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Summer 2016

SIEMENSS JOE KAESER THE INFLUENCE OF ANDY GROVE OUTSIDER CEOs

A CONTINENTAL SHIFT IN THE GLOBAL ECONOMY

strategy+business

A CONTINENTAL
SHIFT IN
THE GLOBAL
ECONOMY

83

Summer 2016
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YOUR BUSINESS
CHALLENGE IS THE
SUBJECT.

comment
editors letter
editors letter

Illustration by Lars Leetaru

Islands of Certainty
Even more than usual, I see a lot of
uncertainty in the news these days.
Nobody is sure whats going to happen next with the U.S. presidential
election, the European Union, or
Asian economies. And yet, as the articles in this issue remind us, there
are some aspects of the future we
can count on. The development may
not always be positive. But there are
islands of certainty that stand as
beacons to guide our way through
the murky swells of the unknown.
In the cover story, Global
Power Shift, Dennis Chesley, Miles
Everson, and John Garvey outline
three inevitable aspects of the future
that few are prepared for: an increasingly multipolar global economy led
by the U.S. and China, the continued evolution of state-controlled
corporations, and dramatic reactions as companies face technological disruption (page 44). One such
disruption is cyber-attacks, which
are certain to increase in both frequency and ferocity. But David Burg
and Tom Archer describe a related
certainty: the effectiveness of cloud
computing in preventing intrusion
(page 36).
We can be sure that the convergence of robotics, sensors, data ana-

sb83_001_Ed-Letter-fin.indd 1

lytics, and digital fabrication will


transform not just factories but the
entire global value chain. As Reinhard Geissbauer, Jesper Veds, and
Stefan Schrauf point out on page 86
in A Strategists Guide to Industry
4.0, this change will vastly increase
the capabilities of large organizations. (For example, exporters will
ship code, not goods, across national
boundaries.) On page 96, Joseph
Kaeser, the CEO of the industrial
giant Siemens, explains how this
wave of innovation is transforming
that influential enterprise.
Another certainty is the value
of user experience, especially for
employees. Expert Elizabeth Rosenzweig explains why (page 64), with
an added perspective from Dan
Bricklin (co-inventor of the spreadsheet) on page 68. There is also the
certainty of Moores Law, the doubling of computer power every two
years. On page 76, Jeffrey E. Garten,
the former dean of Yales school of
management, recounts the story of
Intel CEO Andy Grove. Grove, who
passed away in March, contributed
as much as anyone to this ongoing
enabler of economic vitality.
Elsewhere in this issue, Chunka
Mui, Toby Redshaw, and Olof

Pripp note that corporate boards


need technologically savvy directors (page 6). Luis Ballesteros and
Michael Useem suggest that corporations can play a greater role in
helping communities and nations
recover from crisis (page 16). Roger
L. Martin, Sally R. Osberg, and Jennifer Riel propose a powerful model
for social entrepreneurship exemplified by Nandan Nilekanis visionary
project: digital ID cards for every Indian (page 24). And Jorge Camarate,
Peter Hoijtink, and Miles Puttergill
offer an approach for building a
business presence in Africa (page 9).
This issue also contains our
annual report on the hiring and
tenure of global chief executives,
From the Outside In, by DeAnne
Aguirre, Per-Ola Karlsson, and Gary
L. Neilson (page 52). Theres one big
counterintuitive finding this year: a
rise in the percentage of new CEOs
hired from another company. Finally, we note with sadness the passing
of Joel Kurtzman, the founding editor of s+b, in early April.
Art Kleiner
Editor-in-Chief
kleiner_art@
strategy-business.com

4/14/16 11:08 AM

leading ideas
6

76

Your Next Board Member


Should Be a Geek
Chunka Mui, Toby Redshaw, and Olof Pripp
Why companies need directors with
technological expertise.

A New Map for Business in Africa


Jorge Camarate, Peter Hoijtink, and Miles Puttergill
On the worlds most diverse continent, companies
need a deep understanding of local context.

12

Social Network Effects


Laura W. Geller
Stanfords Adina Sterling on the pros and cons of relying
on relationships in the hiring process.

16

Corporate First Responders


Luis Ballesteros and Michael Useem
Even in wealthy countries, companies can play a vital
role in disaster relief.

19

16

Small Customer Today,


Revenue Giant Tomorrow
Namit Kapoor and Lavanya Manohar
A new segmentation strategy can help sales teams
identify their growth hot spots.

22

s+b Trend Watch: What Keeps CEOs


Up at Night?

essays
GLOBAL PERSPECTIVE

24

Social Entrepreneurship by
the Billions
Roger L. Martin, Sally R. Osberg, and Jennifer Riel
An audacious effort to provide digital ID numbers
throughout India illustrates the potential for
large-scale change.

INNOVATION

30

Will You Be Mine?


Joerg Krings, J. Neely, and Olaf Acker
As they look to enhance digital capabilities through
mergers and acquisitions, traditional companies have to
heed a new set of dating rules.
TECHNOLOGY

36

Safety in the Cloud


David Burg and Tom Archer
The next generation of cybersecurity prevents attacks
by monitoring online behavior of intruders, customers,
and everyone else.

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4/14/16 11:22 AM

features
44

GLOBAL PERSPECTIVE

THE THOUGHT LEADER

Global Power Shift

INTERVIEW

Dennis Chesley, Miles Everson, and John Garvey

96

Daniel Gross

Winners, losers, and strategies in the new world


economic order.

The CEO of Siemens describes


how an industrial powerhouse
founded in the 19th century
is using software, sensors, and
savvy to build a digital manufacturer that can thrive in the
21st century.

STRATEGY & LEADERSHIP

52

From the Outside In


DeAnne Aguirre, Per-Ola Karlsson,
and Gary L. Neilson
Faced with volatility, more companies are looking
beyond their own ranks to find new leadership.

55 CEO Turnover in 2015


57 2015: Not the Year of the Woman CEO

TECHNOLOGY

64

Beyond the Ninth


Circle of Help

BOOKS IN BRIEF

104

106

The Race Goes to the Grift


Nancy A. Nichols

108

Rocking the Bus


Mark Stahlman

110

Twilight of the Central Bankers


Zachary Karabell

To raise employee morale and productivity,


improve the design of your internal software.

Dan Bricklin

Boardroom Brawlers
Jill Priluck

Elizabeth Rosenzweig

67 How to Tell if Your Software Is Well Designed


68 Radical Intimacy and the Smartphone

Joseph Kaeser

END PAGE: RECENT RESEARCH

112

Whos the Boss?


Matt Palmquist
When companies are run by co-CEOs, sharing
power equally doesnt necessarily translate into
better results.

INNOVATION

76

Moores Lawman
Jeffrey E. Garten

Cover illustration by Otto Steininger

Intels Andy Grove pioneered high-stakes, highspeed, high-tech manufacturing and made the
computer age possible.
OPERATIONS & MANUFACTURING

86

A Strategists Guide
to Industry 4.0
Reinhard Geissbauer, Jesper Veds, and
Stefan Schrauf
Global businesses are about to integrate their
operations into a seamless digital whole, and
thereby change the world.

Issue 83, Summer 2016

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leading ideas

Leading
Ideas
Your Next
Board
Member
Should
Be a Geek
Why companies need
directors with
technological expertise.
by Chunka Mui, Toby Redshaw,
and Olof Pripp

magine that you were a major investor in a leading company, and


its board of directors had no
members with independent, worldclass financial expertise. Who
would look after your interests? You
could probably coach the directors
to ask good questions, but they
would lack the competence to judge
the answers. The board would not
be able to engage management in
robust conversations about the
complexities of capital structure,
mergers and acquisitions, financial

sb83_006-022_LeadingIdeas_fin.indd 6

accounting, reporting, regulatory


compliance, or risk management.
Most investors and regulators
would deem such a board unfit to
carry out its fiduciary guidance and
governance responsibilities.
Yet thats precisely where many
companies are when it comes to
information technology. Digitally
driven change is becoming as critical an issue to most companies as
finance. Companies are being called
on to reimagine and reconstruct every aspect of their business; customers, suppliers, and markets expect
no less. Consider, for example, the
rapidly expanding use of mobile
phones in retail and banking. Or
the changes foreseen in the transportation industry due to car-hailing algorithms and driverless vehicles. Already, one MIT study has
found that digitally adept companies are, on average, as much as 26
percent more profitable than their
competitors. And that advantage is
only likely to increase.
The boards of many large companies are ill-equipped for these
shifts. That was the conclusion of
our 2015 study of more than 1,000
nonexecutive and executive directors
at 112 of the largest publicly traded

companies in the United States and


Europe. By analyzing company filings and public information, we
found that all too many boards
lacked the expertise needed to understand how technology informs
strategy and affects execution. In
Europe, for example, 95 percent of
the companies we assessed, excluding
technology and telecommunications
companies, still had no non-executive directors with deep technology
fluency. In the United States, almost
half of the surveyed companies had
no technology expertise on their
boards. These included major financial-services, insurance, industrial,
and consumer products companies.
Yet each of those industries is grappling with complex strategic questions that hinge on technology.
Even boards with world-class
technology expertise can have blind

