,
and serving as a model for how he or she expects every-
one to behave. +
Reprint No. 00184
Infographic on the Incoming CEO Class of 2012
One-page graphic highlighting data on the professional
and educational backgrounds of new CEOs in 2012.
VIEW MORE
INFOGRAPHIC
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Research Perspectives
on the New CEO
Academic studies of
the recruitment of chief
executives suggest that
those from outside the
industry do relatively
well, companies pay
more for generalists
than for specialists, and
“shadow emperors”
hamper performance.
by Matt Palmquist
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Management researchers are taking note lately of
factors affecting recruitment, selection, and perfor-
mance of new CEOs. Since mid-2012, a number of
academic papers have explored the impact and perfor-
mance of different types of incoming chief executives.
Three particularly intriguing reports shed light on some
broad and significant questions:
• When recruited from outside companies as new
CEOs, are industry specialists or broad-based general-
ists more likely to be successful?
• Which new CEOs—specialists or generalists—
tend to command higher salaries?
• What role, if any, should the old CEO play when
a new CEO takes over?
Of course, there are no universal answers to any of
these questions. Each successful company has its own
unique circumstances. But the findings in these studies
might prove particularly useful to those who make deci-
sions about chief executives or have a stake in the out-
come, such as boards, shareholders, sitting CEOs, and
executives with aspirations for the top office.
A Premium for Cross-Industry Experience
Most firms consider outside candidates for CEO even
if there are strong internal contenders. But how far out-
side? Should someone be brought in from another in-
dustry? A new CEO with industry-specific knowledge
would presumably have better-informed judgment, but
someone from another sector could offer fresh ideas.
“Outsider CEO Succession and Firm Performance,”
by Abu M. Jalal and Alexandros P. Prezas of Suffolk
University in Boston, examines the impact of appoint-
ing external candidates on a firm’s operating model and
stock performance, and also on CEO compensation.
The results suggest that many companies that look out-
side would do better in the long term by hiring someone
from far outside—from another industry.
This finding, to be sure, applies to only about one-
third of the large companies seeking CEOs. That is the
percentage that, for planned transitions in 2012 at the
2,500 largest public companies in the world, chose an
outsider as a new chief executive (see “Portrait of the
Incoming Class,” by Ken Favaro, Per-Ola Karlsson,
and Gary L. Neilson, page 52). Even so, the number of
CEO vacancies filled by outsiders, including those from
other industries, has been increasing in recent decades.
No previous research had reached a conclusion
about whether general managerial skills or specialized
industry expertise has more value when leading a major
company, especially when coming in from the outside.
Jalal and Prezas aimed to fill the gap by examining the
stock market’s reaction to the arrival of the two types
of outsiders. They also looked at other results: the com-
pany’s stock performance, short-term profitability, and
long-term growth potential during the five years that
followed each new CEO’s arrival. Combining data from
Compustat and the Center for Research in Security
Prices, the authors analyzed outside CEO successions at
528 companies from 1993 through 2009; of these turn-
overs, 216 hires came from the company’s industry and
312 were from other sectors. (The study did not include
CEOs hired from inside the same company.)
On average, firms bringing in someone from within
the same industry had higher overall returns than those
with non-industry outsiders, at least during the first few
months. But the picture soon began to change. By the
third or fourth year following succession, firms that had
reached beyond their own industry to appoint a CEO
posted better stock returns, on average, than those hir-
ing closer to home.
“It appears as if initially the market is not as favor-
able about the prospects of firms hiring CEO successors
from another industry, but once these firms introduce
policy changes and demonstrate better performance un-
der their new CEOs, the market turns and remains in
their favor,” the authors write.
The companies that hired CEOs from a different
industry also enjoyed other performance gains. On aver-
age, they paid more dividends to shareholders, engaged
in higher capital spending, and demonstrated better op-
erating performance, as measured through profitability
and Tobin’s Q (the ratio of a company’s market value to
the total value of its assets).
The authors also looked for correlations to explain
why companies made the hiring choices they did. The
greater the number of similar firms there were in the
hiring company’s industry, the more likely it was that
the new CEO would be hired from that sector. By con-
trast, firms that had smaller boards, more independent
directors, or more members who were also sitting on
other major company boards were more likely to ap-
point a CEO from another industry.
Paying More for Generalists
The Suffolk University study also found that CEOs
brought in from another sector received more com-
pensation than newcomers from the same sector. That
finding jibes with another recent paper, “Generalists
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Matt Palmquist
mattpalmquist@gmail.com
is a freelance business
journalist based in Oakland,
Calif., and the author of s+b’s
Recent Research column.
versus Specialists: Lifetime Work Experience and CEO
Pay,” by Cláudia Custódio of Arizona State University,
Miguel A. Ferreira of the Nova School of Business and
Economics, and Pedro Matos of the University of Vir-
ginia. This study finds that CEOs who have accumu-
lated more general managerial skills during their career
have been increasingly better paid during the past two
decades than their counterparts who specialized in one
industry or company.
The authors assembled a database of almost 4,500
resumes from CEOs at firms in the Standard & Poor’s
1500 list from 1993 through 2007. This collection of re-
sumes listed some 32,500 previous jobs. After indexing
these documents, the researchers created a list of general
skills that could be accumulated and transferred across
companies and industries.
After controlling for many characteristics of firms
and executives—including CEO age, tenure, and edu-
cational background—the authors found that general-
ists earned a significant pay premium compared with
specialists. CEOs with more general abilities than the
sample’s median received a premium of 19 percent in
annual pay, on average, or almost US$1 million in extra
compensation. Pay increased the most when the gener-
alist CEO was also an industry outsider replacing an
industry insider.
Pay was also higher than the median for generalist
CEOs who were hired to oversee complicated projects
such as restructuring or acquisitions. This implies that
the labor market rewards CEOs who can guide their
firm through a challenging business landscape. Indeed,
the premium for generalists was higher at firms that
were distressed, undergoing intense M&A activity, or
operating in turbulent industries.
Although the premium for generalists was preva-
lent across sectors, it was higher in segments that had
gone through regulatory and technological shocks in
the past two decades, the authors also found. As an
example, they cited the telecom industry, which has
experienced disruptive leaps in innovation, shifting
consumer trends, and legislation that has reshaped
business models.
The researchers point to the late Michael H.
Jordan as a model of the versatility and increasing value
of high-powered generalists. Jordan was the CEO of
PepsiCo from 1986 to 1990; of Westinghouse Electric
from 1993 to 1998, overseeing the acquisition of the
CBS television and radio network; and of Electronic
Data Systems (EDS) from 2003 to 2007. His chief ex-
ecutive experience thus encompassed consumer nondu-
rables, electronics and industrial supplies, broadcasting,
and business services. While he headed EDS, Jordan
was paid $10 million more a year than the average sin-
gle-industry CEO was.
The Shadow Emperor Effect
Another recent paper offers worrisome findings for
any new chief executive whose predecessor is looking
over his or her shoulder. The paper, “When the For-
mer CEO Stays on as Board Chair: Effects on Succes-
sor Discretion, Strategic Change, and Performance,” by
Timothy J. Quigley of Lehigh University and Donald
C. Hambrick of Pennsylvania State University, finds
evidence that an ex-CEO who stays on as chairman can
cramp his or her successor’s style and strategic initia-
tives—to the frm’s detriment.
The authors of this paper cite Booz & Company’s
2009 study of chief executive trends, “CEO Succession
2000–2009: A Decade of Convergence and Compres-
sion” (by Ken Favaro, Per-Ola Karlsson, and Gary L.
Neilson, s+b, Summer 2010), which indicated that
more than half of incoming chief executives were as-
suming office as their predecessor stepped up to the role
of chairman. The percentage of companies with this
dynamic was increasing worldwide, and it was particu-
larly evident in North America.
Because lingering ex-CEOs can reasonably be ex-
pected to support policies they enacted themselves and
have power over their replacements, previous research-
ers have referred to them as “shadow emperors.” It has
been argued that they can blunt many of the desired
effects of succession, such as breaking through inertia
or increasing efficiency. But until now there has been a
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part ways with the predecessor completely, the research-
ers conclude. But a departing CEO with valuable wis-
dom and experience should perhaps be retained in a
consulting role for six months or so, enough time for
the successor to settle in and feel comfortable charting a
new strategic direction.
Unconventional Thinking
Can we draw conclusions from these three papers, and
from others like them, about the best CEO candidates
for a successful company? The value of generalist skills,
as described in the first two papers, seems clear. But per-
haps the critical factor is not what it might appear to be.
Rather than breadth of experience, boards and recruit-
ers should look for a proven track record of challenging
conventional wisdom and experimenting with uncon-
ventional ideas—especially those that pay off.
The final paper is a warning to boards and recruit-
ers not to hedge bets. If you hire a CEO to shift your
company’s direction, don’t undermine that choice by
keeping the old CEO around, at least not for more than
a few months. Let him or her depart, ideally in friend-
ship, but also in totality. +
Reprint No. 00185
lack of quantitative evidence to show that these negative
effects are actually occurring.
Quigley and Hambrick drew on the ExecuComp
database to identify all 181 CEO successions between
1994 and 2006 in three industries: computer hardware,
computer software, and electronics. These sectors were
chosen because they are fast-moving industries with
plenty of turnover at the top and a variety of leader-
ship structures. Only companies that had been public
for at least three years and that had annual revenues of
more than $100 million at the time of succession were
considered, in an attempt to eliminate the influence of
younger companies that might face distinctive chal-
lenges. Interim and short-term CEO appointments were
also excluded from this study.
The researchers measured firms’ post-succession
performance for up to five years or until the new CEO
departed, comparing return on assets (ROA), share-
holder dividends, and stock returns. Extensive controls
were employed, including company size and resources,
pre-succession performance, and typical indicators of
a board’s desire for change (such as hiring an outsider,
forcing a turnover, or promoting an heir apparent).
The analysis showed that shadow emperors do in-
deed constrain their successors. The presence of a pre-
decessor CEO significantly suppressed several types of
strategic initiative: namely, resource reallocation, di-
vestures, and the replacement of executives. Even more
striking, as long as the predecessor stayed on as chair-
man, company performance tended to be about the
same as before succession.
“In allowing predecessors to stay on as chairs—
perhaps as an honorific courtesy or because of institu-
tionalized custom—boards need to be vigilant of the
possibility that their new CEOs may be explicitly or im-
plicitly thwarted in their attempts to update their firms’
profiles,” the authors write. In a supplementary analy-
sis, they discovered an abrupt increase in resource re-
allocation, divestitures, and executive replacement once
the predecessor relinquished the chairman’s position.
Performance, as measured by ROA, also then tended
to diverge significantly from pre-succession levels, sug-
gesting a predecessor’s influence does not linger long
after he or she actually departs. In this way, a prede-
cessor’s retention as chairman can be termed a “quasi-
succession,” say the authors, delaying many of the typi-
cal after-effects of CEO turnover.
When a board is relatively confdent in an incom-
ing CEO’s ability to exert influence, it should probably
Resources
Cláudia Custódio, Miguel A. Ferreira, and Pedro Matos, “Generalists
versus Specialists: Lifetime Work Experience and CEO Pay,” Darden
School of Business Working Paper No. 2116525, July 2012. The
paper will also appear in a forthcoming issue of the Journal of Financial
Economics.
Abu M. Jalal and Alexandros P. Prezas, “Outsider CEO Succession and
Firm Performance” (subscription or fee required), Journal of Economics
and Business, vol. 64, no. 6, Nov.–Dec. 2012.
Timothy J. Quigley and Donald C. Hambrick, “When the Former
CEO Stays on as Board Chair: Effects on Successor Discretion, Strategic
Change, and Performance” (subscription or fee required), Strategic
Management Journal, vol. 33, no. 7, July 2012.
For more thought leadership on this topic, see the s+b website at:
strategy-business.com/recent_research.
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By the time people reach the most senior levels
of a company, they are expected to have a degree of per-
sonal competence and a strong gut feel for making good
executive decisions. Otherwise, they wouldn’t be consid-
ered for a top job. But how do they attain this acumen?
At Procter & Gamble (P&G)—where we (A.G. Lafley
and Roger Martin) served as chief executive and one of
the senior advisors to the company, respectively—we de-
veloped a systematic approach to cultivating that skill
among emerging and senior executives. We found that
business literature contains a great deal of advice for
chief executives about strategy and execution, but much
less is written about how to become the kind of person
who can bring the right judgment to bear on business
decisions, especially when facing a disruptive environ-
ment. Thus, many CEOs develop their own form of on-
the-job training, quietly honing their own heuristics for
strategic thinking. That makes it difficult to tease out
and develop the personal attributes that separate suc-
cessful leaders from less-successful ones.
In our view, leaders would do well to take a more
systematic approach to developing their decision-mak-
ing capabilities. The place to start is where we started
at P&G: with intellectual integrity. In common usage,
the word integrity means honorable or virtuous behav-
ior. For our purposes, though, we draw a distinction be-
tween exhibiting honorable behavior (moral integrity)
and exhibiting discipline, clarity, and consistency so
that all of one’s decisions fit together and reinforce one
another (intellectual integrity).
Leading with
Intellectual
Integrity
One skill distinguishes
the effective CEO: the ability
to make disciplined and
integrated choices.
by a.g. lafley and
roger martin,
with jennifer riel
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A.G. Lafley
editors@strategy-business.com
is coauthor, with Roger Martin,
of Playing to Win: How Strategy
Really Works (Harvard Business
Review Press, 2013). He is the
former chairman, president,
and CEO of Procter & Gamble.
He is a special advisor at the
private equity partnership
Clayton, Dubilier & Rice, and a
director of General Electric.
Roger Martin
martin@rotman.utoronto.ca
is dean and professor of
strategic management at the
Rotman School of Management
at the University of Toronto. He
is a well-known advisor
on strategy and leadership
development to CEOs.
Jennifer Riel
jennifer.riel@rotman.utoronto.ca
is associate director of the
Desautels Centre for
Integrative Thinking at the
Rotman School of Manage-
ment, University of Toronto.
In our work with companies, boards, and govern-
ment agencies, we see people wrestle with the need to
make tough choices—those critical decisions made in
service of a relevant strategic goal for which there is no
fully satisfactory option and every path seems to de-
mand a trade-off. These are the kinds of decisions for
which intellectual integrity is particularly vital.
Most people, including experienced executives,
don’t like to make choices because it means giving up
options. There is a clear temptation to hedge bets, to try
to do everything, to attempt to keep all doors open at
once by refusing to pick from among existing options
or to work to create a better answer. Procter & Gamble
was certainly not immune to this phenomenon. At cer-
tain times in the 1990s and 2000s, for instance, it was
tempting to compete in as many markets as possible,
as quickly as possible. Internally, there was a good deal
of concern that competitors would make inroads into
important emerging economies that P&G had not yet
entered. But P&G couldn’t be everywhere at once and
succeed. Judgments had to be made about which mar-
kets to enter, and in which ways. We explicitly chose to
enter first those promising but underdeveloped markets
where none of our global competitors had a preexisting
advantage (for instance, China as it created special eco-
nomic zones, Russia and eastern Europe after the fall
of the Iron Curtain) and then to expand thoughtfully
in other developing markets. For example, we entered
many Asian countries with our baby-care products first,
conscious that demographics suggested most of the
world’s babies would be born in Asia for the foresee-
able future. To fully engage in these countries, we had
to defer or delay pursuit of other markets, in some cases
indefinitely.
Intellectual integrity is the quality that enables a
CEO (or any other organizational leader) to set these
kinds of priorities, to articulate the rationale behind
them, to stand behind them even when the outcomes
are uncertain, and to provide the support that oth-
ers need to stand behind those choices as well. Only a
CEO with integrity can respond to the avoiding-choice
temptation appropriately: “No, we can’t do everything.
We must choose to do some things and not others. We
just have to think harder and create the choice that is
right for us.”
We’ve seen a lack of intellectual integrity, and its
consequences, in many settings: in large and small
businesses, startups, nonprofits, private equity turn-
arounds, and government agencies. Conversely, we’ve
seen integrity—on the part of a CEO or other execu-
tive leader—ripple out and deeply affect the culture
of an organization. When a leader has intellectual
integrity, the people of the enterprise are less likely
to be distracted by irrelevant considerations, and more
likely to keep focused on the indicators that matter
most: those related to customers and competitors. They
are more likely to maintain a long-term view when
making their decisions, and are less susceptible to the
dangers of short-term decisions driven by quarterly fi-
nancial reporting.
Integrity of this sort is like a muscle. In a healthy
organization, it is exercised often. But if it is ignored by
an organization, the muscle can atrophy, and the orga-
nization becomes more scattered and vulnerable. Such
an organization moves in different directions at the
same time, subject to the parochial ideas and priorities
of individual business units and functions. That is why
by the time a CEO is appointed, he or she should have
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Exhibit: The Integrated Cascade of Strategic Choices
Where will
we play?
How will we
win in our chosen
markets?
What capabilities
must be in place
for us to win?
What management
systems are
required?
Wh
What is our
winning aspiration?
Going through a process that integrated these five strategic choices
within a single system led to a higher level of intellectual integrity among
the leaders of Procter & Gamble in the 2000s.
Source: Playing to Win: How Strategy Really Works
tion failed to address the real needs of emerging market
consumers. When this became clear, we began to de-
sign new kinds of products, specifically engineered for
emerging market consumers—with consumers, and not
the machines, in mind. This meant we had to reverse
course on some very expensive manufacturing systems,
and switch to different machines for different markets.
The Strategic Choice Cascade
To instill intellectual integrity throughout a company—
as opposed to leaving its development to chance—some
kind of explicit, ongoing decision-making process is
needed. At Procter & Gamble, the method we used
was known as the strategic choice cascade. Each year,
we asked hundreds of company leaders, at all levels, to
develop choices explicitly using this framework. The
cascade consisted of five interdependent choices (see
Exhibit). We said explicitly that none of these choices
should be treated as “silver bullets” to solve short-range
problems. Nor could they be made in isolation from
each other.
The first choice is that of a winning aspiration.
Winning matters. Without a competitive goal, it is
easy to become complacent and settle for being “good
enough.” Settling for good enough means failing to
make the tough choices and do the hard work of build-
ing outstanding capabilities. At P&G, we chose, at the
developed his or her intellectual integrity, and should be
prepared to help develop it in others.