Illustration by Benoit Tardif, colagene.com

4/18/16 3:31 PM

sb83_006-022_LeadingIdeas_fin.indd 7

low are three critical steps you can


take to better prepare your company
for these challenges.
1. Hold out for sufficiently broad
and deep expertise. Although com-

pany leaders agree on the need to


attract technology-fluent directors,
they often approach the undertaking as an exercise in diversity. They
check the box by bringing in one
person to stand for the full technological field, rather than seeking
multiple directors with relevant experience and insight.
To assess the severity of this deficiency in the companies we studied, we analyzed the resumes of their
nonexecutive directors on four distinct aspects of technology: pureplay disruptive digital business, enterprise-level IT, cybersecurity, and
the digital transformation of Fortune 500sized enterprises. Each is
critical to boards oversight responsibilities, and fluency in each requires
a distinct body of knowledge and

having just one IT-savvy member is


problematic. To fill these seats, you
may have to reach beyond the traditional search targets of former
CEOs and CFOs. Tap into recent
CIOs, CTOs, and other C-level
leaders at successful informationintensive companies; retired military officers with large informationtechnology commands; and senior
consulting and private equity partners with deep cross-industry expertise in enterprise technology
transformations. Resist the urge to
rely solely on Silicon Valley experience. Startup experience is valuable,
but addresses just a small part of the
large enterprise technology challenge. Likewise, the move fast and
break things attitude in Silicon
Valley often does not translate well
to other industries.
When recruiting these board
members, be wary of candidates
without fresh experience; in fastmoving fields such as cybersecurity

leading ideas

spots in areas of strategic importance; these include analytics, cybersecurity, and digital fabrication.
And even experts who keep up with
particular technologies may miss
the general effects of rapid technologically driven change on core
products, business models, and customer preferences.
Many board members are aware
of these deficiencies. They know that
their companies will either embrace
technological change and claim the
markets of the future or be put out
of business. In 2015, a PwC global
survey of large-company directors
found that 85 percent of the respondents were dissatisfied with the way
their companies were anticipating
the competitive advantages enabled
by technology. Almost as many, 79
percent, said their boards did not
sufficiently understand technology.
The pervasiveness of the problem is troubling for anyone who
cares about these companies but
it also represents an enormous opportunity. At the board level, there is
a need for knowledgeable, incisive
geeks: independent directors with
experience and perspective in putting technology to use. In the past,
many boards have compensated by
relying on management or external
consultants for strategic advice. But
the stakes are now too high to take
that approach.
Boards can no longer duck the
responsibility for the companys digital transformation. They must take
real ownership by ensuring that they
are equipped to fully understand this
part of the board agenda. Otherwise, how can they adequately oversee their companys strategy, investments, and expense base? How can
they guide profitability, manage risk,
assess management performance,
and ensure proper talent supply? Be-

Resist the urge to rely on Silicon Valley


experience. Startup experience is valuable, but
addresses just a small part of the challenge.
experience. Few experts in enterprise-level value-chain IT could offer expert guidance on building disruptive digital business, and vice
versa. We found that more than 90
percent of the companies, including
technology and telecommunications
firms, lacked expertise in one or
more of these critical technology
areas. Our research revealed only
two companies that addressed all
areas: Google and Wells Fargo.
To address the gap, you must
open multiple board seats for people
with technological experience. Just
as having only one woman on a
board has proven to be insufficient,

or disruptive digital technology,


people who are no longer active
dont always keep up with the latest
trends. If executives in the business
sector are scarce, look elsewhere;
other sectors may be surprisingly
relevant. In financial services, for
example, understanding sophisticated process control is increasingly
important. The best prospective
board member may come from the
logistics industry from, say, FedEx or UPS.
2. Support robust discussions of
technology with the right kinds of
practices and management structures. There are two possible mech-

4/18/16 3:31 PM

sb83_006-022_LeadingIdeas_fin.indd 8

cade for example, big data and


analytics, cloud computing, mobile
technology, artificial intelligence,
the Internet of Things, and autonomous transportation and the
potential implications each has for
the company.
They must also have a clear
view of their own companys IT
landscape: their existing hardware
and software, including estimates
of redundancy, age, robustness, any
risk of obsolescence, and costs. For
example, how many marketing systems, customer databases, and human resource systems does the company have? How interoperable are
those systems? The need to ask these
types of questions about a factory or
back-office footprint would be obvious, but boards have generally neglected such inquiries regarding
technology. The board must also
understand risks related to technology, the defenses currently in play,
and any weaknesses in those defenses. Most important, the board
must understand how the companys IT systems relate to the companys overall strategy, and what capabilities are needed to support it.
It falls to the board to ensure
that the company has a multiyear
plan to address technology needs
while reducing costs and risk.
Boards need not grant a license to
spend. On the contrary, the hallmark of computers and networks is
that they continually get faster, better, and cheaper. These benefits accrue only to those with modern
gear, however, so frequent upgrades
are essential.
Finally, the board must incorporate its expanded technology context into larger deliberations. Talent
recruiting and leadership development should be designed to fill gaps
in technological fields. The critical-

ity of IT should inform the review


of proposed mergers and acquisitions. A close link to the audit committee is important because technology affects regulatory compliance
and ethical issues. And the relationship to full board strategy discussions is critical.
Of course, placing someone
with world-class technology expertise on a board does not guarantee
success. Many technically proficient
companies have lost to upstarts with
a better product or service. But without this expertise, boards cannot
play their most important role:
intervening with substantive conversations about strategic decisions
early enough to make a difference.
And without these focused conversations about technological investments and decisions, boards cannot
fulfill their fiduciary responsibilities.
Today, every board of directors
has a once-in-a-generation chance
to leapfrog the competition through
technology competency. The opportunity is great because the task is
difficult, and there is no large pool
of talent waiting to be recruited.
Those companies that meet this
challenge successfully will capture
the markets of the future. +
Reprint No. 16201

Chunka Mui
chunka.mui@devilsadvocategroup.com
is a business advisor and coauthor of
The New Killer Apps: How Large Companies
Can Out-Innovate Start-Ups (with Paul B.
Carroll; Cornerloft Press, 2013).
Toby Redshaw
toby@kevingtonadvisors.com
is CEO of Kevington Advisors and former
global chief information officer of Aviva
PLC and American Express.
Olof Pripp
olof.pripp@kornferry.com
is vice chairman, board and CEO services
EMEA, at Korn Ferry.

strategy+business issue 83

leading ideas
8

anisms for accomplishing suitably


robust discussions. The first is
to establish a formal technologyfocused subcommittee of the full
board, on par with other oversight
functions such as audit or compensation. This can be helpful in raising critical issues and promoting
deep discussion of complex topics.
It also creates a mechanism for engaging external advisors.
Alternatively, set up a technology advisory committee that meets
regularly with top management and
periodically reports to the board.
AT&T does this. It may be easier,
with such a committee, to attract
best-in-class expertise, given that
the time commitment is low and
there are no full fiduciary responsibilities. Typically, advisory committees can also rotate members more
frequently than a board can. It must
be remembered, however, that an
advisory committee reports to management, not the board. This can
and will color its advice.
Whatever the structure, it is important for this group to address topics that go beyond technology strategy and IT governance. The most
important priority may be enterprise
strategy and the ways in which technology makes new value propositions possible. FedEx, which is as
much a technology company as a
transportation icon, has used such a
board to great effect for many years.
3. Set the right context. Alan
Kay, one of the foremost pioneers in
personal computer conception and
design, once said, Point of view is
worth 80 IQ points. The context
with which your board of directors
views technology is a critical element for enterprise success. They
must collectively understand the 10
to 15 drivers of technology that have
taken quantum leaps in the past de-

4/18/16 3:38 PM

On the worlds most diverse continent, companies


need a deep understanding of local context.
by Jorge Camarate, Peter Hoijtink,
and Miles Puttergill

nly a few years ago, Africa


was being dubbed the next
Asia, and multinationals
watched with mounting interest as
local economies boomed across the
continent. Although a decline in
global commodity demand has since
ushered in a slowdown, Africa remains a promising long-term growth
market. Its GDP grew about 3.4
percent in 2015, a full percentage
point above the global growth rate,
and is expected to increase to 4.2
percent in 2016, according to World
Bank forecasts. The African Development Bank estimates that consumer spending will reach US$2.2
trillion by 2030 (up more than twofold from $680 billion in 2008). As
home to seven of the worlds megacities, and with 29 million youths
entering the labor force each year,
Africa is fertile ground for investment in such areas as infrastructure
and manufacturing.
These figures paint an optimistic picture of the continent as a
whole. But Africa is made up of 54
fully recognized sovereign states that
cover a vast range of natural ecosystems and an even vaster range of cultures, with some 2,000 languages
spoken. Unfortunately, weve seen
too many multinational corporations (MNCs) take their businesses
into Africa without a deep understanding of local market dynamics,

sb83_006-022_LeadingIdeas_fin.indd 9

skills, and conditions. They assume


that success is a sure thing, and, as a
result, their strategies turn out to be
too broad. They revolve around
growth projections rather than what
individual markets actually need.
Understanding distinctions is
critical. But it is equally important to
know where your own strengths lie
and to match these capabilities to the
circumstances of each local market,
or to know what capabilities you
need to succeed and find partners
that possess them. Either way, youll
also need to develop a network of local experts to execute your strategy

leading ideas

A New Map for


Business in Africa

help to think about groupings of


countries with comparable wealth
(measured by GDP per capita) and
institutional quality (measured by
the World Bank Doing Business Index). Based on these criteria, African
countries fall into six basic categories
(see map, next page). The first three
described below offer the most opportunity; the others tend to be
more challenging environments in
which to operate.
Countries with high income and
strong institutions have reliable ports,
roads, legal systems, police, and educational resources. They typically
have a sizable middle class, along
with a skilled workforce. Companies
with distinct capabilities that include world-class product, service,
and technological innovation; quality management; and branding and
marketing management can thrive
in these markets. For example,
South Africabased First National

Many multinational corporations assume


success in Africa is a sure thing, and, as a result,
their strategies turn out to be too broad.
on the ground. This is what companies that have established thriving
businesses in Africa have done.
Many are Africa-based companies
that have expanded throughout the
continent. MNCs based elsewhere
should learn from their experience.
Market Matchmaking

The companies that perform best in


Africa tend to target countries in
similar stages of economic development. The expertise that benefits
their operations in South Africa
would also do so in Botswana or Namibia, but wouldnt get them far in
Mali or the Democratic Republic of
the Congo (DRC). It can therefore

Bank has delivered impressive profits in Botswana, Namibia, and Swaziland, based largely on its innovations in such areas as mobile
applications and online banking.
Such features are popular in these
countries, where income is higher,
infrastructure is more robust, and
penetration of banking and mobile
phone services is greater than in
many other African countries.
Countries with high income and
weak institutions have pockets of
wealth, and therefore purchasing
power. But their lack of institutions
places greater demands on companies. They will need strong capabilities in managing relationships with

4/18/16 3:31 PM

Analysis of wealth and institutional strength reveals six basic categories.

Tunisia
Morocco
Algeria

Libya

Egypt

Western Sahara
(Morocco)
Mauritania
Mali
Senegal
Gambia
Guinea-Bissau
Guinea
Sierra Leone
Liberia
Ivory Coast

Sudan
Eritrea
Djibouti

Nigeria

Central
African
Republic

Gabon

Rwanda
Burundi
Angola
Zambia

Weak
institutions

High income

Botswana

South
Africa

Somalia

Uganda
Kenya

Tanzania

Malawi

Zimbabwe

Namibia

Middle income
Low income

Ethiopia

South
Sudan

Democratic
Republic of
the Congo

Congo

KEY

Strong
institutions

Chad

Burkina
Faso

Ghana
Togo
Benin
Cameroon
Equatorial
Guinea

10

Niger

Madagascar

Mozambique
Swaziland
Lesotho

Note: Map excludes the following island nations: Cape Verde, Comoros,
Mauritius, Sao Tome and Principe, and Seychelles.
Source: World Bank (2014 data on GDP per capita, at constant 2005 US$);
the World Bank's "Doing Business 2015" Index

government and other stakeholders,


planning for and managing security
challenges and crises, and creating
supply chain resilience to ensure
consistent service. Nigeria-based
Dangote Group, one of the largest
conglomerates in Africa, has built
deep relationships across the country that enable its divisions to set up
productive partnerships and agreements. Its cement division has benefited from this capability, while
ensuring the resilience of its supply
chain through vertical integration
from raw material sourcing to production and distribution.
Countries with middle income
and strong institutions have aspirational customers that demand premium products and services, but

sb83_006-022_LeadingIdeas_fin.indd 10

need them to be delivered at lower


price points. Cost leadership capabilities are thus critical, along with
cost management and low-cost service and product provision. Companies can also succeed in these
markets if they offer innovative
technology, especially at the distribution level, to help keep prices low.
The widely publicized success of
Kenyas Safaricom provides a powerful example. Safaricom pioneered
the M-Pesa mobile money system,
which uses a low-cost distribution
network to enable subscribers to set
up modest accounts with prepaid
sums, then make payments out of
the accounts via mobile phone. No
traditional bank account is needed.
In countries in the other three

categories the middle-income


markets with weak institutions and
the low-income markets with strong
or weak institutions companies
face more acute challenges. They
need to be able to operate with limited infrastructure, less efficient and
less transparent regulation, and lessskilled employees. A company going
into any of these markets has to excel at crisis management, as well as
end-to-end operations management
that ensures self-sufficiency and operational resilience.
For the most part, companies
enter these countries to extract resources, and mitigate risk as much
as possible through agreements and
contracts with the government, often supplemented by guarantees
from multilateral organizations such
as the World Bank. Other types of
companies that have expanded in
these countries are those highly
skilled at building and operating
every component of their business
independent of external support.
When the South Africabased retail
chain Shoprite built shopping centers in Uganda, for example, it essentially created its own infrastructure for its stores.
Think Global, Operate Local

Once a company has identified its


target markets, it will need the right
people on the ground to execute the
strategy. In many of Africas labor
markets, companies will have to develop talent with the skills needed to
run their local operations.
They should start by embedding a core team of home-country
experts to oversee the new business.
The 170-year-old South African financial-services firm Old Mutual,
for example, has subsidiaries in the
southern, western, and eastern parts
of Africa. In many of these regions,

strategy+business issue 83

leading ideas

Africas Markets

4/14/16 11:40 AM

sb83_006-022_LeadingIdeas_fin.indd 11

Africa development manager, the


company turns down 95 percent of
the deals it is pitched.
Sanlam Emerging Markets, a
South African financial-services
group founded in 1918, avoids competitive bids. The company prefers
to invest 18 to 36 months in establishing a trusted relationship with
a new partner and demonstrating
the unique benefits it can bring to
develop the partners business
including inviting management to
visit Sanlams operations in South
Africa. According to Heinie Werth,
CEO of Sanlam, the companys
2005 acquisition of African Life
Assurance Company was critical to
enabling its expansion. African Life
provided access to Botswana,
Ghana, Kenya, Tanzania, and Zambia, and focused on the low-cost
product offerings and mass-market
distribution that were missing at
Sanlam but essential to success in
these markets. Sanlam has since
built a direct interest in 11 countries
in the southern, western, and eastern regions of Africa (as well as in
India and Malaysia).
Finally, local subsidiaries wont
function well if policies and processes are ill-suited to their culture. But
as you loosen the reins, you must
ensure that you wont be exposed to
major failings of local judgment or
to ethics violations. Greg Davis,
CFO of Standard Bank, a leading
African bank with operations in
20 countries, attributes much of
the banks success in Africa to its
ability to strike a balance between
regional compliance and risk oversight, and its local empowerment of
decision makers. For instance, although the bank establishes a consistent corporate and investment
banking capability globally, it grants
country teams the autonomy to de-

velop and execute strategies tailored


to their own market.
Risk and Reward

As in all less-developed markets,


companies will face challenges as
they enter Africa. These might include local insurrections, underestimated costs, or overestimated consumer purchasing power. African
economies are highly volatile and
unpredictable, vulnerable to both
commodity price swings and political instability. GDP per capita in
Ghana has grown 106 percent during the last 25 years, whereas in the
DRC, it has fallen 39 percent over
that same period.
In the end, if you incorporate
your companys expertise with the
economic, institutional, social, and
infrastructural realities in local contexts, you can give yourself a competitive edge. Its a worthwhile risk,
because if you succeed you will find
yourself in an enviable position: You
could be an architect of one of the
early pan-African powerhouses. +

leading ideas

the company relies on a pool of expats with relevant qualifications and


experience for such functions as actuary work, an area in which local
talent is generally limited. These expats are selected as much for their
cultural agility as for their technical
skills, to ensure that they can connect with local employees.
It is important to invest heavily
in skills transfer. This often includes
both conducting on-the-ground
training and bringing local employees to the home office to understand
the firms culture and ways of working. After that, the challenge for
many successful companies is how
to prevent competitors from poaching their talent. They should develop
compelling value propositions for
local staff, including compensation
above the market average, additional
benefits such as pensions or housing,
career development opportunities,
and a sense of community.
Aside from developing a local
talent pool, companies can seek out
local businesses to partner with,
through mergers, joint ventures, or
simple supply arrangements. Theyll
need to clearly define what they
want from a potential partner, and
then evaluate candidates carefully
against these requirements. RCL
Foods, the leading South African
poultry producer, takes stakes in local product manufacturers and distribution networks that will benefit
from its cold-chain distribution
capability. But the company has
strict requirements regarding any
partners ethical reputation and
track record of teaming with international players. Its stringent criteria mean that RCL, which currently
has joint ventures in several countries, among them Zambia and Botswana, has to be patient. According
to Pierre Rossouw, RCLs Group