Coming to Grips with Reality
Many company leaders think their situation is signifi-
cantly better than it actually is, because they look only
for data that confirms their existing view of the world
and listen only to those voices that agree with them. By
contrast, intellectual integrity requires that one hold
oneself and one’s company up to rigorous, challenging
examination. That is the only way to learn to anticipate
when reality is likely to fall short of expectations.
Failure to come to grips with the reality of the situ-
ation led directly to several major competitive losses at
Procter & Gamble in the 1990s. For our oral-care prod-
ucts (including Crest toothpaste), we invested heavily
in overseas distribution in emerging countries such as
Brazil. We thought it would be easy for us to build a
business there, on the basis of our strength in innova-
tion and the brand equity we had developed in other
markets. We didn’t fully recognize that our largest com-
petitor (Colgate) had far more extensive global distribu-
tion, spent twice as much on oral-care R&D as we did,
and had already built up great brand loyalty in Brazil
and other emerging markets.
Because we were distracted by our expectations, we
lost millions of dollars on these investments before we
realized that we needed to change our expansion strat-
egy. We decided to retreat from Brazil and get our house
in order before returning there. We also saw we needed
a broad P&G strategy for scaling up in new markets,
building a sustainable business one core brand at a time.
In Brazil, this led us to focus on our strengths in laun-
dry products and baby care. For oral care, we explicitly
concentrated on winning in North America and China
before turning our attention back to Brazil. When we
demonstrated that integrity in our strategic decision
making, things worked much better for us in Brazil and
elsewhere.
Similarly, in our Pampers disposable diaper busi-
ness, we held a strong belief that the best way to lever-
age our global scale was to install a single, sophisticated
manufacturing system, using state-of-the-art “convert-
ers” that could produce all our diapers across all our
different markets. To compete with lower-priced rivals
in developing markets, we assumed, we needed only to
switch to less-expensive materials and remove some of
the features. Because, in effect, we let the machines dic-
tate our strategy, we didn’t see that our technology solu-
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the active ingredient, transforming the packaging, and
partnering with our mass retailers to create a “masstige”
(mass-prestige) in-store experience that rivaled the pres-
tige brands in department stores. The result was a fast-
growing, high-profit brand that revitalized the category.
For household cleaning, we thought entirely differ-
ently about cleaning hard surfaces. We determined that
there might be new cleaning jobs around the home not
served by existing products. Rather than continue to
focus on well-served areas like countertops and sinks,
we turned to floor cleaning. There, we pioneered an
entirely new category, a new way to win in household
cleaning, with the Swiffer electrostatic mop. Subse-
quently, with our Mr. Clean brand, the key where-to-
play area became stains on household surfaces. To win,
we launched the “Magic Eraser,” an innovative line of
products that remove scuffs and stains easily, taking
some of the hard work out of cleaning. In short, with
both Mr. Clean and Swiffer, we saw a need for quick-
cleaning solutions, and rather than attempt to force-fit
existing products to consumers’ needs, we pursued a
path with more intellectual integrity. We devised entire-
ly new-to-the-world products, designed specifically with
a consumer need in mind.
In our fine fragrances business, intellectual integ-
rity meant taking the long view. Fine fragrances can
be an intensely competitive field, so we made an im-
portant where-to-play choice to focus first on the male
fragrances segment, which was considerably less com-
petitive than the women’s market. To win in fragrances
over the long term, we built on our existing expertise.
P&G has long been the world’s largest purchaser of fra-
grances, which go into laundry detergents, soaps, sham-
poos, conditioners, deodorants, dish soaps, fabric soft-
company-wide level, to meaningfully improve the lives
of the world’s consumers and, by doing so, drive con-
sistent double-digit profit growth. Articulating a win-
ning aspiration was not a major stretch for most P&G
leaders, given the company’s long history of attempting
to achieve decisive product leadership across its many
categories. Nonetheless, it was a message that warranted
reinforcement.
Next come the choices of “Where will we play?”
and “How will we win in our chosen markets?” These
are the core choices, the heart of any strategy. Choos-
ing where to play means choosing in which markets,
for which customers, in which product lines, in which
geographies you will compete. Choosing how to win
means figuring out how to create a sustainable competi-
tive advantage on a specific playing field. These choices
can have integrity only when they fit together consis-
tently; that is, when the how-to-win choice is made in
the context of the where-to-play choice. At P&G, our
where-to-play choices focused on a core group of brands,
customers, and geographic markets. We would start
with market leadership in the home, beauty, health, and
personal-care sectors, and position for long-term growth
in emerging economies. Our how-to-win choice was to
build powerful consumer-focused brands that took ad-
vantage of ubiquitous distribution and global scale.
We rethought brand and product positioning in
terms of where to play and how to win as well. For
example, for the skin-care brand Olay, we shifted our
where-to-play from women over 50 who were target-
ing wrinkles, to women age 35 to 50 who were fight-
ing the first signs of aging, which we successfully char-
acterized as “the seven signs of aging.” How would we
compete to win with this new segment? By upgrading
Choosing where to
play means choosing
in which markets, for
which customers, in
which product lines,
in which geographies
you will compete.
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At P&G, for instance, when it came to our brand-
ing capability, we had traditionally done a poor job of
systematically learning from our marketing successes
and failures. Most institutional knowledge on brand
building and marketing was captured in pithy one-page
memos or passed down in anecdotal storytelling by
managers who had lived through the experience. The
implicit message was that if young brand managers and
assistant brand managers hung around seasoned brand
builders long enough, they would master all they had to
learn about marketing in due course.
In 2000, for the first time in the company’s his-
tory, we launched a project to codify P&G’s approach to
brand building. The resulting “Brand-Building Frame-
work” (BBF) laid out the company’s approach in one
coherent document, which is still regularly updated.
With the BBF frameworks in place, new P&G market-
ers can learn the trade more quickly, and senior man-
agers have an organized and written resource to guide
their efforts. The BBF serves as a management system
that nurtures and enhances the critical brand-building
capacity of P&G. Organizational infrastructure like
this was central to everything we did, and it enabled
us to improve the overall integrity of decisions made
throughout P&G.
It is important to emphasize that for every brand,
these five choices must clearly fit together. As a strate-
gist, you can start anywhere in the choice cascade, but
you must make all five choices and they must all be co-
ordinated. This is the truly challenging part of strategy.
The choices themselves are not terribly complex or dif-
ficult. But integrating them, and refusing to stop think-
ing until they genuinely reinforce one another, takes
true intellectual integrity.
Moreover, in a large company, the choices made at
the category, function, and company-wide level must
also fit together and reinforce one another. The choices
made by the Bounty paper towel team, for instance,
must have integrity with the overall P&G choices made
by the CEO and senior team.
Sometimes, when the cohesion between choices
isn’t strong enough, divestiture is the best answer. This
was the case for P&G’s pharmaceuticals business. It was
a strong and growing business, with important brands
and products. But over time, it became clear that the
kinds of choices, capabilities, and systems required to
win in this business did not mesh well enough with the
company’s core businesses. P&G is at its best when it
can develop branded products through a standardized
eners, and other products. We put our deep experience
in combining scents and formulating appealing fra-
grances to work on licensed fragrance brands like Hugo
Boss and Lacoste. As we expanded our fragrance lines,
eventually turning to women’s brands as well, our scale
enabled us to both purchase our ingredients and manu-
facture our products very cost-effectively. Over time, we
grew more sophisticated in understanding consumer
reactions to fragrances. This further enhanced our for-
mulation expertise. It enabled us to build a strong busi-
ness in beauty care.
Cohesion and Cascades
These first three choices—our winning aspiration,
where to play, and how to win—are closely tied to the fi-
nal two choices on the cascade: “What capabilities must
be in place for us to win?” and “What management sys-
tems are required?”
Capabilities are those things you must do exceed-
ingly well in order to deliver on your aspiration, where-
to-play, and how-to-win choices. In thinking about our
capabilities in light of our other choices, we came to see
our core capabilities as deep consumer understanding,
innovation, brand building, going to market with cus-
tomers and suppliers, and global scale. In each of these
areas, we had room to deepen and grow our expertise.
In terms of scale, we had tended to focus on scale
within a brand or category, such as laundry detergent or
beauty care. We had to work hard to expand our think-
ing about scale to encompass the whole company—for
example, by bringing our global business services (IT,
HR, and other internal functions) together into one
department. This encouraged the leaders of our global
business services to ask how they could better serve their
internal customers globally, and how they could smartly
outsource their lower-value-added activities. Now, the
real scale advantages began to accrue. We reduced costs
across the company, worked more closely with custom-
ers in ways that increased our importance to them, and
managed our supplier relationships in new ways that
made all of us better. These changes were possible only
because of our growing intellectual integrity.
Finally, one must ask, “What internal management
systems are required?” Select the ones that can best en-
sure that your required capabilities add up to a platform
for advantage. Systems and measures are essential to
building capabilities and supporting the other strategic
choices. But to have intellectual integrity, a leader must
make an explicit choice to develop these systems.
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innovation process, sell through its best customers (such
as Walmart and Walgreen Company), and develop a
long-term relationship with its end consumers. In phar-
maceuticals, there is a highly specialized and complex
development process with many steps not in common
with our standard approach—including blind trials and
FDA approvals. The industry also has a different mar-
keting model from that of consumer products. It sells
directly to doctors and pharmacies; consumers don’t
make the purchase decisions and may never know the
brand name of the drug, or who makes it. In the end,
we divested a profitable pharmaceutical business, be-
lieving it could be more successful elsewhere.
In divesting this business, P&G walked away from
billions of dollars of sales and profits, but it was the
right decision. Walking away allowed the company to
reinvest cash, human resources, and other assets in busi-
nesses that did have integrity with its overall set of strat-
egy choices: beauty, home, and personal care. When
P&G acquired Gillette in 2002, it was as much for the
sake of integrity—for its fit with the firm’s choices and
competencies—as it was for the strength of its male
grooming, personal-care, and oral-care brands.
Building Integrity at P&G
The five cascading choices provide a structure within
which to practice intellectual integrity. Participants are
continually drawn back to the same crucial decisions:
what to aspire to, where to play, how to win there,
which capabilities to build, and which management
systems to set up. This framework removes a great deal
of fear and anxiety, especially among lower-level man-
agers and those far from headquarters, about doing the
right thing.
But, like any other system involving behavior
change, the cascade process takes some time to learn
and requires concerted attention. At P&G, once we
recognized the importance of consistent, integrated
decision making, we looked for other ways to foster
it. We knew that integrity is not a fixed quality that
people inherit at birth; it can be cultivated and devel-
oped, in part through training but mostly through bet-
ter business practice and by encouraging the right types
of conversations.
We thus began to explicitly identify up-and-coming
high-potential executives and coach them in strategy,
inquiry, and the process of making integrated choices.
We redesigned the strategic review process, turning it
into a vehicle for building the strategic integrity muscles
of our entire leadership cadre. Previously, annual strat-
egy reviews were like corporate theater—a setting that
did not encourage integrity. The presidents of P&G’s
businesses and their teams trooped in before the com-
pany’s most senior executives with bulletproof Power-
Point presentations. The presenters naturally wanted to
show their results, defend their decisions, and get out
of the room as rapidly as possible. They didn’t welcome
critical probing of the logic of their choices. When se-
nior leadership felt that resistance, they either kept their
reservations private or piled on with attacks—in which
case the presenting team had no choice but to take the
criticism and then slink out, proverbial tails between
their legs.
The old strategic review process had also been an
impediment to collaboration among P&G’s businesses
and functions. If the hair-care category president came
into the review seeking only to defend his strategy and
avoid any criticism, he would be less likely to talk open-
ly about how the hair-care choice cascade fit with the
choice cascade for skin care or home care. Nor would
senior leadership be inclined to force the issue. Yet such
discussions are vital. Without firsthand experience with
just that type of dialogue—knitting together various
choice cascades across a corporation—emerging leaders
can’t develop their strategic integrity muscle, and senior
leaders get less practice doing so as well.
To address these roadblocks, we fundamentally
transformed the process and tone of our annual strategy
reviews. We shifted the paradigm to one of candid con-
versation and exploration. Teams still prepared a strat-
egy presentation in advance of the meeting, but rather
than take time in the meeting to review it, they provid-
ed the work to the senior team several weeks in advance.
In divesting a profitable
pharmaceutical business,
P&G walked away from
billions of dollars of sales
and profits, but it was the
right decision.
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an overarching, integrated strategy.
This will pay off, but it won’t be easy. None of these
choices can be exercised through a rulebook or through
top-down fiat. They can’t be made once, and then left
for all time. Strategy choices have to be made thought-
fully and organically with a good deal of organizational
give and take. They must be revisited and reexamined
regularly. Norms and assumptions must be challenged,
and every attempt must be made to see the world as it
is, not as it was or as you would wish it to be. It’s far,
far easier to refuse to make these choices, to make them
in isolation from each other, or to make them for only
one part of the business without considering the impli-
cations for the whole.
It takes intellectual integrity to insist upon the con-
tinued practice of choice cascades throughout the orga-
nization. It’s tough to answer the questions posed in this
exercise, and tougher still to follow through with action.
But the alternative—attempting to win in the market-
place with no consistent company-wide strategy—is ul-
timately far more difficult. +
Reprint No. 00186
The senior team then issued to the category team a set
of discussion topics for the meeting.
This enabled us to focus the meeting on construc-
tive dialogue involving those specific strategic issues,
and it helped shift the tone from defensiveness to a joint
exploration of possibilities. We also initiated a continu-
ous series of conversations on strategic matters, con-
ducted at all levels: brand, category, sector, customer,
channel, region, country. A common theme of these dis-
cussions was how the choices knitted together, how they
fit with the broader corporate strategy, and how the
team planned to measure results moving ahead. These
discussions were driven by a commitment to ask-
ing tough questions, which brought issues to the sur-
face that everyone was thinking privately but nobody
felt ready to say out loud. Articulating these kinds of
thoughts can create helpful tension and can lead to a
true shared purpose.
Toward a World of Integrity
Throughout all the strategy discussions at P&G, the
objective was to get leaders comfortable with collabo-
rating on strategy, playing with ideas, and challenging
their own thinking—and thus to build the integrity
of the leadership of the company. By framing strategy
as the answer to five integrated questions, we avoided
fragmentation. Fragmentation is a trap that all organi-
zations, whether in the for-profit, nonprofit, or govern-
ment sectors, can fall into—to their own detriment.
In the U.S. government, for instance, right now,
many groups are working in one way or another on en-
ergy policies. But there is no comprehensive strategy, no
single set of aspirations that guide an integrated set of
cascading choices for the country’s energy future. In-
stead of having an integrated aspiration, a sense of where
to play, a sense of how to win there, and the right capa-
bilities, the United States is lurching from the Canadian
pipeline to alternative energy investments to shale-based
oil and gas. Companies fall into the same trap, attempt-
ing to do everything at once without a guiding principle
to direct resources and drive action. The result is wasted
resources, inaction, and disillusionment. It doesn’t have
to be that way.
At P&G, every strategy document at every level
of the organization had to specify clear where-to-play
and how-to-win choices. Not every CEO will define the
company’s choices in that explicit way, but every CEO
should internalize the need to make every choice—
from aspiration through management systems—part of
Resources
A.G. Lafley with Ram Charan, “P&G’s Innovation Culture,” s+b,
Autumn 2008: The deliberate steps that enabled P&G’s company-wide
embrace of game-changing activity.
A.G. Lafley and Roger Martin, Playing to Win: How Strategy Really Works
(Harvard Business Review Press, 2013): Explicates the principles underly-
ing the choice cascade.
A.G. Lafley, Roger L. Martin, Jan W. Rivkin, and Nicolaj Siggelkow,
“Bringing Science to the Art of Strategy,” Harvard Business Review,
Sept. 2012: Describes a choice cascade process.
Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to
Win with a Capabilities-Driven Strategy (Harvard Business Review Press,
2011): How to develop a coherent strategy by integrating your value
proposition (“way to play”) and capabilities.
Roger Martin, The Opposable Mind: Winning through Integrative Think-
ing (Harvard Business Review Press, 2009): This view of complex,
contradiction-embracing leadership resonates with intellectual integrity.
For more thought leadership on this topic, see the s+b website at:
strategy-business.com/strategy_and_leadership.
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In a shopping center on the western outskirts of Har-
risburg, Penn., sandwiched among a women’s clothing
shop, a pet supply store, and a dental clinic, sits a win-
dow into the future of healthcare in the United States:
Highmark Direct. Open since 2009, it is part of a small
chain of nine retail health insurance stores scattered
across Pennsylvania owned and operated by Highmark
Inc., the fourth-largest plan in the Blue Cross and Blue
Shield Association, which serves 4.9 million members in
Pennsylvania, West Virginia, and Delaware.
The retail stores run by Highmark, a US$14.8 bil-
lion, diversified health-services company, are a direct
channel into the growing market for individual health
insurance created by a combination of reform and bud-
get-strained employers, many of whom are off-loading
healthcare coverage decisions and costs to their em-
ployees. Consumers walk in or make appointments for
consultations with Highmark’s licensed agents, who
help them navigate the often confusing world of health
insurance and assist them in identifying and applying
for coverage. Seniors attend informational seminars that
explain their Medicare coverage and supplemental in-
surance needs. Plan members learn how to better man-
age their own health with Highmark’s wellness pro-
grams, and can contact customer service via self-service
kiosks and videoconferencing.
The last few years have seen a handful of other
U.S. health insurers enter the bricks-and-mortar retail
business, including Florida Blue (a licensee of the Blue
Cross and Blue Shield Association), which operates a
Putting
an I
in Healthcare
by Gil Irwin,
Jack Topdjian,
and Ashish Kaura
the days of the disengaged
health consumer are numbered.
Consumerization will transform
healthcare systems, involving
individuals as never before in the
management of their own care.
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Gil Irwin
gil.irwin@booz.com
is a senior partner with Booz &
Company based in New York.
He specializes in business
model and operating model
transformations in the health-
care industry, with a focus on
technology and operations
strategy.