11

Reprint No. 16202

Jorge Camarate
jorge.camarate@strategyand.za.pwc.com
leads the financial-services practice
for the African continent for Strategy&,
PwCs strategy consulting business.
He is a partner with PwC South Africa in
Johannesburg.
Peter Hoijtink
peter.a.hoijtink@strategyand.nl.pwc.com
focuses on transformational strategies
for Strategy&. He is a director with PwC
Netherlands and is currently based in
Amsterdam. He was previously based in
Nairobi and Johannesburg.
Miles Puttergill
miles.puttergill@strategyand.za.pwc.com
specializes in strategy, M&A, and emerging
markets for Strategy&. He is a senior
manager with PwC South Africa, and is
based in Johannesburg.
This article is adapted from the authors
Strategy& white paper, Creating Value
in Africa, Nov. 2015.

4/14/16 11:40 AM

Stanfords Adina
Sterling on the pros
and cons of relying on
relationships in the
hiring process.
by Laura W. Geller

ob seekers are keenly


aware that who they know
matters. A friend at a prospective employer can push a resume to
the top of the pile, put in a good
word, or arrange an introductory
lunch. Companies, for their part, are
happy to oblige. Employee referrals
help them cut through the noise,
target searches, and save money.
Social networks play a positive
role in the hiring process. But what
can these useful connections tell us
about performance on the job? Does
the advantage of knowing someone
carry over once an individual joins a
firm? Adina Sterling has been asking these questions since transitioning from engineer to academic nearly a decade ago. Sterling had spent
five years with Procter & Gambles
global baby care and beauty care
R&D teams before leaving to pursue a Ph.D. in organization and
management. She joined the faculty
of Stanford Universitys Graduate
School of Business as an assistant
professor in the fall of 2015.
Sterling has found that the effects of peoples social networks on
their own career and on their organization are just as disparate as the

sb83_006-022_LeadingIdeas_fin.indd 12

S+B: You research social networks,


in the traditional sense.
STERLING: Everyone has a social

network. You can think of it as the


people that you know, your interactions with those individuals in terms
of frequency and duration, and the
way those people are connected to
one another. Sometimes we conflate
social networks and social media.
Social media allows us to keep up
with the people in our networks in
more efficient ways.
In graduate school, as I was exposed to research on social networks, I began to wonder about
their importance. I noticed there
was a lot in the literature about the
value of networks for finding jobs,
but not much about the impact
these networks have after people enter organizations.
For example, I worked at Procter & Gamble as an engineer for five
years prior to graduate school. I ended up with a great network, and I

wasnt sure how Im not a particularly gregarious person. I didnt


think that much about it at the time,
but I knew that having this network
was very beneficial to me in terms of
my career progression at the company. Later, I was able to trace my
network back to the very first person
I met in the interview process for an
internship when I was 18.
S+B: How are companies using
social networks to find talent?
STERLING: One of the main ways

companies are using social networks


in their recruiting efforts is the same
way they have for decades: They encourage their employees to refer
people who they know and think
are qualified for positions.
However, a variety of factors
have made social networks increasingly important. For one, firms
have had to become more creative
about how they search for and attract top talent because of the sheer
number of applicants. A few decades ago, recruiters could list a job
in a newspaper and get a few dozen
responses. Today a job can be posted on Monster.com, and within
two hours it could have several
hundred applicants.
In addition, younger workers

Adina Sterling

Photograph by Nancy Rothstein

leading ideas
12

Social
Network
Effects

networks themselves. As she explained to s+b in January 2016,


knowing someone at a new job can
help people quickly develop a strong
network, and it can help some people get promoted. Having personal
connections can also make candidates less likely to shop around a job
offer, and perhaps even less likely to
turn it down.
But in fields that have quantifiable measures of peoples quality (class rank, prestigious
appointments, sales data,
and so on), the positive
effects of knowing someone can disappear for
those not considered top
performers. And companies can
put diversity at risk by relying too
heavily on the Rolodexes of their
current staff.

4/18/16 3:31 PM

vetted someone, and made an offer,


and then that applicant shops it
around, trying to increase their salary from competing firms without
any intention of accepting the original offer.
I focused specifically on friendships between applicants and employees. I found through qualitative
interviews that managers believed
candidates with friends in the firm
were less likely to shop the offer
around and use it for leverage, because it would reflect poorly on their
friend. In a follow-up experiment, I
confirmed their suspicion: People
are less likely to hold on to offers
that they dont intend to keep if
their friends work at the company.
S+B: Besides expanding their
networks more organically, are there
other advantages for employees of
being hired through social networks?

STERLING: In a forthcoming study,

Jennifer Merluzzi of Tulane and I


looked at the effect of networks on
upward mobility or promotions. We
analyzed data from a large, private
employer on over 15,000 employees
and their post-hire promotion outcomes over an 11-year period. Weve
found that for African-American
employees, those who came in as referrals had more promotions than
those who did not.
Were still exploring the potential mechanisms behind this finding. That initial network might
provide greater access to new relationships within the company or
additional resources that enable
mobility. It could also be that when
someone comes into a company and
has been vouched for through the
referral process, it alleviates concerns about how that person is
going to perform. To the degree

leading ideas

today expect to work for companies


for shorter periods of time than
older employees do. Turnover is
also high in certain industries, like
technology. Most industry reports
cite the average tenure in tech as
under three years, with the average
tenure in some companies being
much lower. Firms are in the position of constantly looking for talent. Of course, this is made all the
more challenging by a shortage of
highly skilled labor in areas such as
engineering, IT, operations, marketing, and sales.
Companies have often tried to
address the war for talent by offering financial incentives. That sometimes works. But even when it does,
its costly to the firms bottom line.
Plus, a company can always be outbid by a competitor. Its important
to find alternative ways to recruit
and retain top candidates.

13

S+B: How can social relationships


help?
STERLING: I have found that know-

ing somebody in a company prior


to joining someone coming
through, for instance, a referral
helps people develop more robust
networks inside firms. As part of my
dissertation research, I surveyed
MBA students both before and after
they completed internships. Those
who knew somebody in the firm
prior to starting formed more network connections than those who
didnt start out with a connection.
This may be one reason that those
hired through a network connection
tend to stay with a company longer.
In another study, I researched
how networks can help managers
deal with the strategic behavior
of job seekers. Its problematic for
HR managers when theyve gone
through a long recruiting process,

sb83_006-022_LeadingIdeas_fin.indd 13

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4/14/16 11:40 AM

S+B: Are there any disadvantages


to relying on social networks?
STERLING: Oftentimes the net-

works we have are due to things


outside our control: the family we
are born into, where we went to
school, and so on. And then there
are those who feel uncomfortable
actively trying to expand their connections. Some people may end
up without a strong network for
these reasons, and find themselves at
a disadvantage.
But interestingly, I also found
that even the people whod prefer to
skip happy hour can still see their
network grow. It depends largely on
their field. For example, as Ive
mentioned, I found that for MBA
students who dont reveal their
grades to recruiters coming in
and knowing somebody affects how
large their network becomes.
Law school students, however,
have clear signals of quality for
example, class rank or serving on
prestigious law reviews. For lawyers,
I found that having a pre-entry contact didnt have a direct effect on the

networks they were able to form


once they started. Having that contact mattered to their network development only if they were known
to be good coming in in this
study, being good was defined as being in the top 20 percent of their law
school class. If they lacked this signal, it appears the people they knew
prior to starting were less willing to
help them establish connections
within the company.
For companies, meanwhile, using networks to hire whether its
using a referral program in the traditional sense or using social media
to cull contacts from current employees can have a potentially
serious drawback. Our networks
tend to connect us to people who
are like us on intellectual and social dimensions. Its possible that
employers can over-recruit through
their employees networks, leading
to a lack of intellectual diversity or
diversity on other bases. And of
course this is problematic, because
having different perspectives is critical for creative problem solving,
innovation, and resisting a groupthink mentality.
S+B: Can companies tap into some
of the advantages of using networks
while avoiding the pitfalls?
STERLING: This question is moti-

vating a new set of projects Im


working on about so-called trial employment. Generally we can think
of a trial as a tryout period, through
which a firm gets a first look at
somebody prior to hiring him or her
full-time; Im specifically studying
internships. In one study, Im using
personnel records from a large em-