Jack Topdjian
jack.topdjian@booz.com
is a partner with Booz & Com-
pany based in New York. He
leads the firm’s North Ameri-
can healthcare technology and
operations practice and global
healthcare consumerization
practice. He specializes in
large-scale transformation
and capability building in the
healthcare industry.
Ashish Kaura
ashish.kaura@booz.com
is a partner with Booz &
Company based in Chicago. He
specializes in the development
of growth strategies and new
business models in response
to market discontinuities for
healthcare and health-services
companies.
Also contributing to this article
were Booz & Company senior
partner Gary Ahlquist, partner
Michael Ruhl, and senior
associate Nate Holobinko.
chain of 11 stores stretching the length of its state, and
United Healthcare, which opened 30 pop-up stores and
more than 1,400 kiosks in shopping malls in October
2012. These companies are being driven by a nascent
trend that is quickly becoming an industry imperative:
the consumerization of healthcare.
Health insurance stores are only one of its manifes-
tations—other consumerization initiatives are currently
under way among insurers, care providers, and pharma-
ceutical companies. Accountable care organizations, for
example, are beginning to tie physician compensation to
population health. Healthcare bundles combine medi-
cal care, coverage, and support across a care episode or
condition—such as a knee replacement or coronary by-
pass surgery—at a fixed, risk-adjusted price. And capita-
tion payment contracts pay providers an annual rate per
patient, no matter how much care they require. These
and other efforts skim the surface of a game-changing
industry transition.
The word consumerization has several meanings,
but we use it here to describe the transformation of an
industry from a primarily business-to-business (B2B)
enterprise to one that focuses on business-to-consumer
(B2C) activities. In today’s B2B health marketplace,
business is transacted among large employers, payors,
providers, and pharmaceutical companies. The people
being insured and treated have little involvement in or
responsibility for their own care and cost choices. In the
years ahead, healthcare will evolve into a B2C industry,
in which consumers will take a much more active role
in their healthcare decisions and expenditures. And, as a
result, every healthcare company and organization will
need to become more consumer-centric. The deck is be-
ing reshuffled, and there will be new winners and new
losers, depending on how companies play their hand.
This shift is both a reaction to and a result of the
state of healthcare systems around the world, which are
characterized by high costs, lack of access, and unsat-
isfactory outcomes. The U.S. system has been in the
spotlight for years because of double-digit cost infla-
tion, frustratingly complex patient experiences, and,
most recently, the controversial Affordable Care Act.
But the much-lauded, publicly funded healthcare sys-
tems in nations such as Canada and the United King-
dom are coming under pressure, too, as their founda-
tion in fixed-budget, capitation-based care is strained
by rising healthcare costs and demand. This is creating
allocation challenges; for example, the benchmark tar-
get wait time for a knee replacement in Canada was 182
days in 2011, and 25 percent of patients were not served
within that period. It is also creating equity challenges:
In the U.K., a secondary healthcare system is develop-
ing, which calls into question the viability of universal
healthcare. Private medical insurers, hospitals, and care
providers are springing up to answer the demands of
consumers who want more timely care and can afford
to pay for it.
Meanwhile, in developing countries, the struggle
to extend basic healthcare to large portions of the popu-
lation has been intensified by an explosion of “devel-
oped nation” diseases. A 2011 study by the World Eco-
nomic Forum and the Harvard School of Public Health
estimated that the cumulative costs of noncommunica-
ble diseases—including cardiovascular disease, chronic
respiratory disease, and cancer—in low- and middle-
income countries would surpass $7 trillion by 2025.
Diabetes is a case in point. Five of the 10 countries with
the highest national prevalence of diabetes are in the
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has an outsized influence on the demand for care and
care outcomes. In the United States, fully 40 percent
of deaths are attributable to behavioral factors—more
than factors such as genetics, environment, and socio-
economics. And according to the American Medical
Association, 25 percent of the United States’ total an-
nual healthcare expenditures are the result of behaviors
that could be changed, such as smoking, lack of exer-
cise, and poor diet.
Furthermore, once people become ill, their behav-
ior often exacerbates their condition, as many are un-
willing or unable to complete their treatment. The lack
of treatment adherence, such as failing to complete a
medication regime or to cut fat or sugar from a diet, is
the cause of approximately 125,000 deaths and 10 per-
cent of hospitalizations in the U.S. each year, according
to a study funded by the U.S. Department of Health
& Human Services. In a recent analysis of the finan-
cial effects of five chronic diseases (namely, hyperten-
sion, asthma/chronic obstructive pulmonary disease,
chronic back pain, depression, and rheumatoid arthri-
tis) in Europe, Booz & Company and the Bertelsmann
Foundation concluded that national productivity losses
associated with a lack of treatment adherence were €10
billion to €20 billion ($13.5 billion to $27.1 billion) in
Germany,  €8 billion to  €19 billion ($10.8 billion to
$25.7 billion) in the U.K., and  €2 billion to  €4 bil-
lion ($2.7 billion to $5.4 billion) in the Netherlands (see
“Unleashing the Potential of Therapy Adherence: High-
Leverage Changes in Patient Behavior for Improved Health
and Productivity,” by Peter Behner, Ab Klink, and Sander
Visser, Booz & Company, July 2012).
The ramifications of consumer behavior extend to
choices regarding care options and healthcare insur-
ance. A 2012 survey by health insurer Aetna Inc. found
that Americans rank choosing a health plan as the
second most difficult decision in their lives (choosing
a retirement plan was first). The survey also revealed
that 43 percent of consumers rarely or never track their
out-of-pocket care costs. The Consumers Union stud-
ied the ability of consumers to select a health insur-
ance plan, reporting in January 2012, “Almost all par-
ticipants were stymied in their desire to identify the
best value plan among those offered. While their con-
cept of value was sophisticated, participants had little
ability to assess the overall coverage offered by a plan.”
The Affordable Care Act is a first step in demystify-
ing the healthcare process for consumers, but they will
need sustained guidance and support.
Middle East. In Mexico, Type 2 diabetes is the leading
cause of death among adults. And there are 92 million
people with the disease in China and 63 million in In-
dia, according to the International Diabetes Federation.
These global healthcare challenges have revealed
the cracks in the industry’s current operating models,
and they demand a new way of thinking. The idea of
consumer-driven healthcare has been around for years,
but now healthcare companies are being forced to act.
The U.S. is the bellwether in this regard. The Supreme
Court’s upholding of the Affordable Care Act and the
reelection of President Barack Obama in 2012 have ef-
fectively ended the debate on whether to pursue reform
and turned the industry’s attention to how to achieve
it. Thus, U.S. health insurers, care providers, and phar-
maceutical companies are experimenting with a host of
new models and technologies that should be replicable
in the healthcare systems around the world.
Many of these innovative solutions are based on
fundamentally sound ideas for cutting costs and improv-
ing care outcomes. But unless and until the consumer
is positioned at the center of the healthcare industry, it
is highly unlikely that such concepts will deliver their
full potential. Just look at the fate of HMOs (health
maintenance organizations) in the United States. In the
1990s, HMOs produced lower costs and provided care
comparable to that of other healthcare benefit models.
But because HMOs disenfranchised their members by
imposing constraints on where they could go to obtain
care and placed limits on the amount of care they could
receive, they created a consumer backlash, and many of
them failed.
The lesson: To successfully cure the systemic ills
of healthcare in the U.S. and elsewhere, the industry
will have to promote and support more control, aware-
ness, and responsibility on the part of the healthcare
consumer. The digital enablers of consumerization—
big data, cloud computing, telemedicine, and social
media—are already at hand, and can be leveraged by
forward-thinking executives. Eventually, as consumer-
focused initiatives multiply and their effects reverber-
ate throughout the industry, they could bring about a
dramatic improvement in health and a transformational
reduction in costs.
Influencing Consumer Behavior
A fundamental reframing of the consumer’s role on the
part of healthcare companies is a prerequisite for sus-
tainable healthcare systems, because consumer behavior
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will alter their lifestyles and behaviors to use them (for
example, paying $4 for a cup of coffee).
Occasionally, such products and services are born
of intuition. But in most cases, their genesis is found in
insights that come from a deep study of what consumers
need and desire, and how they act. As healthcare com-
panies become more effective gatherers of insight, they
will seek to study their consumer markets in increasing-
ly sophisticated ways. They will segment them accord-
ing to preferences, health status, care utilization levels
and patterns, lifetime customer value, and propensity to
purchase specific products and services, whether those
offerings are insurance plans, medical care, or medica-
tions and medical devices.
We are already seeing the glimmerings of this more
sophisticated, consumer-centric approach to product
and service innovation in the health insurance sector. In
the absence of a clear value proposition, accessible lan-
guage, and a full understanding of their own insurance
needs, consumers are struggling to make sense of what
kind of coverage to buy. In response, the industry has
begun developing more insight-driven offerings, such
as life stage–based products that are tailored to match
consumers’ evolving health and financial needs as they
enter the workforce, start families, or prepare to retire.
For example, for budget-conscious young people, insur-
ers are offering policies that feature low premiums and
catastrophic coverage, while they offer a more compre-
hensive set of benefits to pre-retirees who seek coverage
for preexisting conditions and protection for their nest
eggs. As insurers draw on ever-expanding data sources,
we would expect to see more and more of these tailored
products, perhaps including products that are co-brand-
ed with hospitals or that give rewards for healthy be-
Influencing consumer behavior, whether through
outright incentives or the design of the subtler, suppos-
edly more effective changes in choice architecture advo-
cated by economist Richard H. Thaler and legal scholar
Cass R. Sunstein in Nudge: Improving Decisions about
Health, Wealth, and Happiness (Yale University Press,
2008), is no trivial task. Certainly, it will require more
than the estimated 4 percent of national healthcare ex-
penditures in the U.S. currently devoted to behavioral
change.
The Building Blocks of Consumerization
There is no fixed starting point or one-size-fits-all strat-
egy for consumerization. The different healthcare sectors
and the organizations within each sector will pursue it in
their own ways. But three building blocks are essential
to any successful adoption: (1) product and service port-
folios based on insights that are derived from a nuanced
understanding of consumers; (2) tools and programs that
engage consumers in care delivery and influence their
behavior, and enable service providers to optimize and
coordinate patient-centric care; and (3) end-to-end cus-
tomer experiences that produce consumer satisfaction,
trust, and brand loyalty.
In developing these products and tools, healthcare
companies will have to master new capabilities—with
all the skills, knowledge, behaviors, processes, struc-
tures, and technology inherent in those capabilities—or
risk disintermediation.
1. Insight-powered products and services. As com-
panies such as Starbucks and Facebook have demon-
strated, if products and services are accessible and can
be personalized in ways that make them highly rele-
vant, consumers will do more than just buy them: They
Influencing consumer
behavior will require
more than the estimated
4 percent of national
healthcare expenditures
in the U.S. currently
devoted to behavioral
change.
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encourage competition among the providers that of-
fer bundles. In a Booz & Company survey of roughly
1,000 U.S. healthcare consumers in October 2012,
78 percent of respondents found the concept of bundled
care appealing. Among the benefits they would expect
to reap from care bundles are lower prices, greater price
clarity and transparency, more integrated care, the abil-
ity to provide input in care processes, and simplified
billing.
Healthcare bundles are starting to drive costs down
by streamlining, standardizing, and coordinating what
were formerly discrete and often highly variable process-
es and procedures, transforming them into comprehen-
sive, patient-centric delivery systems. In October 2012,
Wal-Mart Stores Inc. announced agreements with six
leading hospital systems, including Cleveland Clinic,
Geisinger Health System, and Mayo Clinic, for exclu-
sive, fixed-price care bundles for certain heart, spine,
and transplant surgeries. This enables the company to
provide incentives to employees who choose one of the
six providers. If an employee who requires one of these
procedures uses one of the fixed-price bundle providers,
the employee’s out-of-pocket expenses are eliminated
and other expenses related to receiving the care, such as
travel, lodging, and food for the patient and a caregiver,
are provided without charge.
As Walmart’s agreements suggest, employers can
play a valuable role in encouraging consumer engage-
ment. Whole Foods Market, which provides its own
health insurance to its employees, is using several pro-
grams to build healthy lifestyles into its corporate cul-
ture. In CEO John Mackey’s new book, Conscious
Capitalism: Liberating the Heroic Spirit of Business
(with Raj Sisodia, Harvard Business Review Press,
2013), Mackey describes Whole Foods’ Team Member
Healthy Discount Incentive Program. It is a voluntary
program in which employees can go to a mobile lab that
will measure basic biometrics, such as cholesterol levels,
body mass index, and blood pressure. The healthier the
employee, the higher Whole Foods will raise his or her
store discount above the standard 10 percent. At the
highest level, employees can obtain a 30 percent dis-
count. “Within our culture,” writes Mackey, “it has be-
havior or offer money-saving coupons for health-related
consumer products.
To enhance their ability to capture and utilize in-
sights, healthcare organizations will need to integrate all
the data they gather from customer touch points and
meld it with external demographic, behavioral, and atti-
tudinal consumer data. Then, they will need to artfully
redesign their processes and systems to optimize their
products and services and to affordably bring them to
market. For instance, companies will have to adopt rap-
id product design processes and create a tighter align-
ment between the product development function and
consumer-facing functions, such as marketing, sales,
and customer service. In many healthcare companies,
this will be easier said than done, requiring fundamen-
tal shifts in how business is conducted, how success is
measured, and how the corporate culture operates.
2. Engaging care delivery. Involving consumers in
the care-delivery process will require the development
of tools and programs that give people incentives to
pursue healthier lifestyles and participate more active-
ly in the medical treatment they receive, and enable a
new clinical operating paradigm that coordinates care
around the patient.
Consider the advent of healthcare bundles. As more
and more bundles appear on the market, their cost
and quality will become more transparent, enabling
consumers to easily shop for them. In turn, this will
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come a matter of pride for team members to move up to
higher levels.”
Whole Foods has also established the Total Health
Immersion Program for its least healthy and most at-risk
employees. This one-week, medically supervised pro-
gram provides education about healthy eating and living.
Mackey reports that more than 1,300 employees took
advantage of the program in its first two years, prompt-
ing the company to extend the program to spouses and
partners. In 2013, Whole Foods plans to begin offering
the program to the public. “It’s a win-win strategy for
all stakeholders involved,” Mackey told us. “When we
have healthy team members, they are happier, and happy
team members provide better customer service to our
shoppers. It also leads to the company needing to spend
less on healthcare, which is better for investors.”
Consumer engagement is also an area where phar-
maceutical companies can make an impact. For exam-
ple, Biogen Idec and Merck Serono have been making
impressive improvements in the treatment of multiple
sclerosis. Using Web-based engagement tools and pa-
tient services that add “beyond-the-pill” value, they
show consumers how their behavior can maximize the
effectiveness of therapies.
These consumerization pioneers are not seeking to
change the behaviors of one patient at a time. Instead,
they are integrating behavioral cues into a coherent ther-
apeutic system that reinforces medical management and
improves outcomes. To achieve truly engaging delivery,
care will have to be coordinated among consumers, care
providers, and insurers. Simplified and transparent pric-
ing strategies will be needed to help consumers make
more informed decisions. Tools and programs will be
needed to help them participate in their own care. And,
of course, the technology infrastructure, analytics, and
devices that help them fully engage will need to be
ubiquitous within healthcare systems.
3. Compelling end-to-end customer experiences. In
healthcare today, customer experiences tend to be pas-
sive and fragmented, as the consumer is passed from
department to department and care provider to care
provider. Thus, the quality of the customer experience
can vary widely by touch point, and there is often little
or no coordination among the many touch points in the
end-to-end process of purchasing insurance or receiving
care. Unsurprisingly, this results in low levels of cus-
tomer satisfaction, trust, and brand loyalty. According
to the American Customer Satisfaction Index, an inde-
pendent national benchmark based on surveys of more
than 70,000 people, U.S. consumers rank hospitals low,
just above the U.S. Postal Service in terms of customer
satisfaction. They rank health insurers lower yet, in the
company of utilities and wireless service providers.
In the health insurance sector, creating compelling
customer experiences that bolster satisfaction, trust,
and brand loyalty will require more personalized ap-
proaches to selecting products, more transparent and
comprehensible plan options and costs, and less oner-
ous enrollment processes. Once customers sign on,
plans need to support them in the quest to manage their
own health through simplified claims processes and less
complex billing.
In 2011, Cigna launched its largest brand campaign
to date, “Go You,” a $25 million marketing effort de-
signed to attract consumers with a more personalized
customer experience. Go You is more than an ad cam-
paign. Cigna is supporting it with 24/7 worldwide cus-
tomer service; a Web portal, www.MyCignaforHealth
.com; social media apps; tools, such as Intuit Inc.’s
Quicken Health Expense Tracker, that help plan mem-
bers better manage their medical care and costs; and
mobile applications that help members locate nearby
pharmacies and emergency rooms. Plan members are
also provided access to health coaches for chronic con-
ditions and wellness programs.
Hospitals have been on the forefront of the effort
to create more compelling customer experiences. Many
have sent teams to companies that are known for the
world-class customer experiences they provide, such
as Walt Disney Company and the Ritz-Carlton hotel
chain, to become more adept at serving customers. One
result is the addition of experiential elements such as
valet services, streamlined admissions processes, more
family-friendly policies, and the redesign of facilities to
build in directional cues and create calmer, more attrac-
tive settings.
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ers to employees. Its web-
site includes a decision en-
gine that asks employees a
series of questions aimed at
guiding them to the policy
that best fits their needs,
financial situation, and risk
tolerance. In 2011, a trio of
large insurers—WellPoint,
Blue Cross Blue Shield of
Michigan, and the Health
Care Service Corpora-
tion—purchased a 78 per-
cent stake in the company. The rationale: They wanted
to learn how to better develop and market benefit plans
that would appeal to consumers.
Cloud computing will be another key technologi-
cal enabler of consumerization, providing, for example,
the platform for long-overdue interoperable electronic
health records that can provide seamless transitions for
patients and better clinical decision support for physi-
cians. Nimbus Health, a Seattle-based startup, is using
Amazon’s cloud services as a host for its Breeze Medical
System, software that allows doctors to share medical
records with other doctors and patients. Of course, any
mention of cloud computing may raise concerns about
privacy among consumers, especially when it comes to
their medical history. Although industry security stan-
dards have made considerable headway, hospitals and
other care providers will need to manage security re-
quirements and risk carefully.