: Meet the next generation of business thought leaders


at strategy-business.com/youngprofs.

sb83_006-022_LeadingIdeas_fin.indd 14

ployer to investigate employee performance, comparing those hired


through an internship, a referral, or
a traditional, more formal method.
It appears that those hired through
internships perform better on key
metrics such as retention and promotions. I am not able to show with
my current data that the trial experience itself causally affects performance. But just the existence of a
correlation is important.
Why is that the case? Companies assume that networks matter
to hiring because they provide richer channels of information to the
employer about an applicant. If tryouts also perform this function,
companies can recruit people with
greater levels of known information
without going through employee
networks. Although my research
stops short of proving implications
for diversity, I believe that it could
show some differences versus network recruiting. And in fact Im
working on projects with this hypothesis in mind right now.
Tryouts hold potential benefits
for employees as well. For example,
consider parents of young children
who exited the workforce for a few
years. Their professional network
has likely atrophied during their
time away, and theyre probably not
going to get the same employment
opportunities that they would have
with a robust network. If a company were to offer a tryout to these
prospective employees, it could help
them get back into the workforce
more quickly. And companies
might find a new, largely untapped
source of talent. +
Reprint No. 16203

Laura W. Geller
geller_laura@strategy-business.com
is senior editor of strategy+business.

strategy+business issue 83

leading ideas
14

that research (for example, in a paper published by MITs Emilio


Castillo in 2008) has shown that
African-Americans might not receive the same promotion opportunities as majority members in organizations, having that referral may
provide a sort of stamp of quality.
Lastly, it could be that those with
referrals are just better on some unobserved dimension than others.
We cannot assume or rule out any
of these possibilities with our current data, but its a fascinating subject for future research.

4/14/16 11:40 AM

EXECUTIVE
EDUCATION

I came to Wharton to network and


reflect on where I wanted to go next, but
Ive gotten much more than that. The
experiential training was a very unique
experience. The way it was structured,
with leadership concepts woven into
the whole experience, was fantastic.
NEEL MUTHUKUMAR
Global Head of Corporate Finance,
Olam International Ltd., Singapore

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4/15/16 10:34 AM

Even in wealthy countries, companies can play


a vital role in disaster relief.
by Luis Ballesteros and
Michael Useem

16

hat happens when governments lack the resources to respond immediately to a natural disaster?
When Japan was struck by a 9.0
magnitude earthquake and 100foot tsunami in 2011, it was the
worlds third-richest economy. But
at the time, the countrys public
debt stood at more than twice the
level of its GDP, and its real interest
rates were negative. Japans leaders
found themselves with little in their
economic arsenal to quickly draw
down for emergency assistance. In
the months after the disaster,
national production faltered, Japans supply of goods contracted by
an estimated 20 percent, and the
countrys stock market and credit
rating plummeted.
Weve seen similar scenarios in
Italy, after the LAquila earthquake
in 2009; in New Zealand, after the
Christchurch earthquake in 2011;
and in the U.S., after Superstorm
Sandy in 2012. All three were developed nations that, most experts assumed, could self-finance their recovery. Yet each suffered deeply
when disaster struck and outstripped
its state capacities.
In a recent study of these and
other low-probability, high-magnitude disasters calamitous black
swans during the previous two
decades, we found that business has

sb83_006-022_LeadingIdeas_fin.indd 16

increasingly filled the recovery gap.


The data shows a convergence
among three areas: unmet high social recovery costs in many developed countries after a disaster;
companies strategic decisions regarding aid; and the effectiveness
and speed of aid delivery. Companies have been able to serve as a
critical and effective stopgap in the
aftermath of black swans in nations
where the suffering is real but the
vulnerability is underestimated or
even obscured.
The Fragility Factor

In five of the worlds largest natural


disasters during the past five years,
companies gave more aid than foreign governments, multilateral agencies, nongovernment organizations,
and private individuals combined.

In five of the worlds largest natural disasters


in the past five years, companies gave more aid
than foreign governments, multilateral agencies,
NGOs, and private individuals combined.
Japans 2011 earthquake, for instance, attracted an outpouring of
donations from corporations that accounted for 58 percent of total aid.
Of course, taken at face value,
this type of corporate giving poses a
vexing problem. Companies are donating most frequently to wealthier
nations some 85 percent of corporate donations over the last 15
years have gone to higher-income

wake of a black swan is traditionally


assessed. The method of determining international aid for disaster recovery mimics the way public policy
for international aid typically functions. The decision-making process
for identifying national financial
vulnerability thus relies on criteria
such as a countrys GDP per capita.
As a result, during the last 30
years, the bulk of multilateral disas-

strategy+business issue 83

leading ideas

Corporate First
Responders

economies. These are typically nations where companies have strong


interests or operations, or where they
have a large customer base. Recent
studies in corporate philanthropy
have shown that the share of a firms
income from a given market is a
good predictor of its willingness to
foster social welfare in that market.
Yet we also know that close to
90 percent of the deaths associated
with natural disasters in the last
three decades have occurred in lowincome countries. Put more graphically: Nepal lost one inhabitant for
every 3,000 residents from its 7.8
magnitude earthquake in 2015,
whereas Japan lost one for every
10,000 from its 2011 disaster. In
contrast with the overwhelming
business response to Japans seismic
event, corporate disaster giving accounted for less than 5 percent of
Nepals international assistance.
This disparity naturally raises questions about whether corporate disaster relief is truly satisfying a global
social need.
To answer these questions, we
looked at how a countrys capacity to
finance relief and recovery in the

4/14/16 11:40 AM

Illustration by Tang Yau Hoong


sb83_006-022_LeadingIdeas_fin.indd 17

ture the complex aftermath of


major disasters. Broadly, a state has
three sources for funding disaster
response: government assistance,
private plans (such as insurance),

tional aid at the time of a disaster,


we calculated states financial capacity to respond. We then ranked
the 3,115 major disasters that occurred worldwide between 2003 and

leading ideas

ter aid has gone to low-income countries, such as Haiti after its 2010
earthquake or Nepal after its 2015
earthquake. (We are categorizing
countries using World Bank definitions; low-income nations have a
GNI per capita of US$1,045 or less.)
Middle-income economies (those
with a GNI per capita of between
$1,046 and $12,736) such as Chile
and Mexico received just 8 percent
of multilateral public disaster relief,
and high-income economies (those
with a GNI per capita of $12,737 or
more) such as Japan and the United
States, less than 2 percent.
But the well-documented struggles of developed countries to finance fast and efficient recovery
efforts have made clear that economic development is a poor indicator of social need; it fails to cap-

Economic development is a poor indicator


of social need; it fails to capture the complex
aftermath of major disasters.
and international aid (which includes aid from foreign governments, multilateral organizations
and NGOs, and individuals). The
first channel is made up of three
main instruments that a government can use to secure liquid resources after sudden shocks: debt,
deficit, and interest rates.
Using the total value of government aid, private plans, and interna-

2013 according to the magnitude


of the gap between this capacity
and the cost of a disaster what
we have termed state fragility to
black swans. The results defied commonly held assumptions: 87 percent
of the 150 disasters with the largest
gap occurred in medium- and highincome countries.
We next conducted a series of
econometric evaluations using data
on disaster giving and our ranking
of state fragility. The data set consisted of the reported international
contributions by firms, foundations, nonprofit organizations, foreign governments, and multilateral
agencies to relief and recovery of all
major natural disasters worldwide
from 2003 to 2013.
Our analysis revealed that corporate giving is more likely to be allocated to countries whose government is less able to supply essential
goods following so-called fat-tail
calamities. These states have high
fragility, but in many cases dont receive a large share of aid from traditional sources as a result of their
relative affluence. In short, corporate dollars may go to some higherincome countries, but those countries are the most financially vulnerable in the wake of a black swan.