Telemedicine—remote monitoring and diagno-
sis—is a third enabler of consumer-centric healthcare. It
promises improved access and lower care-delivery costs.
After a successful pilot project with 6,000 patients in
2011, U.K. health minister Jeremy Hunt announced
plans to deliver remote care to 100,000 chronically ill
patients in 2013, and as many as 3 million patients by
2017. Patient conditions are monitored with remote de-
vices, and patients who have health concerns can text
their doctors instead of making appointments and trav-
eling to see them.
Finally, given their ability to engage people, it
Of course, before a
customer experience can be
improved, it must be un-
derstood. This starts with
a mapping of the current
customer experience and a
clear understanding of how
consumers interact with
the brand. Highmark, for
example, used a variety of
techniques and tools—in-
cluding research, site visits,
consumer interviews, con-
sumer experience simulations, ethnography, and opera-
tional data—to understand how consumers perceived
their experience with the company. Health organiza-
tions must then develop the skills and tools needed to
enhance touch points and deliver information in ways
that are accessible to consumers.
Enabled by Technology
The common thread in nearly all consumer-driven
healthcare initiatives is digitization. “Big data” and
new technologies will enable organizations to adopt
new products and services by simultaneously support-
ing personalization, superior clinical outcomes, and af-
fordability. Although some technologies have yet to be
widely adopted in healthcare, companies are already us-
ing new platforms to engage with consumers.
Healthcare companies have access to untold
amounts of clinical and financial data. But to make it
actionable, they need to convert this data into readily
understandable information. When this information is
made available and accessible to the consumer through
personalized channels, it will affect their behavior—
whether the information is a treatment reminder, a
lifestyle suggestion, or direction to an optimal site of
care. Some healthcare payors are now using the insights
gleaned from data to create products and services that
align their benefit structure with the individual’s needs.
For example, Bloom Health, a Minnesota-based private
health insurance exchange, uses big data and analytics
to transfer decisions about health benefits from employ-
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should come as no surprise that mobile health (m-
health) and social media can support the transition
to consumerization. During epidemics in the United
States, the Centers for Disease Control and Prevention
(CDC) has been a leader in using social media, such as
Twitter, Facebook, and Wikipedia, to distribute infor-
mation to the public across multiple channels, includ-
ing smartphones. During the 2009 H1N1 swine flu
pandemic, for example, the CDC used social media
channels to disseminate information on behaviors for
avoiding H1N1 and to teach people how to recognize
its symptoms. The CDC is also tapping into the power
of crowds to encourage people to become “health advo-
cates” who pass health information through their own
networks. It is expected that m-health and social media
use among healthcare companies will increase, engag-
ing consumers more in their own health and wellness.
For example, they could use their smartphone to moni-
tor prescriptions, track weight maintenance, and get
medical appointment reminders.
The digital tools are available and accessible, and
organizations such as the National eHealth Collabora-
tive (NeHC) are devising strategies and standards for
integrating them into the U.S. healthcare landscape.
The Patient
Engagement
Framework
I
n November 2012, the National
eHealth Collaborative, a pub-
lic–private partnership, developed a
five-phase road map for the digiti-
zation of healthcare. It begins with
“Inform Me,” an initial step during
which consumers are provided with
standardized forms and information
about advanced directives, privacy,
and specific conditions. The second
step, “Engage Me,” provides patients
with access to their electronic health
records, fitness trackers, and other
e-health tools. The third step, “Em-
power Me,” includes secure mes-
saging between patients and care
providers; the integration of patients’
personal data, such as genetic,
behavioral, and medical history
information, into the providers’ elec-
tronic records; and patient access to
the quality, safety, and experience
ratings of care providers.
Next, during the “Partner with
Me” step, the penultimate phase
of engagement, patients are given
condition-specific management
tools and access to care summaries
to support their personal health
maintenance efforts. Also, patient-
generated information, such as per-
sonal preferences and wellness and
home health device data, is added to
their electronic health records. In the
road map’s most advanced and final
phase, “Support My e-Community,”
patient engagement is enhanced with
a fully interoperable platform that
supports seamless information shar-
ing between a patient and the entire
care team.
Today, various players are at
different stages of the road map,
though most have yet to move be-
yond “Empower Me.” As companies
continue the evolution, they will not
only optimize individual outcomes,
but also enhance health through the
analysis of data and the identification
and dissemination of best practices.
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Resources
Gary Ahlquist, Minoo Javanmardian, Sanjay B. Saxena, and Brett
Spencer, “Bundled Care: The Voice of the Consumer,” Booz &
Company, Jan. 30, 2013: According to the results of a recent Booz &
Company survey, U.S. consumers are ready for the advent of healthcare
bundles.
Minoo Javanmardian, Ashish Kaura, Sanjay B. Saxena, and
Brett Spencer, “Healthcare after the Ruling: Let the Work Continue,”
Booz & Company, June 29, 2012: What the upholding of the Affordable
Care Act will mean for insurers, care providers, pharmaceutical firms,
and other healthcare companies.
Ashish Kaura, David S. Levy, and Minoo Javanmardian, “Health
Insurance Gets Personal,” s+b, Autumn 2010: Earlier analysis of the
health insurance market’s coming retail era.
Avi Kulkarni and Nelia Padilla McGreevy, “A Strategist’s Guide to
Personalized Medicine,” s+b, Winter 2012: The tailoring of treatments to
specific populations is changing the game for key industry stakeholders.
Ramez Shehadi, Walid Tohme, and Edward H. Baker, “IT and Health-
care: Evolving Together at the Cleveland Clinic,” s+b (online only),
Aug. 6, 2012: CIO Martin Harris on how information technology is
transforming patient engagement.
For more thought leadership on this topic, see the s+b website at:
strategy-business.com/health_care.
The NeHC has mapped out a five-phase framework
for guiding the development of the technological in-
frastructure that the industry will need to support
consumer-centric healthcare. It suggests how the digi-
tal components of healthcare may come together in the
coming years (see “The Patient Engagement Framework,”
page 76).
The Path to Consumerization
As consumer-driven healthcare spreads, the fundamen-
tal nature of the industry will change—just as in other
industries that have moved from B2B to B2C, such as
banking and computers and electronics. The ultimate
goal for insurers, care providers, and pharma companies
alike is to drive initiatives forward until the industry
reaches a tipping point. The new healthcare industry
that results will be adept at influencing consumer be-
haviors. It will use sophisticated attitudinal segmenta-
tion to design and deliver personalized products and
services, and its financial performance will be linked
directly to care outcomes. Such an industry will mo-
tivate consumers to pursue wellness, and will provide
them with access to healthcare when they need it via
the channels that they prefer.
Of course, this vision will not materialize over-
night. It will take years, perhaps decades. And it will
require a sustained effort across the healthcare industry,
investment, and the willingness and ability to change.
But healthcare companies around the world are realiz-
ing that their current business models are insufficient to
meet today’s challenges. As Aetna CEO Mark Bertolini
told the participants at the HIMSS Conference in Las
Vegas in 2012, “The end of insurance companies, the
way we’ve run the business in the past, is here.” Con-
sumerization is the industry’s future. The work will be
hard, but the rewards promise to far exceed the effort:
a high-quality, cost-effective, and user-friendly system
that continuously improves population health. +
Reprint No. 00167
Says Aetna CEO Mark
Bertolini, “The end of
insurance companies,
the way we’ve run the
business in the past,
is here.”
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by Lawrence M. Fisher
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How a Small Firm Named
AeroVironment Is Changing the
Course of Airplanes, Automobiles,
and Warfare
Many of AV’s small unmanned
aircraft systems, including
the Wasp, can be carried in a
backpack and launched from
almost anywhere.
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Lawrence M. Fisher
larryfisher1@me.com
is a writer and consultant
based near Seattle. A contrib-
uting editor to s+b, he covered
technology for the New York
Times for 15 years.
The late Paul B. MacCready earned his reputation as
an inventor, a pioneer in environmentally friendly tech-
nologies, and a daredevil. In 1979, he oversaw a trium-
phant flight over the English Channel in a seemingly
impossible machine: a human-powered aircraft kept
aloft by pedaling. He also left his adventurous mark on
AeroVironment Inc. (AV), which has had a rich history
of seemingly impossible innovations ever since Mac-
Cready founded the company in 1971. Today, more
than 40 years later, AeroVironment may be poised to
lead the next wave of major change in the way people
fuel their vehicles, go to war, and make use of flight.
AeroVironment holds dominant, market-leading
positions in two seemingly unrelated technologies: un-
manned aircraft (including those commonly known as
drones) and charging systems for electric vehicles. These
might seem like products for niche markets, but they
are also the kinds of products that can gain broad im-
pact when networked into a new and expanding infra-
structure. Developments like these, because of the way
they fit with other technologies, end up changing the
way people live.
Indeed, the executives and researchers of AeroVi-
ronment, who regard MacCready’s bold, experimental
approach to life as a core cultural element of their com-
pany, have deliberately set up their battery systems and
unmanned aircraft to be quietly disruptive to conven-
tional industry. They believe this disruption is similar
to what occurred as personal computers forced change
among a host of other technologies, from mainframes
to typewriters to recorded music. AeroVironment’s in-
ventions offer the prospect of a systemic transformation,
potentially akin to the transition from sailing ships to
steam, which spanned more than a century and led to
broad advances such as sweeping changes in military
power and the globalization of the market for meat.
If roads full of electric cars and skies full of pilot-
less aircraft seem like a relatively distant prospect, re-
member that the substitution of steam for sailing ships
once did as well.
AeroVironment’s first-mover status, its relatively
large installed base (compared to those of its direct
competitors), and the 85 to 90 percent share it claims
in each of its markets allow it to define standards in
both unmanned aircraft and electric-vehicle charging.
But the path to more widespread adoption of AeroVi-
ronment’s products is anything but clearly marked, and
the twists promise to be as political as they are techni-
cal. In addition, as a relatively small company that an-
swers to shareholders, AV may struggle to scale its op-
erations adequately to seize the opportunities inherent
in its products.
And yet, the firm has some powerful assets to draw
from. AeroVironment is a small, nimble company with
a catalog of breakthrough innovations belying its size.
It possesses a distinctive and systematic approach to
R&D that extends deep into its customer relationships.
It remains committed to a culture that promotes in-
dividualism as a means of enhancing collaboration. It
knows what to knit and sticks to it.
The AeroVironment story is not a playbook for
other companies to follow wholesale—for one, its
heritage cannot possibly be duplicated—but it’s a fas-
cinating tale rich with lessons for any company. Most
of all, AV shows how disruptive technologies can
evolve and shake up their industries, even when mul-
tiple market forces exist to hold them back. It also
offers companies guidance about when to evolve to
meet the needs of the future and when to stay true to
their history.
Makers, Builders, and Dreamers
By their own account, the engineers and executives who
run AeroVironment are pragmatists. They are makers
and builders, not TED talkers. In some respects, CEO
and chairman Tim Conver and his fellow members
of the company’s top leadership team resemble their
company’s founder. But in other ways, they couldn’t
be more different. For one thing, Paul MacCready was
a dreamer.
MacCready, who died of metastatic melanoma
in 2007, was a passionate environmentalist who loved
airplanes, hence his company’s somewhat awkward A
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full name, which is often shortened to AV. As a boy,
he built and flew model airplanes competitively. As a
young man, he piloted gliders, winning soaring cham-
pionships in the United States and Europe. Dyslexic,
slight of stature, and physically uncoordinated, Paul
MacCready was no one’s idea of a charismatic leader.
Yet by the time of his death he had been called the poet
laureate of flight. The National Aeronautics Association
and the American Society of Mechanical Engineers in
1980 named him “Engineer of the Century,” and Time
magazine called him one of the 20th century’s 100 most
creative minds.
After earning a doctorate in aeronautics from the
California Institute of Technology, MacCready started
his first company in the then new field of weather modi-
fication, and was the first to use small instrumented
aircraft to study storm interiors. After selling the com-
pany, he started AeroVironment in 1971. He intended it
to be an environmental consulting firm, and it was for
a while.
The first major shift in the company’s fate came in
1976. Deeply in debt after acting as cosigner for a bad
loan, MacCready heard about a cash prize of £50,000
(US$87,700) being offered by British industrialist
Henry Kremer for the first human-powered flight. And
before he realized it, MacCready was setting himself
and his company in an entirely new direction: upward.
On a cross-country trip with his family that year,
MacCready had an aeronautical epiphany while watch-
ing vultures circling above the desert. Although vultures
are weak flyers relative to hawks and other birds, the
shape and length of their wings allows them to stay aloft
for long periods. In that vulture’s glide, MacCready
saw what a person could do given the right wingspan.
More specifically, he realized that if he could increase
the wingspan of a plane without increasing its weight, a
fit bicyclist could likely pedal fast enough to move the
craft forward and generate lift. He would now test—
and prove—that theory.
MacCready assembled a wonderfully heterogeneous
team to build the Gossamer Condor, as his first human-
powered plane was called. There were Ph.D. engineers
and physicists like himself, but also a swell of self-taught
enthusiasts and nerdy polymaths from the lively south-
ern California hang-gliding scene. Several “recruited”
themselves, drawn by MacCready’s reputation in inter-
national glider competitions—and by the heroic nature
of his quest.
The team rallied around a shared vision. They were
PAUL MACCREADY
WAS NO ONE’S IDEA
OF A CHARISMATIC
LEADER. YET BY THE
TIME OF HIS DEATH
HE HAD BEEN CALLED
THE POET LAUREATE
OF FLIGHT.
Gossamer Albatross landing at
Cap Gris-Nez, France, 1979
Paul MacCready
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out not to simply win the Kremer prize, but to break
a barrier that had tantalized humankind at least since
Leonardo da Vinci first penned drawings of human-
powered airplanes. Many people in the group had al-
ready achieved a high level of personal mastery in the
design, building, and flying of gliders and ultralight
powered airplanes. Human-powered flight was an irre-
sistible next step.
Earlier runs at the Kremer prize had attempted to
beat gravity through exquisitely elegant aerodynamic
wing designs, which inevitably made the aircraft too
heavy to fly very far. MacCready approached the prob-
lem from the perspective of making the most of the
human pilot’s limited power. Build the aircraft light
enough, he reasoned, and at the slow flying speeds he
projected, the aerodynamics would hardly matter. The
Gossamer Condor was a crude assemblage of piano
wire, aluminum tubes, bicycle parts, Mylar film, and a
propeller. But it was light, efficient, and effective. It flew
successfully just a year after work began; others had
spent decades to no avail.
Three years later, the same team produced the Gos-
samer Albatross, which became the first human-pow-
ered aircraft to fly across the English Channel, captur-
ing a second Kremer prize.
The Snaking Path of Commercialization
Having conquered human-powered flight, the Aero-
Vironment team set its airborne sights even higher—on
harnessing the power of the sun. For the flight of the
Solar Challenger, which in July 1981 flew the 165-mile
distance from Paris to London under solar power at
an altitude of 11,000 feet, AV had the sponsorship of
DuPont, which manufactured the Mylar material used
to skin the fuselage and wings.
But the company’s market focus developed in
fits and starts, and the link between its achievements
and commercially viable products was still often tenu-
ous. Indeed, a flapping-wing replica of a pterodactyl,
produced for an Imax movie about creatures in flight,
remained typical of projects the group took on—it
was done as much for the sheer challenge and pleasure
of producing cool things that fly as for commercial
considerations.
“There is a value in some way-out impractical proj-
ects that are done for prizes, symbolism, or the fun of it,
where you don’t have to worry about production,” Mac-
Cready told this reporter in 1990. “You can focus on ex-
tremes; when you do that you’re able to go way beyond
“THERE IS A VALUE,”
ACCORDING TO PAUL
MACCREADY, “IN SOME
WAY-OUT IMPRACTICAL
PROJECTS THAT ARE
DONE FOR PRIZES,
SYMBOLISM, OR THE
FUN OF IT.”
AeroVironment’s
electric-vehicle
chargers can be
incorporated into
parking garages.
AV technicians discussing the
assembly of small, unmanned
surveillance vehicles.
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of directors since 1988.) This meant maintaining a huge
“battery room,” with three batteries for each vehicle,
so two could always be charging while one was in use.
“We convinced the industrial market that fast-charging
wouldn’t destroy their batteries and could even increase
their life.”
AeroVironment found its first believers at Ford Mo-
tor Company and American Airlines. At Ford, the ap-
plication for AV’s “smart” recharging systems was the
forklifts used inside factories; for American, the target
was the many support vehicles used to move aircraft
and luggage around on the ground (which had been
identified as a significant source of air pollution at air-
ports). By adding a microprocessor to the battery that
could communicate with the charger, AeroVironment’s
systems were able to reduce charging time to minutes
from hours, while increasing battery life and eliminat-
ing the need for battery rooms. The company now has
more than a 90 percent share of the market for airport
support-vehicle charging. It is also the charger supplier
for electric cars from Nissan, Renault, BMW, Ford, and
Mitsubishi.
Just as it was developing its recharging business, AV
was discovering new ways to put its substantial knowl-
edge of low-powered flight to more profitable use. Re-
mote piloted aircraft, for most of their nearly 100-year
history, had been used for the lowest of low-level mis-
sions, like target practice. But AeroVironment had a
different idea: to develop an “unmanned tactical recon-
naissance vehicle.” Resembling a large model airplane,
the hand-launched Pointer climbs aloft on a small elec-
tric motor and carries a video camera that relays images
to an observer’s monitor on the ground. It is a lower-
cost and less-observable surveillance vehicle than a pi-
loted aircraft. Subsequent models such as the Raven, the
Wasp, and the Puma have offered reduced size and in-
creased capabilities. Some are even small enough to fit
in a soldier’s backpack.
Although the firm doesn’t make the large lethal
drones that get headline attention, such as General
Atomics’ Predator and Reaper, its diminutive hand-
launched planes—the Raven, for instance, which has
a wingspan of just 55 inches and weighs a little more
than 4 pounds—now account for 85 percent of the un-
manned aircraft purchased by the Department of De-
fense (DOD).