17

Fast and Effective

As part of our study, we also sought


to determine the efficiency of com-

4/18/16 3:31 PM

corporate disaster giving (for example, removing debris, delivering supplies, and rebuilding schools) affects
recovery. The ratio of in-kind to
monetary giving varies across industries and countries. But our analyses
revealed that when at least 30 percent of post-disaster business assistance to a country comes in the

The entire system is in trouble: The inflationadjusted annual cost of natural disasters
worldwide nearly quintupled between 1980 and
2012, from $54 billion to $250 billion.
four post-disaster weeks than they
do when corporate intervention is
less than 5 percent of total aid. In
other words, when corporate aid has
arrived with substantial magnitude,
the assistance has reached the
ground faster.
This is significant, because
most experts on disaster management agree that the time that elapses between the occurrence of a
shock and the provision of essential
goods (water, food, medicine, and
housing, as well as the rapid restoration of such staples of the economic infrastructure as communication and transportation) largely
determines the degree of disruption. And studies on disaster risk
management suggest that whether a
natural shock morphs into a fullfledged catastrophe or not depends
greatly on the promptness of the
response. For example, consider the
impact of Hurricane Katrina on
New Orleans in 2005: The consequences of the hurricanes physical
destruction were made far worse by
the governments inability to quickly deliver relief to victims.
Another sign of the business
communitys ability to meet local
needs is the extent to which in-kind

sb83_006-022_LeadingIdeas_fin.indd 18

form of in-kind giving, residents receive disaster assistance 65 percent


faster than in statistically similar
countries with lower levels of corporate in-kind donations.
Finally, we found that corporate disaster giving does not crowd
out or replace international public
assistance. If a country that has experienced a disaster receives no international aid, its more likely that
businesses will donate there. But if
some amount (still insufficient for
recovery) of international aid is sent,
the likelihood of corporate giving
grows higher. The latter complements the former, rather than creating a substitution effect.
Fast and Effective

Our findings should not be interpreted as an argument for giving to


the rich at the expense of the poor.
Thats especially true because the
entire system is in trouble: The inflation-adjusted annual cost of natural disasters worldwide nearly quintupled between 1980 and 2012,
from $54 billion to $250 billion.
Public assistance now covers only a
median 5 percent of the cost of natural disasters globally. The costs of
calamities also can be expected to

rise because more people are living


in disaster-prone regions, such as the
ring of fire around the Pacific
Rim, with its earthquakes, tsunamis, and volcanoes. And many national governments now face rising
public indebtedness, making recovery increasingly challenging.
Theres no one answer to the
complex problem of responding to
these crises and their growing costs.
But its clear that business giving is
moving in a positive direction: In
2000, less than 30 percent of the
worlds largest multinationals engaged in some form of disaster giving, including cash, goods, services,
and sometimes even direct engagement in relief support and logistics.
By 2013, that figure had risen to
more than 90 percent.
Most big companies are now
giving, but all should consider giving more. Our findings suggest a
new way of thinking about disaster
relief that should inform corporate
social responsibility leaders. Financing recovery efforts in states illprepared to respond has become a
major challenge for the international community and one that corporate aid can help overcome. +
Reprint No. 16204

Luis Ballesteros
luisf@wharton.upenn.edu
is a doctoral candidate in management
at the University of Pennsylvanias Wharton
School.
Michael Useem
useem@wharton.upenn.edu
is a professor of management and the
director of the Leadership Center at the
Wharton School.

strategy+business issue 83

leading ideas
18

panies aid efforts. In our econometric evaluation, we found evidence


that when corporate giving makes
up at least 5 percent of total international aid after a disaster which
implies that firms are taking an especially active interest in a countrys
recovery recipients receive 37
percent more aid during the first

4/14/16 11:40 AM

A new segmentation strategy can help sales


teams identify their growth hot spots.
by Namit Kapoor and
Lavanya Manohar

Illustration by Tomasz Walenta

ost large companies rely


on bread-and-butter customers, those whose repeat
sales have long provided a steady
stream of revenue. But with each
new digital innovation, this model
loses some of its luster. Telecom
companies feeling price pressure
from over-the-top mobile players,
health insurance payors coping
with the spread of private health
exchanges and increased consumerization, and financial-services firms
facing the rise of fintechs are all reexamining their business models
and offerings.
The market is also changing for
tech firms. Cloud startups with their
growing customer base are rapidly
becoming a legitimate source of
competition. Incumbents are trying
to solve the problem by investing in
their own cloud offerings. But in
many cases such moves have not
been accompanied by a shift in the
sales strategy. Incumbents are still
segmenting almost exclusively by
value, which leads sales teams to
stack-rank customers on the basis
of revenues and operating margins.
Because the revenue model for software-as-a-service (SaaS) trades upfront license fees for a subscription
model whose fees are spread over
several years, SaaS customers arent

sb83_006-022_LeadingIdeas_fin.indd 19

identified as strategic priorities. Yet


many of these companies, although
small today, will likely become key
customers in the near future. By
placing them in the bottom tiers,
companies may be leaving millions
on the table.
With a new approach to segmentation, incumbents can find
their growth hot spots, those highpotential customers obscured by
more traditional methods. Sales
leaders need to consider two critical
but often overlooked factors when
assessing their current and future
customers: need and behavior.
When combined with value, these
indicators will reveal the customers
whose strategic direction and operating model come together in a way
that could make them huge sources
of revenue. Sales teams should then
tailor their deployment strategies toward these customers.
Although growth hot spots
might seem elusive, they are within
reach. After all, companies have access to unprecedented troves of rich
customer data. But in large firms,
this data is often spread among various business units sales, analytics,
marketing, and customer support
operating in silos. The units arent
sharing their information in a meaningful, integrated way. Thats a problem for incumbent tech firms as well
as for companies in other industries
facing an influx of online competi-

leading ideas

Small Customer
Today, Revenue
Giant Tomorrow

tors. The online players, which are


often more nimble and flush with
digital natives, are already embracing
these new segmentation strategies.
Smarter Segmentation

Small fixes wont be enough to help


incumbents identify the customers
they are missing. They need to rethink their approach to segmentation, moving beyond present-day
revenues and margins as the primary driver of their sales efforts.
The exhibit (next page) shows
how measuring customer need, value, and behavior reveals growth hot
spots. For each factor, companies
need to ask themselves a series of
qualitative and quantitative questions. Here, coordination among
functions is critical. By deploying a
standard technology platform across
all sales-related functions, businesses
can easily move data across different
organizational units. This provides
the backbone that sales leaders need
to collect, combine, and analyze a
wider variety of data in real time.
To determine customer need,
a company would consider questions such as these: What percentage
of the customers portfolio is covered
by our offerings? To what extent is
the customers buying portfolio
aligned with our future growth

19

4/14/16 11:40 AM

and making bets on products and


services? How regular and streamlined are account-level processes
such as payments and notifications?
Once companies have answered
these questions, they can calculate a
score for each customer using appropriate weighting for each dimension depending on a products lifecycle stage. Those customers that

Incumbents need to rethink segmentation,


moving beyond present-day revenues and
margins as the driver of sales efforts.
total opportunity from this customer? How important is this customer
to our share of wallet? Does the customer usually buy higher-value/
higher-margin goods and services?
And to measure behavior, companies should ask: How empowered
are the buyers (procurement reps,
product leads, etc.) to make forwardlooking product decisions? How
progressive is the customer leadership in identifying market trends
Exhibit: Growth Hot Spots

Sales teams should consider need, value, and


behavior when segmenting customers.

TIER 1A

VALUE

TIER 1B

HOT
SPOT

NEED
Source: Strategy&

sb83_006-022_LeadingIdeas_fin.indd 20

TIER 1
CUSTOMERS

rank high on both value and need


(typically about 10 percent of the
total customer base) make up the
growth hot spot; these should be
Tier 1 customers. Behavior then distinguishes two types of customers
within this tier.
The first group (Tier 1a) will be
easy to work with, because their way
of thinking and operating is already
aligned with your way of doing
business. For example, you may
have a customer whose growth strategy is closely aligned to the products
and services you sell. This same customer may be highly evolved in
terms of its ability to identify market trends. And it may be organized
such that purchasing decisions are
streamlined the procurement
team and product groups work together to buy as one unit.
Customers in the second group
(Tier 1b) are high in value and need,
but you will likely have to work with
them to modify some of their practices. Their procurement department may use external vendors that
have their own set of metrics, which
may or may not be aligned with
those of the business leaders using
your products. Or perhaps the business leaders themselves are unable to

identify growth trends and key market indicators that would encourage
them to shift to your higher-growth
product offerings, or they are not influential enough to sign off on working with you.
In other words, the Tier 1b customer clearly needs your services or
your products, and the products
themselves are at a high value. But
because of various ingrained processes or mind-sets, key stakeholders
dont realize this value or arent empowered to act on it. You may have
to invest significant time up front in
changing that behavior, helping
them see things from your perspective, before you make your sales
pitch. But odds are, that investment
will pay off.
Targeting Your Top Tier

After identifying your hot spots,


you will need to create sales-force
deployment strategies specific to
these customers.
1. Engage through a tailored,
high-touch model. All Tier 1 cus-

tomers are best served by sales reps


with whom they have a strong personal relationship. The sales reps
should make a point of meeting
face-to-face at regular intervals and
providing tailored service. A strategic account management team or
senior leader should oversee the sales
force, setting the direction for the
account managers who serve the top
tier. The role of strategic account
management is to take a longer-term
view of the customers needs and
help provide them with customized
support designed to boost recurring
revenues and to pinpoint opportunities to sell these customers new
or higher-end products.
2. Focus on selling solutions,
rather than individual products and
services. Selling a solution is a big

strategy+business issue 83

leading ideas
20

plans, particularly in newer areas


such as SaaS offerings? To what degree does the customer require a
high-touch model in terms of services from sales reps?
To determine value, companies
would ask some of the more traditional revenue-based questions:
How much business do we currently
do with this customer? What is the

4/18/16 3:31 PM

3. Take a consultative selling


approach. Consultative selling is

that improve the key metrics critical


to Tier 1 accounts. Ways of rolling
out incentives include variable pay
with additional compensation for
sales of products that are aligned
with the companys growth plan;
pay linked to margin, rather than to
volume (to mitigate the impact of
volume discounting on the sales
reps compensation); and quotas
based on product families, rather
than volume.

4. Have a robust compensation

through data and technology. Back-

plan. Staff incentives can be used

end processes such as quoting, pricing, proposal writing, and so on

strategically to encourage sales reps

5. Simplify the sales process


21

Account managers need to see themselves


as consultants, not just as sales reps.
to focus on high-margin growth
products, to retain top-performing
reps, and to reward the behaviors

should be frictionless, low-touch,


and easy for the customer. This will
free up the sales team to focus more

th
e

G
o!

particularly important for the customers in Tier 1b, who need your
products but may not yet have realized it or may not have the ability to
act on that need. Account managers

should embed themselves in growth


discussions with these customers.
They need to see themselves as consultants, and not just as sales reps, so
that they can help their customer
look at the market differently, identify growth trends, and select the
products that are best for their future. However, the shift in mind-set
needed to go from being an order
taker to being a consultant is not
easy, and will require significant
training and incentives.

leading ideas

ask for technology firms, in which


products typically exist in silos, each
with its own sales reps. Further complicating matters, these reps are essentially competing for the same
share of wallet. For example, one
sales rep may be offering a customer
traditional on-premises software,
whereas another sales rep from the
same parent company is offering
that customer a SaaS product. To
avoid these issues, focus on selling
solutions. The idea is to tailor your
sales strategy to the customers specific needs, and include a bundle of
products and services that are most
critical for that customer.

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s+b Trend Watch


What Keeps CEOs Up at Night?
In a survey of 1,409 chief executives around the
world, policy threats weigh heavily: 42 percent
express significant worry about overregulation.
The top business concern among respondents is
the availability of skilled labor; here, tech CEOs
are the most anxious.
POLICY THREATS Percentage of CEOs extremely concerned
Asset Management
Healthcare
Banking & Capital Markets
Insurance

GLOBAL
TOTAL

Overregulation

Exchange rate volatility


Consumer Goods
Consumer Goods
Energy
Metals

Increasing tax burden

Government response to fiscal


deficit and debt burden

Engineering & Construction


Healthcare

Geopolitical uncertainty
0%

10%

20%

Entertainment & Media


30%

40%

50%

60%

70%

BUSINESS THREATS Percentage of CEOs extremely concerned


Availability of key skills

GLOBAL
TOTAL

Technology

Speed of technological
change

Technology
Banking & Capital Markets
Insurance
Entertainment & Media

Bribery and corruption

Namit Kapoor
namit.kapoor@pwc.com
is a leading practitioner in sales and
marketing strategies for Strategy&, PwCs
strategy consulting business. He is a
principal with PwC US, based in Chicago.

Insurance
Energy
Engineering & Construction

Cyber-threats

Entertainment & Media


Insurance
Banking & Capital Markets
Technology

High or volatile
commodity prices

Lavanya Manohar
lavanya.manohar@pwc.com
is an advisor to executives in sales and
marketing strategies for Strategy&. She is
a manager with PwC US, based in Chicago.

Consumer Goods
Chemicals
Energy
Metals

Shift in consumer spending


and behaviors

Consumer Goods
Retail
Entertainment & Media

Reprint No. 16205

This article is adapted from the authors


Strategy& white paper, The NextGeneration Sales Force, Feb. 2016.

Consumer Goods
Transportation & Logistics
Energy
Chemicals
Metals

High or volatile
energy costs
0%

10%

20%

30%

40%

50%

Source: PwC Global CEO Survey, Jan. 2016, pwc.com/usceosurvey

sb83_006-022_LeadingIdeas_fin.indd 22

60%

70%

strategy+business issue 83

leading ideas
22

on the customer relationship. In


studying sales practices at approximately 45 companies, we determined that roughly 40 percent of
a salespersons time is spent on
non-client-facing work that ideally
should be automated. Automation
also provides the best medium
through which to integrate data
across different channels, whether
involving social media, CRM, support, or marketing campaigns. This
may sound obvious, but its difficult
in practice. In many companies, the
social media channel is divorced
from customer support, which is
usually embedded within operations, which is distinct from CRM.
Better segmentation, effective
use of big data, more targeted strategies it all adds up to a sales
approach that will enable companies to capture their best potential
for growth.
Implementing the new model
will require a systematic transformation, one that hinges on embracing
change throughout a company and
on engaging the sales leadership,
sales representatives, and back-office
employees at all levels. It wont be
easy for large incumbents, but those
that wait may see startups claim an
ever-larger share of their market. +

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4/15/16 10:34 AM

24

Social Entrepreneurship
by the Billions
An audacious effort to provide digital ID numbers
throughout India illustrates the potential for largescale change.
by Roger L. Martin, Sally R. Osberg,
and Jennifer Riel

nly a decade ago, some 400


million people in India
lacked any type of formal
documentation. Most were impoverished and, without even basic
identification such as a birth certificate, they were marginalized
and unable to alter their societal
status. This condition made them,
in effect, noncitizens, with no influence on or ability to participate in
their countrys economic and legal
systems. They couldnt vote, open
a bank account, or access government services.
Nandan Nilekani wrote about
this problem in his 2008 book,
Imagining India: The Idea of a Renewed Nation (Penguin Press). An

sb83_024-028_ESY_SocialEntrprnshp_fin.indd 24

engineer by training, he was one of


the cofounders of Infosys, the IT services giant that helped spur Indias
technology revolution. In his book,
Nilekani proposed providing each
of Indias approximately 1.2 billion
citizens with a unique, fraud-proof
identifier. The following year, Indias then prime minister, Manmohan Singh, asked Nilekani to turn
this idea into reality. He appointed
Nilekani chairman of a new government agency, the Unique Identification Authority of India (UIDAI),
which was tasked with creating such
an identifier. The initiative came to
be called Project Aadhaar (the Hindi word for foundation or base).
Indias documentation problem was the product of a system in
a miserable equilibrium. Left alone,
it would continue to operate in the

same way and deliver the same outcomes hundreds of millions of


people excluded from formal citizenship. Shifting such an equilibrium
is no simple task. But it is the sort
of challenge to which the worlds social entrepreneurs apply their resolve
and creativity.
Social entrepreneurship has been
variously defined over the years as
any enterprise that includes social
good as part of its mission, as a
nonprofit that seeks to build its sustainability through market forces,
and simply even as any organization working to make the world a
better place. This last catch-all is
the most problematic, as it suggests
every organization aiming for even
the smallest improvement in the
status quo can be considered to be
engaged in social entrepreneurship.
The term thus becomes everything
and nothing.
In our view, social entrepreneurs
seek something beyond better. They
want to change a well-established
but unhappy equilibrium, and
transform it into a more just or more
equitable stable state. Such social
entrepreneurship can be practiced
within any organizational structure, including for-profit businesses,
NGOs and not-for-profits, social enterprises, and even government.
Nilekanis efforts in India provide a striking example of social
entrepreneurship practiced within a
government context. Its a novel and
notable experiment, given the sheer
size of the problem in terms of
both geography and the number of
people affected. But it is not entirely
unique. In many regions and in different contexts, a discernible pattern
has emerged for endeavors that aim
to change equilibrium at a meaningful scale. This framework can
help any organizational leader, in

Illustration by Lars Leetaru

essay global perspective

GLOBAL PERSPECTIVE

4/14/16 1:09 PM

A Unique Identity

When Nandan Nilekani was appointed head of the UIDAI, the


businessman became a bureaucrat.
But the entrepreneur in him would
not be easily co-opted. Nilekani
was really in the game of applying
the tools and principles of business
to achieve social change. As he saw
it, not only would a unique identifier program enable Indias poor to
gain access to civic benefits, but it
would reduce the countrys burden

you can make sure the benefits will


go to the right person, and (b) [you
can ensure] that the same person can
be identified over time. Given that
so many of Indias poor lacked formal identification, social programs
were easy targets for fraud and abuse.
As an integrative thinker unwilling to choose between the best
interests of individuals and those
of the government, Nilekani seized
on the opportunity to serve both
through the same initiative. He
knew, of course, that it wouldnt be
easy. The poor had no base documents, no way to prove their identity
in the first place. The initial challenge was to address that deficiency.
We had to have a fairly foolproof
way of establishing uniqueness,
Nilekani explained.
Fortunately, in the face of global security threats, governments and
businesses around the world were
making great strides in using biometrics to establish uniqueness with