But AV has more than just military operations in its
sights. The drones’ relatively low cost, compact size, and
quiet operations are opening up all sorts of new pos-
prescribed limits to new frontiers.”
MacCready and his team’s pie-in-the-sky thinking
came more firmly down to earth with the Sunraycer, a
solar-powered race car commissioned by General Mo-
tors (GM). Infused with the expertise that AeroViron-
ment had developed in solar flight, the Sunraycer won
first place in a 1,867-mile race across Australia in 1987,
with an average speed of 42 miles per hour. While GM
was still basking in its branded glory, MacCready per-
suaded the company to let his team develop a prototype
of an electric car that could possibly go into production.
GM showed the barely finished car, initially
dubbed the Impact, at the January 1990 Los Angeles
Auto Show. It was such a hit that by Earth Day, three
months later, the company had decided to manufacture
it under the production name EV1. In December 1996,
GM provided a limited launch of the pure electric car
for lease only. Powered by lead-acid batteries, the first-
generation EV1 could travel 70 to 100 miles before re-
charging. (A later version, using nickel-metal hydride
cells, could travel up to 120 miles.) But then a shift in
policy intervened: The California Air Resources Board
agreed to delay implementation of the first phase of a
zero-emissions vehicle mandate that had been sched-
uled to go into effect in 1998, and whatever momentum
had been building at GM for the EV1 died.
General Motors was inconsistent in its support for
the EV1, and the oil companies did their best to un-
dermine electric car development altogether. As shown
in the documentary film Who Killed the Electric Car?
(2006), when the automobile and oil industries joined
forces to block the zero-emissions mandate, they sacri-
ficed the prototype electric vehicles. Despite candlelight
vigils by EV1 owners, GM recalled its leased cars and
crushed all but a few, which were donated—minus their
drivetrains—to museums. That decision left AeroVi-
ronment with some painful lessons about the capricious
effects of public policy and corporate influence, but also
with some hard-won knowledge about electric vehicles,
batteries, and fast-charging equipment.
The company now set out to find fresh commercial
opportunities, and it wasn’t long before it succeeded—
this time in the industrial sector. “We found out there
was an installed base of over 1 million forklifts that were
conventionally charging because everybody ‘knew’ you
couldn’t fast-charge batteries without destroying them,”
CEO and chairman Conver recalled. (Handpicked by
MacCready, Conver has served as president since 1991,
chief executive since 1993, and a member of the board P
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sibilities. Researchers with the U.S. Geological Survey
(USGS) and the U.S. Fish and Wildlife Service have
used ex-Army Ravens to count the number of sandhill
cranes that visit the Monte Vista National Wildlife Ref-
uge, for example. They have been deployed to examine
the drainage infrastructure at a West Virginia surface
mine. They have been used to monitor forest fires. “We
expect that by 2020, unmanned aircraft will be the pri-
mary platform [for data collection] for the Department
of the Interior,” Mike Hutt, USGS’s unmanned aircraft
project manager, told Air&Space.
AeroVironment also believes small drones will
eventually be used to perform myriad other tasks for
which autonomous mobility will be indispensable—
such as delivering small, high-value payloads (pharma-
ceuticals, for instance) to areas not served well by roads,
or replacing bike messengers delivering documents in
congested cities. As the company’s mission statement
proclaims, “The future is unmanned.”
AV’s plans for the electric car are similarly ambi-
tious. It is already building the infrastructure required
for the truly transformative vision of the electric car
that MIT professor William J. Mitchell and GM ex-
ecutives Christopher E. Borroni-Bird and Lawrence D.
Burns offer in their book, Reinventing the Automobile:
Personal Urban Mobility for the 21st Century (Massa-
chusetts Institute of Technology, 2010).
The next generation of electric vehicles, according
to Mitchell, Borroni-Bird, and Burns, will essentially
be “consumer electronics devices—networked comput-
ers on wheels—relying for their functionality far less on
mechanical and structural components, and far more
on electronics and software, than traditional automo-
biles. Thus their costs can continually be driven down,
and their performance improved, in the same ways as
the costs and performances of computers.”
Factors beyond
Their Control
A
s with all technological change
(remember the Segway?), the
evolution of infrastructure and policy
is highly uncertain. In this case, the
way that commercial drones and
electric vehicles evolve depends on
public policy, market acceptance, and
many other factors beyond the direct
control and influence of AeroViron-
ment or any other single company.
Although the electric car mar-
ket is growing rapidly, just 10,000
battery-only electric vehicles (BEVs)
were sold in the United States last
year—and those sales were stimu-
lated in part by a US$7,500 federal tax
credit on each vehicle. Were electric
car sales to grow to 1 million units,
that would be a $7.5 billion cost to
taxpayers, which is clearly not sus-
tainable. For the industry to be viable
without subsidies, battery prices
would need to come down and capac-
ity would need to go up.
Safety regulations also loom
large. The cars hypothesized in Re-
inventing the Automobile are smaller
and lighter than today’s average auto,
and they achieve safety goals partly
through robotics. They can in some
cases drive themselves, and they
are designed to avoid crashes in the
first place, not to provide a rolling
fortress. If autonomous autos are to
share the roads with conventional
vehicles in any number, new regula-
tions will be essential. The autos’
safety in traffic must be proven,
and the kinds of bugs that exist in
software (where the only negative ef-
fect of a failure is the need to reboot)
must be eliminated (see “The Next
Autonomous Car Is a Truck,” by Peter
Conway, page 8).
Next, mass-market penetration
by electric cars is predicated upon
fossil fuel costs remaining high. If
fracking eventually produces vol-
umes of new oil at attractive prices,
or if hydrogen and natural gas costs
come down more rapidly than antici-
pated, the fully electric car could
be sidelined.
And although drone aircraft
are an increasingly common, albeit
controversial, feature in foreign war
theaters, their appearance in domes-
tic skies has prompted a multiyear
policymaking effort by the Federal
Aviation Administration and may
require involvement from the Federal
Communications Commission as
well. Most unmanned aircraft are
actually piloted remotely by human
beings, but AeroVironment’s systems
also have substantial autonomous
capability, such as the ability to fly a
preprogrammed GPS course. Both
Boeing and Airbus have talked about
unmanned cargo aircraft, and jetlin-
ers have actually been capable of
autonomous takeoffs and landings
since Lockheed’s L-1011 was intro-
duced in 1970. But that doesn’t mean
public sentiment or policy is ready for
large fleets of robotic planes.
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they can influence the future, they can’t control it.
Many of the factors governing when their technologies
reach their full potential—or determining whether they
ever will—are well beyond AeroVironment’s reach (see
“Factors beyond Their Control,” page 84). So they have
built a company that can pursue multiple moon-shot
prospects without putting its immediate survival at risk.
The firm has grown steadily and profitably, and is
likely to continue doing so. It has no debt and has about
$200 million in cash and investments. It finances its
more outlandish projects with other people’s money, so
the company is buffered should those projects fail, but
reaps the upside when they succeed.
Wall Street is a believer—at least in the unmanned
aircraft systems. “They have an enviable market posi-
tion with high barriers to entry [and] extremely strong
past performance with their military customers, and
they also happen to be in an extremely well-defined
niche in the military budget,” said Jeremy W. Devaney,
a senior equity analyst with BB&T Capital Markets.
The electric vehicle charging business may be
more difficult to defend. Although AV has had most
of the market to itself for the last 20 years, if elec-
tric cars are fully embraced in the mainstream,
chargers will become more of a consumer electron-
ics product. AeroVironment is adapting to new re-
alities—it already offers one of its electric vehicle
charging units on Amazon—but it is not clear
that the company can compete effectively in a higher-
volume, lower-profit-margin business. In addition to
electronics giants like GE and Siemens, it faces com-
petition from fast-moving, aggressive startups, such as
Coulomb Technologies, which has already installed
thousands of its ChargePoint public charging stations
around the world.
An Innovation System
AeroVironment’s two businesses look discrete, and in-
deed Wall Street analysts treat the company as an un-
manned aircraft system pure play, ignoring the charging
business. But the two sides of its operations are, in fact,
tightly linked, and the capabilities built in one strength-
en the other.
Consider the firm’s use of lithium-ion batteries.
First developed for laptop computers and cell phones,
these batteries now provide power for the new genera-
tion of electric cars, like the Nissan Leaf and Tesla’s
Roadster and Model S. Although AeroVironment’s in-
dustrial charging business has relied primarily on con-
The authors say much of the wireless communica-
tions and sensor technology needed to implement their
vision is available today. Indeed, much of it can already
be purchased from AeroVironment. The future is also
electric.
Think Big, Move Fast, Stay Small
Small is a recurring theme with AeroVironment. With
fiscal 2012 revenues of $325 million, it is dwarfed
by competitors like Lockheed Martin, Boeing, and
Northrop Grumman on the defense side, and by Gen-
eral Electric and Siemens in electric vehicle charging.
Although AV maintains a modest presence in Wash-
ington, DC—and briefs lawmakers and staffers when it
gets the chance—it has nothing like the resources of the
large aerospace or technology companies. And it doesn’t
intend to acquire them.
Instead, the firm plans to continue to use its orga-
nizational compactness as a benefit—in much the same
way that it has seized small product size as a competitive
advantage in the drone market—while remaining agile
and opportunistic. AeroVironment has established a
way to play that is easy to describe, difficult to emulate,
and nearly impossible to duplicate. It is a serial innova-
tor, with a broad and deep portfolio of successful inven-
tions and the intellectual property to back them up. It
is also a value player, devoted, in its founder’s words, to
doing “more with less.”
Central to AV’s strategy is its practice of fast pro-
totyping, that is, building a full-scale working model
of a proposed product as early as possible in the R&D
phase. “We try to move into a customer dialogue sooner
rather than later, as we’re trying to discern what’s [just]
interesting and cute [versus] what’s going to change the
world,” said Conver.
AeroVironment’s approach to outsourcing is a criti-
cal component of its ability to scale the business without
sacrificing agility. “In both of our businesses, we devel-
op the products initially internally, and when we can’t
buy things, we invent them,” Conver said. “But when
we transition to production, we outsource everything,
with internal quality control and testing. As the prod-
uct matures and the market grows, we push even more
of that out. We think of our strategic intent as market-
leading growth doing important work. We’re arrogant
enough to think we can be successful in lots of different
things, so we choose to focus on things where we can
achieve both of those goals simultaneously.”
Conver and his team understand that although
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ventional lead-acid batteries, the company uses lithium-
ion cells in its unmanned aircraft, taking advantage of
the new technology’s superior power-to-weight ratio.
Because thousands of its airplanes are operating in war
theaters around the globe, the company has developed
an unmatched knowledge of how lithium-ion batteries
respond to hard use and frequent recharging—intellec-
tual assets it has now successfully leveraged in the con-
sumer auto market.
But given the long stretch of hurdles that still block
the path to widespread adoption of electric vehicles,
superior charging technology alone is no guarantee of
commercial success. The infrastructure to support it is
every bit as essential. Indeed, what made the difference
in AeroVironment’s win of the Nissan Leaf contract was
the combination of AV’s field experience and the sys-
tems approach it took to recharging. Its bid on the job
not only specified the capacity and cost of its chargers,
but also spelled out how the company would create a
nationwide network of trained installers, so that Leaf
customers would have a seamless purchase and delivery
experience. Today, all the public and private chargers
AV has installed are linked through the Internet to serv-
ers that monitor the health of every battery in the field.
In the future, they will communicate wirelessly with ev-
ery electric vehicle, so finding a quick charge will be no
more challenging than finding a gas station.
The casual observer may be tempted to find a dis-
connect here. On the one hand, AV prays to the gods
of high risk and fast experimentation. It is steeped in a
tradition of jumping on challenges for challenges’ sake
and of creating new technologies to meet needs yet to
be defined. The company can appear downright whim-
sical. On the other hand, it is winning business through
a shrewd commercial mind-set, one that displays a deep
understanding of the needs of its customers. In reality,
however, these two seemingly disparate mind-sets are
highly complementary. Great change starts with crazy
ideas, but true disruption occurs only when there are
ways to carry those ideas forward. This is not a revela-
tion that emerged overnight, but what AeroVironment
has learned is how to build a system for disruption.
That system is a way to innovate and a way to mar-
ket. It is even a way to think and to talk. Semantics
count for a lot at AV. Just as the company always speaks
of efficient energy systems when referring to its chargers
and battery analysis equipment, its aircraft are never
referred to as drones, but as unmanned aircraft sys-
tems. One system, the Raven, for example, is sold with
three aircraft, two ground stations, and varying levels
of personal support, for a complete cost that ranges
from $100,000 to $200,000. AV has support personnel
on the ground in Afghanistan and other conflict sites
around the globe. More than 10 percent of its employ-
ees are veterans, and many have Special Operations ex-
perience. As with the battery chargers, the customer is
buying not just equipment, but also the framework that
enables it.
“If you want an unmanned system, but for what-
ever reason you’re not comfortable flying it yourself, or
want to test it in another country, they’ll come out and
deploy their team of former Navy Seals, and backpack
in with your group and show you how it works, and
be responsible for it,” said Gregory McNeal, a professor
of law at Pepperdine University specializing in public
policy and security issues. “They deploy demonstration
teams with the military, and they’re certain that when
they’re done, you’ll say ‘I wish we had those guys back.’”
“They have blocked out the larger primes by work-
ing very closely with their customers,” said BB&T’s
Devaney.
Where the DOD Meets Silicon Valley
A walk through AeroVironment’s aircraft production
facility in Simi Valley, Calif., brings to mind Kelly
Johnson’s famous Lockheed Skunk Works. Several of
AV’s historic aircraft hang from the ceiling; others are
on permanent display at the Smithsonian National Air
and Space Museum in Washington, DC. And it’s not
unusual to spot a senior executive proudly wearing a
badge from the AMA—not the American Medical As-
sociation, but the Academy of Model Aeronautics, a
nonprofit organization dedicated to the promotion of
model aviation as a recognized sport as well as a recre-
ational activity.
AV has the casual atmosphere of a Silicon Valley
software company. Long before Google or Genentech
empowered employees to pursue individual interests on
company time, AV’s talented engineers were encour-
aged, even expected, to engage in pet projects.
AeroVironment employees are also expected to
speak their mind whenever they believe the company’s
actions are at odds with its stated values of innovation,
a great workplace, trust, and technological innova-
tion. “We have an open invitation, and really an open
requirement, for employees to speak out if they think
the company is operating inconsistently with any one
of those four,” said Conver. “Our intent is when that P
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happens, we’ll either change what we’re doing to comply
with what we said we were going to do, or we’ll change
what we’re saying to comply with how we’re operating.”
One development that prompted a company-wide
forum was the introduction of the Switchblade, AV’s
first lethal unmanned aircraft. Because the company’s
previous models were non-weaponized and primarily
used for reconnaissance, it could reasonably make the
case that they were lifesaving devices.
The Switchblade, in contrast, launches from a tube,
unfolds its wings, and converts into a guided missile,
prompting some industry observers to dub it the kami-
kaze drone. The rationale behind its development was
that when an intelligence and surveillance team comes
under hostile fire, they have little recourse but to hun-
ker down and wait for helicopter support, which could
take hours to arrive. “Our engineers said we could solve
that, and conceived of a small tube-launched vehicle
that (the team) could carry around in a rucksack,” said
Conver. “In that scenario, it allows them to pull that
out in a minute, go find the people who are firing at
them, verify it on a streaming video, [and] designate the
target. And then it turns into a munition that tracks
that target down, and, in the vernacular, ‘services’ that
target. That seemed like a good thing to do. We also
realized that it was a real digression from the kind of
work we’d been doing, and had the potential to be in-
consistent with some of our employees’ view of what
important work is.” In one all-hands meeting where
there was heated dialogue on the topic, a much-decorat-
ed Vietnam veteran told his story of having come un-
der sniper fire and eventually leaving the field in a body
bag, badly wounded and presumed dead. As he pointed
out, a device like the Switchblade could have saved the
lives of several of his comrades. His story quieted most
objections to its development and launch.
Even as AV pursues new markets for its existing
drones, its research and development team is pushing
the unmanned aircraft design envelope with drones
both really big and extremely small. Two current proj-
ects in particular evoke the legacy of Paul MacCready
while pointing the way to an exciting future.
On the big side, AeroVironment’s Global Observer
calls to mind the company’s early experiments in hu-
man-powered and solar-powered flight. With a wing-
span equal to that of a Boeing 767 and a weight roughly
equivalent to a typical SUV’s, the liquid hydrogen–
powered plane is designed to stay aloft for seven days at
up to 65,000 feet. The idea is that the Global Observer
AEROVIRONMENT
EMPLOYEES ARE
EXPECTED TO SPEAK
THEIR MIND WHENEVER
THEY BELIEVE THE
COMPANY’S ACTIONS
ARE AT ODDS WITH
ITS STATED VALUES.
AV employees at a brainstorming
session for a new charging device.
The Puma, like other unmanned aircraft,
is used primarily as an intelligence,
surveillance, and reconnaisance asset.
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1
Resources
Paul Ciotti, More with Less: Paul MacCready and the Dream of Efficient
Flight (Encounter Books, 2002): A reporter’s take on the story of
human-powered flight and the characters involved in it, along with
the MacCready team’s accomplishments in solar-powered aircraft and
flapping-wing ornithopters, including a life-sized pterodactyl replica.
Scott Corwin and Rob Norton, “The Thought Leader Interview:
Lawrence Burns,” s+b, Autumn 2010: More insights from the coauthor
of Reinventing the Automobile.
Morton Grosser, Gossamer Odyssey: The Triumph of Human-Powered
Flight (Houghton Mifflin, 1981): An insider’s account of the development
of human-powered flight, culminating in the launches of the Gossamer
Condor and the Gossamer Albatross.
For more thought leadership on this topic, see the s+b website at:
strategy-business.com/innovation.
could fill a gap between the capabilities of observation
and communications satellites operating at low Earth
orbit and the flexibility of airplanes flying in the lower
atmosphere. One function would be as an alternative to
cell-phone towers, but with a much greater range.
At the other end of the spectrum is the Nano Air
Vehicle (NAV), which mimics a hummingbird in its
size and flight characteristics. It can hover in place and
fly backward and forward in restrictive areas, such as
inside a building, that are inaccessible to conventional
drones, at speeds of up to 15 miles per hour. It calls to
mind flapping-wing ornithopters and pterodactyls—
such as the one MacCready’s team built years ago—but
actually uses the wing motion of real hummingbirds, a
motion that has never been successfully modeled before.
The NAV beats its tiny wings a remarkable 70 times per
second, with the tips nearly touching, like a humming-
bird, but unlike any other winged creature.
Either or both of these projects could reach the
market within a few years. “We look at opportunities in
a different way based on where they are in a continuum
from idea to market launch, and getting through the
wickets gets (increasingly) data-based and ROI-driven
as you move from a zero point of ‘what about this idea,’
to a 10 point of ‘let’s launch this in the market,’” Con-
ver said. “By the time we are allocating significant re-
sources, whether human or capital, we’re getting more
and more rigorous about the market and the value
proposition and our ability to support that adoption.”
That’s systems thinking in full, and a long trip into
the future for a company that has already made a lot of
history. +
Reprint No. 00187
The Nano in flight
The Nano employs biological
mimicry at an extremely
small scale.
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E
very once in a while, you
meet someone who really
knows how to “read a room.”
This is the individual, often a sea-
soned executive leader, who can
walk into a tense meeting and sense
why two would-be collaborators are
butting heads, why a third manager
hardly speaks, and why a fourth
seems to be protecting some unspo-
ken priority. Then, with a few words,
the individual can defuse the prob-
lem, get people back on track, and
move the team to a new level of pro-
ductivity. When this type of work is
done with an executive team, it can
have invaluable impact, cascading
out to the rest of the organization as
people practice and share their
newfound skills. At all levels, the
ability to read a room is considered
by many to be a rare and special gift,
innate and not teachable. Many
people who have this gift admit
that they don’t know how to teach it
to others.
But one man has built his career
around trying to help people track
their conversational interactions,
understand the hidden dynamics in
them, and learn how to intervene ef-
fectively. By codifying these pat-
terns, he has shown that the skills of
insight can be taught. David Kantor
was a family therapist based in
Cambridge, Mass., when, in the
1980s, he began meeting regularly
with a group of noted organizational
thinkers at MIT’s Sloan School of
Management. Kantor had the idea
that the patterns he had seen in fam-
ilies—the recurring ways that peo-
ple became stuck in groups, or fell
into particular types of emotional
turbulence when faced with a grave
or urgent problem—might also ap-
ply to executive teams in businesses
and other organizations.
Kantor began explicitly study-
ing and coaching senior leaders. He
took extensive notes on every inter-
action, trying to discover the combi-
nation of factors, as varied as an
individual’s emotional and family
history and the dynamics in the or-
ganization around him or her, that
would lead some people to crack un-
der pressure and others to thrive.
Over the years, in part through
working with such organizational
learning experts as Peter Senge, Ed-
gar Schein, and Chris Argyris, he’s
become an influential theoretician
of individual and group behavior.
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THOUGHT LEADER
The Thought Leader Interview:
David Kantor
An eminent systems therapist says that learning to recognize the
hidden patterns in conversation is the first step toward more effective
executive leadership.
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BY ART KLEINER
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His book Reading the Room:
Group Dynamics for Coaches and
Leaders (Jossey-Bass, 2012) assem-
bles 40-plus years of organizational
research and practice into a guide to
conversational cues and meanings,
with particular relevance for man-
agement interactions and executive
teams. Kantor makes the case that
being attuned to the signals of a con-
versational system—an approach he
calls “structural dynamics”—is the
first step toward becoming a far
more prescient and effective leader.
(He is currently launching a series of
empirical studies on measuring and
changing leadership behavior with
the Massachusetts School of Profes-
sional Psychology.) He met with
strategy+business at his Cambridge
office to explain the way it works.
S+B: You suggest in your book that
most leaders need a better model of
human systems. Why is that?
KANTOR: In any situation, unseen,
unspoken connections among peo-
ple influence everything that hap-
pens. Leaders are typically not aware
of these connections, and they can’t
be, unless the right conceptual lens
is available. The model I’ve devel-
oped over the years is a schema for
understanding how people talk
while they are making decisions to-
gether. It’s actually two models—
one describing everyday situations,
and one for high-stakes situations
like crises and conflicts.
People behave differently under
extreme conditions; there are break-
downs in communications, and
things can move forward only if
people can overcome those break-
downs. The decisions you make un-
der that pressure are what define you
as a leader.
The model is based on work I’ve
done with groups—first with fami-
lies, couples, and teenagers, and
then with organizational teams and
companies. I’ve been able to observe
and track enough conversations in
enough contexts that I think I have
discovered a universal theory of the
structure of communication. The
theory suggests that communication
can be deliberate; that leaders can
measure and understand their im-
pact (and everyone else’s impact) in
any context where people make de-
cisions. They can also design their
own conversations to generate suc-
cess or failure.
S+B: What do you mean by
designing a conversation?
KANTOR: Every conversation is
made up of individual acts of speech:
statements and questions. The
speech act is my basic unit of analy-
sis. Every speech act can be catego-
rized as having one of four types of
action (being a mover, opposer, fol-
lower, or bystander); one of three
types of content (power, meaning,
or affect); and one of three types
of paradigms, or rules for establish-
ing paradigmatic legitimacy (open,
closed, or random). These categories
combine into 36 kinds of speech
acts, which are the building blocks
of human interaction. They can be
deliberately sequenced to set the di-
rection of a conversation. Interven-
ing with the right speech act at the
right moment can catalyze a shift in
thinking or action for everyone in
the room.
I’ve worked with a number of
organizational experts on this, and
they’ve put the model under a lot of
scrutiny during the past few years.
There’s a basic skepticism, especially
in the fields of economics and psy-
chology, as to whether behavioral
interventions actually produce re-
sults. This model allows us to test
that question. You can train a
team—let’s say a business executive
and a group of direct reports—to
explicitly shape their language ac-
cording to this model. They can
experiment with speech acts—de-
liberately trying out particular se-
quences—and see whether they pro-
duce higher performance or a change
in the right direction.
S+B: What’s the difference
between, say, a mover, an opposer,
and a bystander?
KANTOR: First of all, they’re not cat-
egories of people. Although every-
one has speech acts that they use
more frequently than others, no-
body is completely a mover, opposer,
bystander, or follower. These are de-
scriptions of vocal actions. Change
your vocal action, and you can
change how people perceive you.
Change what people perceive, and
you’ll change how they respond
with their own vocal acts.
Let’s start with a single speech
act: a statement you make. There are
four basic roles you can play in a
conversation. (I also call them ac-
tion stances.) You can make a move:
Start something new, like saying,
“We need to spend less time in these
meetings.” You can follow someone
else’s move, by agreeing with it: “Yes,
I’ve been concerned about the same
thing.” You can oppose the move,
raising objections or trying to stop
it: “I don’t think that’s right. We
need time to cover every topic on the
agenda.” And then you can step
back from the situation and stand by
(or as I call it, “bystand”), reflecting
on the actions being made, without
agreeing or disagreeing: “Ian wants
shorter meetings, Ralph wants to
keep them the same length. What
does everybody else think?”
A gifted communicator knows
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how to sequence these into com-
pound actions. So if you’re dealing
with fierce opposers, you don’t start
off by opposing them. You bystand
first. “I see how concerned you are
about this decision, and it’s having
an effect on the group.” Then you
follow. “I think you have reason to
be concerned.” Only then do you
move. “It seems to me that we’ve got
to change our decision and address
your concerns, but we can’t lose the
momentum of the original plan ei-
ther.” Three different actions: by-
stand, follow, move.
The second dimension is called
the communication domain; I also
sometimes refer to it as the language
people speak. Each domain is ori-
ented toward a purpose, and you can
see that purpose in the content of
the speech act. Some acts of speech
are in the affect domain; they in-
volve words of feeling, seeking an
increase in connection and intima-
cy. “This decision seems pretty
heartless. I wonder how people will
feel about it.”
Other speech acts are in the
power domain, using words about
getting things done, and their pur-
pose is increasing competence and
efficacy. “Who’s going to make sure
that there’s follow-through here?”
Finally, there is the meaning
domain: words about truth and rea-
soning, and content involving ana-
lytics and philosophy, with the goal
of a higher understanding. “It is
critical that the results reflect our
standards for accuracy.”
S+B: And when one person talks in
power while the other one speaks
in affect, they can misread each
other’s intentions.
KANTOR: That’s one of the most
common reasons for breakdowns in
communication. People also have
preferences for specific communica-
tion domains; they do not honor
ways of speaking other than their
own, and this increases the likeli-
hood that they’re going to speak at
cross-purposes.
A third dimension is the para-
digm about the rule of order: People
have different views of the best
way for human conduct to be regu-
lated. All the governance structures
in the world can be boiled down
to three types. The open system is
consensual and unregulated until
it hits a point of action, and then
an authority, chosen by the group,
decides. A representative democracy
is an open system. In the closed
system, authority rests with posi-
tion—the closer you are to the top
of the hierarchy, the more authority
you have. This system is highly
regulated; a military regiment, for
example, is a closed system. In a
random system, authority remains
with those who take and use it; the
group continues to expand, experi-
ment, and move.
Jazz bands are random systems,
and so are most teams of innovators
in an R&D department.
For most people, one of these
three systems feels intuitively right.
When a conversation doesn’t flow in
the way they favor, they feel uncom-
fortable. I first saw that in my work
with families—people intuitively
sought out an open, closed, or ran-
dom family—but I didn’t really
grasp the difference until I learned
about feedback mechanisms in sys-
tems theory. Closed systems rely on
negative, or balancing, feedback;
when something new happens, they
instinctively move to regulate it and
tamp it down. Random systems
work through positive feedback;
they reinforce novelty and make it
stronger. Open systems combine the
two forms of feedback; they are
positive until they reach some point
of dysfunction. Then the leader
steps in….
Art Kleiner
kleiner_art@
strategy-business.com
is editor-in-chief of
strategy+business.
VIDEO FEATURE
Structural Dynamics: Using Coversational Cues to Lead More Effectively
David Kantor speaks with Booz & Company partner Rutger von Post about
how leaders can tap into “structural dynamics” to create better-performing
teams.
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S+B: “Let’s take a vote.”
KANTOR: Or, “We have to reach
consensus.” Everybody must have a
voice in the open system, even if it’s
disruptive, but then it comes to a de-
cision, a vote, a consensus. It shifts
from a positive to a negative feed-
back loop.
S+B: How would I, as a leader, use
all this to design a speech act?
KANTOR: Everything you say can be
framed as a combination of these el-
ements. Suppose you’re in a cold
room. You could say, “Close that
window now.” That’s a closed-sys-
tem move in power. You could
change it to an open-system state-
ment by saying, “It occurs to me
that people are wrapping their
scarves around their necks. Will
somebody near the window step
over there and close it?” This speech
act is still a move in power, but now
you’re open. You’re giving people a
choice; you’re looking for a volun-
teer. You could also switch it into
affect, by saying, “It would be so
much nicer if the room were warm-
er, and people felt more comfort-
able.” And you could move that
into bystanding by saying, “I notice
that people feel uncomfortable, but
nobody seems to feel like closing
the window.”
The goal of structural dynamics
is to increase communicative com-
petency, which means every mem-
ber of the team becomes capable of
reading the room. They know which
interventions will improve the con-
versations. They ideally have full
knowledge of the limits of their own
repertoire so that when a speech ac-
tion is called for, if they can’t do it
themselves, they can call on some-
one else who is capable of the act.
S+B: Is there a person alive who
can speak eloquently in all 36
speech act combinations?
KANTOR: I think so. And, by the
way, this skill is the road to collec-
tive intelligence. The theory says
that when a team is capable of com-
municative competency, there is
an exponential leap to effectiveness.
By becoming more competent, the
team accelerates its ability to define
new outcomes, new products, and
so on.
It’s a bit like improvisational
theater. In fact, when I first began
putting this theory together, I read a
lot about how actors study their
craft, and how they are taught to
improvise. The theater is fascinat-
ing, but it’s not effective by itself as
a model for intervention, because
it’s locked in to a very small group
of activities.
S+B: In your book, you also describe
a fourth dimension—the heroic
modes, which come out only when
there’s a crisis.
KANTOR: A perceived crisis. When
the stakes are raised through stress
or difficulty, people shift into more
urgent, less thoughtful forms of con-
versation. Someone prone to affect
shifts to being an advocate: from “I
feel” to “we should,” arguing for
passion’s sake. A power-oriented per-
son becomes like a prosecutor: from
“let’s do” to “you must do,” forcing
others to perform. And a meaning-
oriented person becomes an adjudi-
cator: from “I think” to “I decide,”
imposing a framework of logic.
If the stakes get raised even
higher, these stances become even
more pronounced; they turn into
what I call “heroic modes.” The ad-
vocate is now a protector, doing
whatever must be done to shield
others from harm. The power-ori-
ented prosecutor becomes a fixer,
out to conquer all enemies and win
at all costs. And the adjudicator re-
treats into being a survivor, intent
only on manifesting the cause and
getting through all the oppression
and aggression.
Everyone unconsciously favors
one of these heroic modes. They’re
all morally neutral; none is more vir-
tuous or vicious than the others. But
they lead people, especially leaders,
“When a team is capable of
communicative competency,
there is an exponential leap to
effectiveness.”
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crisis is often a manifestation of
these shadows, and the enterprise
and the industry will be threatened
if the shadows are not contained. At
that moment, a hero is called for: a
leader who can find a way to tran-
scend his or her own shadows, and
also transcend the shadow-driven
behavior of the systems around him
or her.
Leaders are a special category,
because what they do and say and
the decisions they make affect many
others. If shadow behavior is evident,
and the leader is not willing to ac-
knowledge it and take responsibility
for it, he or she is a dangerous leader.
He or she does not have control over
the shadow side of the system.
On the other hand, if a leader
becomes aware and conscious, in the
moment, he or she can direct the
system away from its shadow side,
moving it in a far more powerful,
and more beneficial, direction.
So, for example, a business team
hits a crisis point, and the key mem-
bers of the team are driving one
another crazy. They are polar oppo-
sites. One is a fixer: “We have to
move fast and cut 30 percent, with
no nonsense about the damage to
morale.” The other is a protector:
“My God, do you really believe that?
in directions that are counterpro-
ductive. At the start of a crisis, peo-
ple enter the heroic modes in mild
form, but they can gradually become
more extreme: Fixers become ag-
gressive, protectors feel wronged,
survivors withdraw and endure.
When left unchecked, they lead to
the same basic attitude: The ends
justify the means. And then the cri-
sis accelerates. The fixers discover
they can’t win, or can’t solve every
problem; the survivors discover they
can’t really withdraw; and the pro-
tectors find they can’t keep everyone
from getting hurt. So they start to
blame one another.
General George Patton was a
classic fixer—and a hero until after
World War II. Then all the stories
about his vicious side emerged, about
him slapping soldiers and so on.
S+B: What’s your advice for the
leader—not the professional
intervenor, but the person actually
leading a group in a company?
KANTOR: There’s always a shadow
side to human behavior. These shad-
ows come from people’s childhood
stories—from ways in which they
weren’t loved. Greed is one kind of
shadow, especially when it involves
lack of care about anyone else. The
We’ll lose our best people, and the
larger culture is going to suffer.”
And then the survivor chimes in:
“I’m going to keep our morale up,
even if I have to do it all myself. I’ll
work twice as hard, 24 hours a day.
And we’ll get it back.”
If the leader of the team can
read these moves in a high-stakes
situation, he or she knows how to be
a competent bystander. “If we listen
to ourselves,” the leader might be-
gin, “It’s clear we all want the same
thing, but we’re going after it from
different directions. Let’s focus on
what we want to have come out of
this mess.”
Given enough skill and experi-
ence at reading the room, a leader
can make some moves that bridge
the gap—that don’t just assuage the
intuitive needs of the heroic modes
of the individuals involved, but that
make strategic sense. An individual
who can do that well is obviously a
superior leader. +
Reprint No. 00154
“If shadow behavior is evident, and
the leader is not willing to acknowl-
edge it and take responsibility for it,
he or she is a dangerous leader.”
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Toward a Better-
Informed Cynicism
by Marvin Weisbord

The Org: The Underlying Logic of
the Office, by Ray Fisman and
Tim Sullivan, Twelve, 2013
I
n ancient China, a business
experienced a 20 percent jump
in sales, and the abacus man
could not keep up. So the business
owner consulted the village sage,
who advised him to have the abacus
man grow a sixth finger on each
hand—upping his capacity 20 per-
cent. But the business owner hesi-
tated, reluctant to challenge author-
ity. “Oh, Wise One,” he said at last,
“how am I to do that?”
“Ah,” came the reply, “my job is
solving the problem. The implemen-
tation is entirely up to you.”
I remembered this story while
reading The Org: The Underlying
Logic of the Office, a wonderfully en-
tertaining rocket ride to what is for
me a new galaxy called “organiza-
tional economics.” I love this book.
Unlike most management books,
this one promises no advice and de-
livers splendidly. It is eclectic, unpre-
dictable, and idiosyncratic, and it is
as factual and ambiguous and sane
and irrational as the diverse orgs it
surveys. I even love the word org.
One pithy, concrete syllable replaces
five that make your eyes glaze over.
On top of that, I find that the book’s
myriad examples validate my experi-
ences trying to fix orgs over the last
50 years. Everything works. Noth-
ing works. Sometimes.
Noting that people spend a
third of their lives working, authors
Ray Fisman, a Columbia Business
School professor, and Tim Sullivan,
editorial director of Harvard Busi-
ness Review Press, do not criticize,
lament, praise, or pontificate. They
simply describe in vivid detail “how
and why orgs do what they do—
how the parts fit together, how the
rules get made, and what happens
when you change the rules.” In
short, if org life tilts you toward cyn-
icism regarding Dilbertian absurdi-
ties and six-fingered abacus men, “a
clearer understanding of how orgs
work” enables you to “descend into
better-informed cynicism.”
Toward that end, the writers
seek to illuminate the workings of
the black box that stands between
input and output. They humanize
the arcane math of economics with
stories. They decode academic man-
agement research to explain “why
the highly imperfect office of today
may nonetheless represent the least
dysfunctional of all possible worlds,
however depressing the idea of ‘least
dysfunctional’ may be.” Organiza-
tional economists recognize that
orgs succeed or fail on “a set of com-
promises that result from trade-offs
among many competing interests
and objectives.”
I support the authors in seeking
to redefine cynicism and dysfunc-
tion as normal, though retaining the
pejorative terms strikes me as a
mixed message. (I dropped “resis-
tance” and “denial” from my org
vocabulary long ago. Labels put no
one in the mood to change.) Fisman I
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and Sullivan show that life in orgs
can be heaven or hell, sequentially or
simultaneously. Hence, they include
many examples of effective work,
creativity, and idealism that defy
cost-benefit analysis. This stretches
the boundaries of organizational
economics to recognize that every-
thing counts even when it can’t be
counted. There are value-based bot-
tom lines beyond net profit.
As I read, I would look up and
say to my wife, “Did you know that
Zappos offers new hires $2,000 to
quit after one week?” Or, “These
guys have turned up an al Qaeda
leader’s memo berating a subordi-
nate for misusing his travel allow-
ance!” I told her how a McDonald’s
franchisee almost wrecked the mod-
el by serving prime roast beef and
that ministers can earn more money
stealing souls from nearby congrega-
tions than enrolling their own. I re-
counted the story of how Digital
Equipment (where I once consulted)
parlayed its informal network of
innovators to win a much-needed
Kodak contract, only to abandon it
when the financial folks left out of
the proposal process found a fatal
economic flaw.
“You really find that book inter-
esting,” Dorothy said.
Indeed, this may be the most
relentlessly realistic, wide-ranging
book on orgs I have ever read. To re-
veal the “underlying logic of the of-
fice,” the authors visit Mumbai’s tex-
tile mills, West Point’s classrooms,
the Hewlett-Packard garage, Balti-
more’s mean streets, and a Carnegie
Mellon computer lab. They use the
word office as a metaphor for any set-
ting where snowballing complexity
propels people to make trade-offs
(the least onerous selections from a
menu of fraught options) and every
choice conceals unforeseen out-
comes. When competitors began
poaching the best and brightest
from employee-friendly Google, for
example, the company refused to
make counteroffers. After the brain
drain became intolerable, however,
Google reversed its stance. Problem
solved, right? Not quite. The com-
pany “was also setting up clear sig-
nals to its entire staff: if you want a
big raise, get a Facebook offer and
we’ll counter. Google was paying for
trolling and disloyalty.”
It’s fitting that the authors con-
clude the book with a variation on
the Serenity Prayer. In org life, we
need to accept what we cannot
change, and to change what we can.
The wisdom is in realizing that few
changes will ever be wholly satisfy-
ing because they always require
trade-offs. +

Marvin Weisbord
mweisbord@futuresearch.net
is codirector of Future Search Network
and a visiting scholar in the University
of Pennsylvania’s Organizational
Dynamics program. He is the author of the
25th anniversary edition of Productive
Workplaces: Dignity, Meaning, and
Community in the 21st Century (Jossey-
Bass, 2012), s+b’s pick for best business
book on organizational culture in 2012.
The Practitioner’s Tale
by David Warsh

Doing Capitalism in the
Innovation Economy: Markets,
Speculation, and the State, by
William H. Janeway, Cambridge
University Press, 2012
A
fter BEA Systems was qui-
etly folded into Oracle
during the financial crisis
of 2008 for US$8.5 billion, around
five times its annual revenues, the
business middleware firm became a
dim memory, even in the software
industry. But in December 2000,
when its shares hit an all-time high
of $85, BEA had been a poster child
for the dot-com bubble. In a series of
perfectly timed sales of founder’s
shares, Warburg Pincus, the Wall
Street private equity firm that had
assembled BEA from several Unix-
based spare parts a few years before,
made approximately $6.4 billion on
a $54 million investment.
The venture capitalist behind
the deal was William H. Janeway.
And in his book Doing Capitalism in
the Innovation Economy: Markets,
Speculation, and the State, he tells
the story of how he did it. That’s fas-
cinating in itself, but more interest-
ing still is how he explains the eco-
nomics that permitted the feat.
Janeway is not just another suc-
cessful businessman. The valedic-
torian of his class at Princeton Uni-
versity, in 1965 he went off to
Cambridge University as a Marshall
Scholar. Janeway planned an aca-
demic career in economics, but his
literary dissertation (on the econom-
ic policies of the U.K.’s Labor gov-
ernment of 1929–31) placed him
on the sidelines of a discipline that
“was then accelerating its transition
to formal methods, mathematical
The Org is as factual and
ambiguous and sane and irrational
as the diverse orgs it surveys.
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models, and quantitative tech-
niques.” So after earning his Ph.D.,
Janeway joined a small Wall Street
firm instead. Forty years later, with
Doing Capitalism, he has returned to
his first love.
The first half of Janeway’s book
is semiautobiographical, a vivid tour
of the transformations that he wit-
nessed following the deregulation
on Wall Street after May Day 1975.
This was when traditional invest-
ment banking, heavily influenced by
the experience of the Great Depres-
sion and protected from competi-
tion, gave way to a period of pell-
mell innovation that ultimately
produced the financial crisis of
2008. It retraces Wall Street’s grad-
ual discovery of the computer and
the Internet, taking the reader to
school on every deal, good and bad,
until the story of BEA provides a
thrilling climax—a $120 to $1 pay-
out that is about as good as it gets in
the venture capitalist’s world.
The second half of the book is a
lucid meditation on the inevitability
of financial bubbles and the large
losses they entail. Over the years,
Janeway spent his evenings reading
Marx, Keynes, Schumpeter, and
Fernand Braudel, a French histor-
ian. He became a board colleague
and friend of Hyman Minsky, the
Levy Institute guru whose financial
instability hypothesis motivated
Charles P. Kindleberger to write
Manias, Panics, and Crashes: A His-
tory of Financial Crises (Basic Books,
1978). Janeway also immersed him-
self in the history of technology, es-
pecially the work of Carlota Perez.
Out of this cauldron comes
Janeway’s overarching argument, as
reflected in the book’s subtitle, Mar-
kets, Speculation, and the State: Eco-
nomic growth over the past 250
years is best understood as the prod-
uct of a “three-player game.” In this
game, the market economy and the
state compete to direct the alloca-
tion of resources to new technolo-
gies—to canals and waterpower in
one century, to steam and electricity
in the next, and to computers after
that. Financial capitalism, the third
player, which includes bankers of ev-
ery sort, exploits the discontinuities
that inevitably arise from such fo-
cused investment. Then investors
pile in, bubbles occur, crashes ensue,
and a new economy is assembled,
partly from the detritus of the binge.
Thus, according to Janeway, bubbles
are the necessary drivers of econom-
ic progress, and financiers are the
nurturers of growth, providing not
just capital but crucial know-how.
BEA is a perfect example of how
Janeway’s three-player game un-
folds. The U.S. Defense Depart-
ment funded the basic research that
brought the Internet into existence.
AT&T built the key technology, the
Unix computer operating system,
but was unable to take advantage of
its single most valuable asset once its
monopoly was broken up. IBM, un-
willing to cannibalize its proprietary
products in order to enter the new
world of open systems, retreated at
a key moment. So Warburg Pincus
and its managers were able to enter
the fray, cobbling together a new
company to meet a demand at just
the right time and selling it to inves-
tors. Larry Ellison then picked up
BEA after the bubble burst, and
folded it into his company, Oracle.
This narrative may be the right
way to think about the last 40 years,
but Janeway acknowledges that the
three-player game is not standard
economics. That isn’t stopping him
from predicting that the “low-car-
bon economy” will be the “next new
economy.” Nor is it stopping him
from seeking to inflate the bubble
that new economy could create by
positioning climate change as an ex-
ternal threat equal to Communism
in the 20th century, and by suggest-
ing that we turn energy policy into
“the economic equivalent of war.”
And so the three-player game begins
again. +
David Warsh
warsh@comcast.net
is the proprietor of www.economic
principals.com, an independent economics
journalism site. He covered economics
for the Boston Globe for 22 years and is a
two-time winner of financial journalism’s
Gerald Loeb Award.
Bubbles are the necessary drivers
of economic progress, and financiers
are the nurturers of growth.
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Many-to-Many
Manufacturing
by Tom Igoe

Makers: The New Industrial
Revolution, by Chris Anderson,
Crown Business, 2012
I
f you’re looking for the future
of manufacturing, Chris An-
derson, former editor-in-chief
of Wired, would have you check the
garage. In his latest book, Makers:
The New Industrial Revolution, An-
derson describes how inexpensive
and increasingly sophisticated digi-
tal fabrication tools, a growing cul-
ture of do-it-yourself enthusiasts
raised on the Internet, and the
spread of open intellectual property
practices are ushering in a new in-
dustrial revolution.
What will this revolution look
like? If Anderson is right, manufac-
turing is seeing the beginning of a
change that is analogous to the
change already well under way in
the media sector, in which large
broadcasters—few-to-many content
providers—now share their markets
with many-to-many content provid-
ers, such as app designers and e-book
publishers.
Makers builds on the premise
of Anderson’s first book, The Long
Tail: Why the Future of Business Is
Selling Less of More (Hyperion,
2006). In The Long Tail, he argued
that although the highly networked
digital economy might appear to
be dominated by a few large players,
a wealth of opportunity exists for
small players because such an econ-
omy does not require distribution
scale to reach the ends of the de-
mand curve. These opportunities,
Anderson contends in his new book,
are supporting the rise of the
“maker” movement and changing
the face of manufacturing.
The maker movement is native
to the Internet, over which weekend
tinkerers share plans and post tutori-
als in online forums. Fueled by
websites like Instructables.com and
publications like Make magazine,
makers are not only making things
for themselves and for their friends
and colleagues, but also starting
businesses that sell components,
kits, and finished products.
Several maker businesses have
become multimillion-dollar compa-
nies in recent years. Anderson cites
SparkFun, an electronics compo-
nent manufacturer with annual rev-
enues around US$30 million; Mak-
erBot, a 3D printer maker that has
attracted $10 million from investors,
including Amazon’s Jeff Bezos; and
3D Robotics, which was poised to
achieve more than $5 million in
sales by the end of 2012. He offers
no growth predictions for the maker
movement, but clearly he is betting
on it: In November 2012, Anderson
left his job at Wired to be the full-
time CEO of 3D Robotics, which
he cofounded.
What’s different about maker
companies, says Anderson, is that
they regard their customers as par-
ticipants in the business. For in-
stance, they publish the plans for
their products online, because they
know that eager customers will offer
improvements. Some companies,
such as 3D Robotics, reward or hire
these customers for their contribu-
tions. Anderson’s description of how
his company integrates customers’
work is one of the stronger chapters
in the book, and a useful read for
any executive who wants to make
community more than a buzzword.
Distributed knowledge isn’t the
only factor contributing to the
growth of the maker movement. In-
expensive digital fabrication tools
have played a huge role, and now
makers are beginning to make their
own 3D printers, laser cutters, and
robot mills (see “A Strategist’s Guide
to Digital Fabrication,” by Tom Igoe
and Catarina Mota, s+b, Autumn
2011). Of course, they’re sharing
the plans for these new tools online
as well.
The impact of these develop-
ments on manufacturing could be
significant. Launching a successful
manufacturing company no longer
requires reaching a mass market,
as long as you can reach the right
customers, wherever they are.
Crowdfunding, through presales on
such sites as Kickstarter.com and
Launcht.com, is making it possible
for manufacturing startups to raise
their initial capital without selling
ownership stakes to venture capital-
ists. Online marketplaces—for ex-
ample, Etsy.com and Fab.com—are
giving unknown designers a greater
ability to reach their target audienc-
es, and supplier aggregators such as
MFG.com and Alibaba.com make it
possible for a garage shop to work
with vendors around the world.
Anderson recognizes that the
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Skill or Luck?
by David K. Hurst

The Success Equation:
Untangling Skill and Luck in
Business, Sports, and Investing,
by Michael J. Mauboussin,
Harvard Business Review
Press, 2012
H
umans are compulsive
makers of meaning. The
notion that the universe
is random and that our activities
might be insignificant is profoundly
disturbing to us. So we construct
webs of cause and effect to explain
events and reassure ourselves that we
are in charge of our lives. In doing
so, says Michael J. Mauboussin,
chief investment strategist at Legg
Mason Capital Management, we of-
ten confuse skill and luck, setting
ourselves up for future failures.
Mauboussin’s new book, The
Success Equation: Untangling Skill
and Luck in Business, Sports, and In-
vesting, aims to help us untangle the
two. It offers this rough-and-ready
test for discerning the difference be-
tween skill and luck in any given
event: Ask yourself if you can lose on
purpose. If you can, skill is involved;
if you can’t, it’s pure luck. For a more
mathematical assessment, figure out
the correlation between a supposed
cause and its effect. If the correlation
is high, the cause is likely related to a
skill, and a good process will usually
have a good outcome. If the correla-
tion is low, luck plays a larger role in
the outcome, and a good process
will produce good results only over
time—a feature of the investment
field, where luck features promi-
nently in short-term results.
Statistics play a large role in the
book, but as its subtitle promises,
Mauboussin illuminates the math
with stories from business, sports,
and investing. The first three chap-
ters explain why even the most so-
phisticated researchers can have a
hard time distinguishing between
luck and skill. The results of obser-
vational studies in medical research,
for example, are either false or sig-
nificantly exaggerated more than 80
percent of the time. More rigorous,
randomized studies prove to be
more valid, but even their results are
flawed 25 percent of the time.
In the next four chapters, Mau-
boussin discusses the analytical tools
required to distinguish skill from
luck and to better understand the
“arc of skill,” that is, how skill de-
clines over time. He predicts that
outfielder Jayson Werth, who, in
2011 at age 31, received a US$126
million, seven-year contract from
the Washington Nationals, will
prove a poor investment: The per-
formance of baseball players peaks
when they are between the ages of
27 and 29, and declines thereafter.
Similarly, statistical analysis offers
clear evidence that corporate perfor-
world of makers isn’t a utopia. Yes,
makers create jobs. But, he notes,
“It’s actually more correct to say that
small businesses destroy a lot of jobs
that they create, since most small
businesses fail before their third
year.” A global network of small sup-
pliers is likewise fragile. Its transport
infrastructure is subject to the
whims of an increasingly volatile cli-
mate and political upheavals, and
small companies don’t have the pull
that large ones do to put pressure on
their shippers when things go wrong.
What makes this situation work
for small businesses is not that it’s
perfect, but that it’s good enough.
If part of their infrastructure fails
them, they innovate to get around it.
It’s the momentum, not the stability,
that Anderson is banking on to cre-
ate growth.
To avoid disruptions, large
manufacturers would do well to
keep an eye on the maker move-
ment. “General Motors and General
Electric aren’t going away,” says
Chris Anderson, “but then again,
neither did AT&T and BT when
the Web arose.” Telecommunica-
tions companies are now platforms
for many-to-many communication
and for innovation. Small Internet
service providers are their custom-
ers, not their competitors. It’s a good
lesson for manufacturers: Those
companies that see themselves as
platforms for innovation will do best
in a many-to-many market. +
Tom Igoe
tom.igoe@nyu.edu
is an associate professor at New York
University’s Interactive Telecommunica-
tions Program (NYU-ITP) and is co-creator
of Arduino LLC, an open source micro-
controller development platform. He is the
coauthor of Physical Computing: Sensing
and Controlling the Physical World with
Computers (with Dan O’Sullivan, Thomson,
2004) and author of Making Things Talk
(O’Reilly Media, 2007).
Mauboussin’s new book offers this
test: Ask yourself if you can lose on
purpose. If you can, skill is involved;
if you can’t, it’s pure luck.
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mance follows a predictable life cy-
cle, falling prey to organizational
rigidities as companies age.
In the book’s last four chapters,
Mauboussin makes practical recom-
mendations for business leaders. For
example, managers should make
sure that their statistics are reliable
and valid. He notes that 70 percent
of companies don’t know if their
nonfinancial measures are stable
and predictive of the outcomes they
want. They should also be aware of
reversion to the mean. When an ac-
tivity is a mixture of luck and skill,
extreme performances, either good
or bad, tend to be followed by less
extreme ones—hence, they tend to
revert to the mean. So, if you praise
someone for a good performance
and his subsequent performance de-
clines or if you criticize someone for
a bad performance and he improves,
you might conclude that your inter-
vention had been counterproductive
in the former case and beneficial in
the latter. And you could be wrong
in both cases!
Mauboussin goes on to advise
leaders to match their improvement
technique to the situation. When
skill plays a large role in an activity,
you can affect outcomes with delib-
erate practice and timely, specific
feedback. When luck predominates,
however, you should concentrate on
the process to ensure acceptable re-
sults over the long run. Use check-
lists to help focus attention on the
process and ensure that it is fol-
lowed. Moreover, leaders should
choose their competitive responses
based on their strength relative to
their opponent’s in a specific situa-
tion. When you are stronger than
your opponent, restrict the number
and variety of encounters, and keep
the game simple. When you are
weaker, increase the number of en-
counters and complicate the game.
These ideas may already be fa-
miliar to some readers; indeed, there
is little in The Success Equation that
has not been said before in other
works. (The book also gives no
“equation” for success.) Neverthe-
less, the clarity of Mauboussin’s
writing and the quality of the ex-
amples make the book a worthy ad-
dition to the managerial library. +
David K. Hurst
david@davidkhurst.com
is a contributing editor of s+b. His latest
book is The New Ecology of Leadership:
Business Mastery in a Chaotic World
(Columbia Business School Publishing,
2012).
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Title: Bottom-Up Corporate
Governance
Authors: Augustin Landier
(Toulouse School of Economics),
Julien Sauvagnat (Toulouse School
of Economics), David Sraer
(Princeton University), and
David Thesmar (HEC Paris)
Publisher: Review of Finance,
vol. 17, no. 1
Date Published: January 2013
Need new evidence on the value of
speaking truth to power? According
to a recent study, firms with more
“independent” top executives—
those appointed before the current
CEO took over—exhibit superior
decision making, see better returns
following large acquisitions, and post
higher profits. The study’s authors
say the implication is clear: These
leaders can act as a powerful counter-
balance to and disciplining force on
their CEO, irrespective of organiza-
tion hierarchy.
Previous research has shown that
in the absence of effective monitor-
ing, CEOs often engage in self-inter-
ested strategies that prove damaging
to shareholders. The consensus rec-
ommendation has been to install
strong boards of directors. But evi-
dence that independent boards boost
performance is lacking. Not so with
independence in the executive suite,
which this paper finds is a “strong
predictor” of positive performance.
The authors looked at five data
sets collected between 1992 and
2009 that covered some 1,850 of the
largest U.S. corporations each year.
They calculated how many high-
ranking subordinates came aboard
after the then current CEO’s ap-
pointment, reasoning that these ex-
ecutives would be more disposed to
share their leader’s outlook, and less
likely to challenge him or her, than
those who worked under a predeces-
sor. Controlling for a variety of fac-
tors, they found that even the small-
est uptick in the nonindependence of
executives caused a decrease in the
firm’s annual return on assets of be-
tween 0.5 and 0.8 percentage points.
The authors also examined all
acquisitions above US$300 million.
Although acquisitions, on average,
led to decreases in shareholder value
for the companies in the study, firms
with fewer independent top subordi-
nates fared much worse, losing about
45 percent four years after they made
an acquisition, almost triple the 16
percent loss posted by firms with
more of those executives.
The authors explain that CEOs
typically interact with members of
the executive suite daily, in contrast
to their dealings with board mem-
bers, who meet infrequently—mean-
ing that CEOs must continually
weigh their subordinates’ opinions.
Through that steady connection, in-
dependent subordinates can subtly
affect their firm’s strategic direction.
Because of the value of such
“bottom-up governance,” the au-
thors write, “the human resource role
of the board should not be limited
to the usually emphasized CEO
succession problem, but should also
be concerned with the choice of key
executives.”
Bottom Line: Having a high number
of independent senior leaders is an
effective way to keep the CEO on
a tighter leash and produce better
returns. +
The Power of “Independent”
Senior Executives
Top leaders appointed by previous CEOs can help rein in the incumbent.

BY MATT PALMQUIST
s+b Recent Research Online
See more coverage of research papers—
including our complete archive—at
strategy-business.com/recent_research.
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A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
REDEFINING CAPITAL:
HOW GE CAPITAL SHARES
GE INSIGHTS AND EXPERTISE
TO HELP ITS CUSTOMERS
BUILD BETTER BUSINESSES
The latest frontier in knowledge management is to
not merely manage knowledge internally but externally
as well. The best organizations share knowledge with
their customers by providing the tools, processes,
metrics, and other techniques they need to help grow
their business. It seems counterintuitive, but these
companies seek to give away some of their best
ideas—unique and often proprietary insights—under the
rationale that it’s not what you know that truly matters,
it’s what your customer knows.
That said, external knowledge management is a
challenge. How do you share what you know with your
customers? How do you step outside your role as a
service provider and become an integral part of your
client’s business? GE Capital offers a case study in how
to make it happen.
Access GE
Access GE is the company’s initiative in customer-
oriented knowledge management. The program
connects the customers of GE Capital—mostly fast-
growing midsized companies—with the knowledge
and expertise from all corners of GE. Essentially, GE
Capital’s relationship managers sit down with their
clients and say, “Here’s what we know—now how can
that knowledge help your company? Or, What are your
challenges to success so we can see how else we can
help your business?” It’s part of GE Capital’s ongoing
T
he idea of knowledge management has been around for more than a decade,
and like many ideas, it has morphed over time. However, the basic principle—that
in an information economy, ideas and expertise are the real high-value assets—
becomes more valid with each passing year. GE is a pioneer in knowledge sharing, which
is how a company that has operations spanning a range of sectors, from aviation to
medical equipment to consumer goods and finance, can thrive. Similarly, career paths
at GE often span business units, markets, and functions, as a way to ensure that the
best ideas spread.
A1
A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
and the channels through which they want to receive
that information. GE Capital provides a sampling of key
content offerings from the portal and offers them on
a free Access GE app, which is available on both the
Apple and Android platforms.
The Access GE portal includes several categories
of content—all vetted by senior leaders within GE. The
vetting process itself reflects the commitment to this
program at the highest levels of GE management.
The first content category contains internal material
from GE, including intelligence and data on specific
geographic markets and industries, along with
white papers, case studies, diagnostic tools and
assessments, Webinars, and videos.
The second content category contains externally-
sourced thought leadership material from GE Capital’s
highly-valued partnerships including Booz & Company,
Harvard Business Review, McKinsey & Company,
Deloitte, the Economist Intelligence Unit, and others.
All are indexed and fully searchable by topic. These
effort to be more than a finance provider for its clients.
As the company puts it, “We’re not just bankers, we’re
builders.”
This has long happened within GE Capital on
an informal level. The engagements were driven
primarily by the GE Capital sales staff and designated
leaders in specific markets, but there was no central,
comprehensive database of experts encompassing all
areas of GE. There also wasn’t a way for customers to
access any of the information themselves.
So a few years ago, the company began making this
process far more systematic and formal, to allow for
scale across GE businesses and geographies. After all,
if internal knowledge management requires dedicated
efforts and resources—along with specific mechanisms
to foster collaboration—external knowledge
management with customers should as well.
The result is Access GE, which turns knowledge
management around and considers business-critical
insights from the customer’s perspective. What are the
most salient issues that midsized companies wrestle
with? For some organizations, it could be entering
new markets, or segmenting customer prospects. For
others, it could be hiring, retaining, and developing
talent. For still others it could be reducing costs,
improving manufacturing processes, or strengthening
risk-management capabilities.
Access GE organizes those topics into four broad
areas where customer needs are greatest and GE
can offer the most impactful expertise: growth and
innovation, operational effectiveness, leadership
development, and finance best practices.
Channels are critical as well. GE still shares
knowledge with its GE Capital customers over the
phone or in face-to-face meetings, but advances in
technology allow new ways to tap into this expertise,
by offering access above and beyond the human
component. The latest Access GE offering is a web
portal, which gives clients access to more information
than ever before, in various formats: externally
sourced, internally sourced (i.e., material from experts
within GE), and personal interactions. It’s a buffet of
information, where GE Capital clients have multiple
options both in the areas they need the most help with,
The Access GE App, at app.accessge.com
A2
A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
A Composites Horizons technician tests a
component before it goes into the company’s
high-temperature autoclave
first two categories allow GE Capital customers to
“self-serve” from the buffet, by tapping into the
material that best addresses their needs.
The portal also offers access to more than 400 GE
experts, who work with GE Capital clients through
one-on-one consultations, and also offer broader
workshops or online community events. Last, the
portal includes a social networking component, so that
GE Capital clients can communicate directly with their
peers—other mid-market companies—in order to share
ideas, talk through specific issues, and brainstorm
solutions. (In that way, the portal is a platform for
fostering knowledge management among GE Capital’s
customers.)
Bottom line? Access GE represents a bold proposal
that GE Capital can win in the marketplace by helping
its clients win. Greater customer satisfaction among
GE Capital clients—along with improved business
results—will lead to stronger banking relationships, and
a banking experience that is different from anything
else out there in the mid-market space.
Perhaps the best illustration of how Access GE works
is to show how it has helped two specific companies.
Case Study: AIP Aerospace
AIP Aerospace is a mini-conglomerate of
manufacturers: five divisions spread across California,
Michigan, and Texas, with about $210 million in annual
sales. One of those divisions is Composites Horizons,
a company in Covina, California, that supplies aviation
components. As the name indicates, its specialty is
composites, or lightweight, high-temperature, high-
strength parts that have replaced metals in many areas
of commercial and military gas turbine engines. These
parts have extremely rigorous quality standards that
match the demand of today’s highest performance
engines. The temperature of the combustion chamber
in modern jet engines can approach 2,000 degrees
Celsius (or about 3,500 degrees Fahrenheit), and these
engines are rated to last several thousand hours before
requiring maintenance. High temperature composites
have found their way into these engines both upstream
of the combustor in the fan, and downstream in the
bypass and external exhaust structures.
For the past 20 years, Composites Horizons has
supplied GE’s aviation unit, where its products go
into the engines for aircraft like the F/A-18 military
jet, the Boeing 777, and the Boeing 787. About two
years ago, Composites Horizons had an opportunity
to expand that relationship. GE’s aviation unit was
about to stop manufacturing a critical engine part
internally, and it sought outside vendors to make the
part instead. Composites Horizons won the bid, which
was good news, but the contract also presented some
challenges due to the complexity of the component,
the variability of the materials involved, and the
significant demand for this part.
To prepare for this program, Composites Horizons
invested in new equipment, including an autoclave,
akin to a giant oven that can “bake” components
under high temperature and pressure, a necessary
step when working with polymers and other advanced
materials. The company used GE Capital to finance the
equipment, and the GE senior relationship manager
also realized that the expansion would require bringing
more electrical power into the facility. Composites
Horizons already had an order in place for the
electrical distribution panel, but GE sold a similar unit
(through its GE Energy division), which met the same
specifications yet cost 30 percent less. Composites
Horizons selected the GE product, which established
immediate credibility for GE Capital.
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A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
Access GE organizes knowledge by principal customer needs and sub-categories
CUSTOMER NEEDS ORGANIZATION FRAMEWORK
• Grow sales and explore new markets
• Manage costs
• Manage regulatory, market, and competitive dynamics
• Hire, develop, and retain talent
• Learn more about a market or industry
• Strengthen and grow my customer relationships
• Develop myself as a leader and build a strong team
• Plan and integrate a merger/acquisition
• Increase operational effectiveness and productivity
• Build a best-in-class finance function
GROWTH
OPERATIONAL
EFFECTIVENESS
LEADERSHIP
DEVELOPMENT
FINANCE BEST
PRACTICES
Organization
People &
Leadership
Operations
Management
Process
Improvement
Sourcing
Information
Technology
Innovation
M&A
Sales &
Marketing
Strategy
Financial
Planning
Investor
Relations &
Governance
Risk
Management
& Compliance
Treasury &
Investment
GLOBALIZATION
But the Access GE component was where the
relationship really accelerated. First, GE conducted an
energy audit, to ensure that Composites Horizons was
being as efficient as possible in its use of electricity,
water, and other resources. GE calls the process an
“Eco Treasure Hunt,” in that the goal is to identify
areas of savings that collectively add up to real value.
Some Eco Treasure Hunts have yielded millions in
annual savings.
Next, Composites Horizons needed some help with
its manufacturing processes. The new component
required advanced engineering and a series of
complex manufacturing steps. Early on, Composites
Horizons was having a hard time meeting demand.
“We knew we had some bottlenecks,” said Jeff
Hynes, president of Composites Horizons. “We were
struggling to produce seven units a month.”
Through the Access GE program, Composites
Horizons requested some help from GE regarding
lean manufacturing techniques, to identify and
eliminate any inefficiencies in the production process.
Composites Horizons had worked to implement
lean manufacturing in the past, dating all the way
back to 1999, and while those efforts had generated
some progress, they hadn’t really transformed the
company’s operations.
At GE, lean manufacturing is a major part of how the
company functions on a day-to-day basis. It has 3,000
employees who have earned the highest possible
lean certification, and nearly 30 years of experience
working with lean tools and techniques. As part of
the Access GE engagement, several GE experts in
lean manufacturing worked on-site with Composites
Horizons to analyze the way the new part was being
produced.
The problem? Composites Horizons hadn’t yet
standardized its manufacturing for the new part, which
had some tricky aspects. The company still had factory
workers shepherding the component through each
production step. “There’s a thermal process, a vacuum
process, and some other things, and it all has to
happen in a very specific sequence,” said Hynes. “That
meant we had a lot of dead time between steps.”
To change that, the GE team helped Composites
Once Composites Horizons reoriented its production process, it quickly went
from shipping seven units a month to 15, and downtime for the company’s
new equipment was reduced by 45 percent, from 18 hours to 10 hours per
month.
A4
A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
Ashley has more than 400 retail furniture stores
corporate finance, and leader of two units—U.S.
aerospace and defense specialty—puts it, “At GE, we
have a $50 billion commitment to the aviation market.
So I understand the needs of our clients. Customers
don’t have to explain to me what composite material
is. With other bankers, you’d have to start on page
one, but I’m already with you on page 50.”
These advantages have helped Composites
Horizons—and all of AIP Aerospace—significantly
increase its operational prowess. “For any U.S.-
based manufacturing company,” said Hynes, “if you
cannot be smarter in how you do things, it’s only a
matter of time before you’ll lose out to lower costs
overseas.” Access GE has been a critical part of that
improvement process.
Case Study: Ashley Furniture
Based in Arcadia, Wisconsin, Ashley Furniture has
grown from a small manufacturer specializing in
occasional tables and wall units to the number one
furniture retailer in the United States and the world’s
largest furniture manufacturer. With five production
facilities in the U.S., four overseas, and 470 owned and
licensed retail stores, the company has about $4 billion
in annual sales (up from just $900 million in 2000).
For the past two years, GE Capital’s Retail Finance
unit has been working with Ashley to help its
Horizons establish a standard work process for
the component, similar to an assembly line. They
identified each step, how long it should take, and
how the steps should be staggered to ensure that
the facility was operating at maximum capacity. The
team even implemented a Takt clock, a standard lean
technique that calibrates ideal production to actual
customer demand (instead of simply producing as
many units as possible, or as fast as possible), and
determines the right amount of time for each step.
Once Composites Horizons reoriented its production
process, the results showed up immediately. Instead
of struggling to ship seven units a month, Composites
Horizons quickly started shipping 15. And soon
thereafter, the company was on track to ship 20.
Not only is it now meeting its contract demands, it’s
also producing buffer stock for the U.S. military. At
the same time, downtime for the company’s new
equipment was reduced by 45 percent, from 18 hours
to 10 hours per month.
Composites Horizons now has a full-time
manager on staff who is solely responsible for lean
manufacturing techniques, with the title of “director
of continuous improvement.” That role has helped the
company improve its operations. “It’s become part of
the culture,” said Hynes.
Through Access GE, several other divisions within
AIP Aerospace tapped into GE’s institutional expertise
as well. One sought advice on how to improve machine
accuracy, through better calibration. GE Capital
even set up a meeting between a divisional CEO and
GE’s director of commercial aviation in China, to
discuss potential joint ventures in that market; those
conversations are still ongoing.
In a way, the aviation market is one of many sweet
spots for GE Capital, given the company’s expertise in
that industry. GE developed the first jet engine in the
U.S., and its products propel commercial and military
jets around the world. (One of its engines, the CF6,
first entered the market in 1971, and upgrades of that
engine are still in the air today, in planes like the Airbus
330 and Boeing 767; in all, the CF6 family has more
than 367 million flight hours.)
As Gib Bosworth, senior vice president at GE Capital,
Ashley is poised for a major global growth phase, which requires that it develop
current and future leaders to oversee the expansion. A key part of this is to
benchmark with organizations that have a strong reputation for developing leaders.
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A5
A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
customers finance their purchases. Recently, GE
launched several Access GE engagements with Ashley
primarily in leadership development. Ashley is poised
for a major global growth phase, which requires that
it develop current and future leaders to oversee the
expansion. A key part of this strategy is to benchmark
with outside organizations that have a strong
reputation for developing leaders.
GE takes leadership seriously and knows how
to cultivate those attributes in its people. Some
90 percent of the company’s top executives have
been promoted from within the organization. It was
voted one of the 20 Best Companies for Leadership
(Business Week 2011) and No. 1 Company for Leaders
(Forbes/Hay Group 2012). And its investments reflect
this emphasis: GE makes a significant investment in
employee training and development each year.
In January 2013, Todd Wanek, Ashley’s owner and
CEO, brought several executives from the company’s
HR, strategic planning, and continuous improvement
groups to GE’s Leadership Development Center in
Crotonville, N.Y., for a day-long session. The session
was led by Cynthia Tragge-Lakra, executive vice
president, human resources, GE Capital Retail Finance,
and it focused on GE’s leadership philosophy, the
organizational structure that supports it, and the
process that GE went through to make leadership
development a top priority.
The session was partly built around some existing
materials that GE uses to communicate these ideas
to its customers, but much of it was a closed-door,
frank discussion about GE’s successes and failures
in implementing similar measures. Overall, the
experience gave Ashley critical insights and some
clear first steps—develop an operational calendar
that defines specific objectives by month, solidify
organizational values, rebuild existing performance
management and succession planning programs.
Ashley prides itself on its heritage. Its mission
statement is straightforward—“We want to be the best
furniture company”—and its business model is built
on four pillars: quality, style, selection, and service. By
integrating these components into its performance
management, Ashley is now realigning its organization
and management methods on the expectations of
its customers: efficiency, speed, quality, and great
service, all at a great price.
Employee assessment was also a major part of
the discussion. Until then, Ashley had been using
relatively basic metrics to gauge performance—e.g.,
did the employee hit his or her operational goals for
the year?—with no explicit links into its values. That
approach worked at a basic level, as evidenced by
the company’s sales growth over the past decade,
but if Ashley was to succeed in the coming expansion
phase, it would need to establish some clear strategic
objectives and ensure that the entire organization was
growing in the same direction.
There was even an architectural component to the
session. Because Ashley is adapting to the challenges
of the 21st-century workforce, it is considering building
its own internal training center. To that end, Ashley’s
executives spent time studying the design of GE’s
Crotonville facility, including the ceiling height, type
of lighting, arrangement of desks around a central
recess in classroom floors, and other aspects. The
goal was to take away anything that would help create
an environment that’s more conducive to collaborative
learning, instead of the traditional lecture-style format.
Several months later, Ashley planned to bring back a
larger contingent to GE’s Crotonville facility—including
some of its retail store owners and operators—for
an expanded version of the session. Todd Wanek
explained, “Access GE has been a great resource for
us as we ramp up our own best practices in leadership
development.”
Conclusion
There are many other customer success
stories; Access GE completed more than 1,000
engagements with GE Capital clients in 2012 alone.
While they range across the four main areas of
expertise—operational effectiveness, growth and
innovation, leadership development, and finance
best practices—they’re all supported by a common
foundation that is sharing GE’s expertise, tools, and
insights to add value for GE Capital customers that
goes far beyond financing.
A6
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