Big equilibrium shifts happen


infrequently and make a
disproportionate difference.
of welfare fraud. In the end, he believed, India could leapfrog Western
nations in the scope and security of
its identification tools.
As Nilekani told us in a 2014 interview, At one level, you can think
of [Project Aadhaar] as one of the
worlds largest social inclusion projects. Thats one part of what it tries
to solve. The second thing that its
trying to solve is common to all societies that build welfare programs.
When you build a welfare program
in any society, you need a way to
identify your residents, so that (a)

sb83_024-028_ESY_SocialEntrprnshp_fin.indd 25

fingerprints and iris scans. After


a little bit of research and proof of
concept, we came to the conclusion
that if you do multimodal biometrics, combining the irises of both
eyes and the fingerprints of all 10
fingers, the digital signature the
digital pattern of these is unique
across a billion people, said Nilekani. This approach enabled the
agency to assess new registrants
against its database to ensure their
biometric patterns were not duplicates. It could do so with accuracy
greater than 99.9 percent.

The basic strategy was to provide every citizen who registered


with a 12-digit identifier tied to his
or her specific biometric pattern.
This Aadhaar number could be
verified, using the biometric identifiers, when needed. It would provide
individuals with access to government services and enable them to
claim the rights of citizenship. But,
importantly, the identifier had applications beyond voting and government programs. Financial institutions, for instance, could use it
to verify a customers identity. This
means that the Aadhaar number
promised value for a broad cross-section of citizens, even if the primary
and greatest benefit was conferred
on the very poor.

essay global perspective

the public, private, or not-for-profit


sector, to think more clearly about
the purpose and principles of social
entrepreneurship. By understanding how a suboptimal equilibrium
has come to be, envisioning a new
future, building a model for change,
and then scaling the solution, social entrepreneurs can permanently
transform a miserable or unfair societal condition, rather than settling
for ameliorating its worst effects.

25

Going Beyond Better

Change typically comes in small


steps: Somebody figures out a way
to make the current state of things
just a little bit better. But big, positive changes are vital to transforming equilibriums. Such shifts happen infrequently and episodically,
and they make a disproportionate
difference to the fate of our world.
Governments have a track record of
producing these equilibrium shifts
through policy innovation, often
in response to the dogged work of
effective social activists. Businesses
have a shorter but equally important
track record of producing positive
shifts through their innovations,
which are motivated both by profit
and by the opportunity to provide
something new to customers and
the world.
Social entrepreneurship is a
much newer source of positive social change; its activities and models navigate the extensive territory
between the modes of business-led
and government-led transformation.

4/14/16 1:09 PM

1. Understanding the problem.

26

The paradox of social transformation is that one has to truly understand the system as it is before any
serious attempt can be made to
change it. Yet those who understand
the status quo best are often those
most deeply invested in it, whereas
those who see the imperative for
change most clearly tend to sit outside the system. Effective social
entrepreneurs acknowledge this dynamic and find a way to navigate it.
The process of equilibrium
change therefore begins with a commitment to understanding a particular status quo, how it came to be,
and the forces that hold it in place.
The process entails the successful
negotiation of three characteristic
tensions: abhorrence of the status
quo versus an essential appreciation of why it persists; application of
expertise from another context versus willingness to apprentice in the
specifics of the context in question;
and an openness to experiment with
possibilities versus knowing when to
commit to and drive forward a specific solution.
Nilekani knew what the problem was he had written about the
lack of ID as a fundamental challenge to an equitable and prosperous
India. He also knew why the problem existed the substantial structural, political, and economic barriers to logging each persons identity.
And he understood that traditional

sb83_024-028_ESY_SocialEntrprnshp_fin.indd 26

methods of documenting identity, including home-to-home census taking, were far too expensive,
too time-consuming, and too susceptible to fraud to be of use in
his context.
As a brand-new government
appointee, Nilekani was a novice
bureaucrat. He refused to give in
to the inertia that can characterize
government agencies. But as an experienced engineer and technology
CEO, he also recognized that he had
much to learn about the key players
in the system, and the specifics of
identity. He balanced a willingness
to learn in areas outside his domain
with a commitment to applying his
expertise to a new field.
2. Envisioning a new future. To
make a positive difference, every
change agent needs to set a direction. Successful social entrepreneurs
place the bar high and envision fundamental equilibrium change. This

sidered not just the people without


identification, but the registering
agencies, local businesses, and, importantly, Indians who already had
formal ID documents. He saw a
world in which there were not two
classes of citizenship and multiple
forms of ID, but a single, elegant
system that could be used to establish identity with government and
businesses alike. He saw a world in
which all Indians would be better
off with an Aadhaar number.
3. Building a model for change.

To bring a vision to life, the social


entrepreneur must apply creativity and resourcefulness in building
a model for change one that is
sustainable because it reduces costs
or increases value in a way that can
be quantified. In our view, social entrepreneurs dont build innumerably
varied models for change; success
stories have recurring themes. Effective social entrepreneurs make use

Social entrepreneurs dont build


innumerably varied models
for change; success stories have
recurring themes.
vision sustains the organization
through the hard work of actually
producing such change.
The vision must be specific
about how the dynamics of the
system will shift and about who
will benefit. Creating and articulating such a vision requires the
social entrepreneur to take a systemic approach, identifying the primary stakeholder but also considering players throughout the system
more holistically.
With the UIDAI, Nilekani con-

of a set of specific mechanisms employed across contexts to transform


equilibriums.
The starting point for building
a successful model is the value equation. Social entrepreneurs must find
a mechanism to turn a losing value
equation, in which costs are too high
or value too low to produce sustainable change, into a winning one, in
which the economics support sustainability over the long term. To do
so, they can target either the value
side of the equation (bringing more

strategy+business issue 83

essay global perspective

At the heart of the equilibrium


transformation is a unique model
that social entrepreneurs design for
a particular context. When we look
at cases of successful social entrepreneurship such as the UIDAI
cases in which true equilibrium
change was imagined, enacted, and
sustained we can discern four
distinct stages.

4/14/16 1:09 PM

sb83_024-028_ESY_SocialEntrprnshp_fin.indd 27

essay global perspective

value in) or the cost side (reducing


capital or operating costs).
For the UIDAI, however, Nilekani tackled both dimensions. On
the value side, he sought to create a
market-based demand for the Aadhaar number, to provide a commercial inducement attractive enough
that Nilekani could get other players to cover some of the costs of
driving his model to scale. As he
recalled, Different people in the
system had different value propositions. Those people dealing with
social issues liked the social inclusion aspect. Those people dealing
with fiscal issues liked the efficiency
aspect. Then we had to ensure that
the banks liked the fact that more
and more transactions would flow
through the banking system. Youre
reducing cash in the economy and
increasing digital transactions. Everybody has a different value proposition. The challenge was to figure
out each stakeholder, and what are
the appropriate value propositions
that we needed to articulate.
On the cost side, Nilekani
also thought carefully about the
capital and operating expenditures
of a program of this size. He was
anxious to avoid crippling startup
costs and overwhelming capital
risk for the agency as the technology was built out across the country. The UIDAI developed a system by which enrolling agencies
purchased the equipment needed
to get started, and were then reimbursed a small amount for every
ID issued. Nilekani explained that
the state government, banks, and
post officesall of them could act
as registrars. At peak, we had more
than 30,000 such enrollment stations across the country. UIDAI
was doing more than 1 million
unique IDs a day. This reduced the

27

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executive.mit.edu/sb

4/19/16 3:43 PM

our ecosystem, but only 300 people


in the main organization, he told
us with a hint of pride. Like the
brain of the system, it is highly leveraged; a small set of people design the
technology, the solution, the business model. Combined with an approach that distributed costs across
partners and over time, this design

By 2014, when Nilekani stepped


down, more than 600 million people
had been issued their unique ID.
typically be too expensive to achieve
transformational scale, especially
when the intended beneficiaries are
unable to pay directly for the benefit.
Of course, scale is not measured
by an organizations size or budget.
It is measured by the effectiveness
of that organization in shifting the
equilibrium it targets that is, by
the changes impact. High impact
is often tied to purposeful action
on the part of social entrepreneurs
to design for economies of scale; to
take a systemic approach and leverage other actors in the ecosystem in
order to bolster and extend a shift;
or to open up their models and
methodologies to others, expanding
impact by inviting imitation.
Nilekani realized early on that
efficient implementation would be
critical to producing sustainable
change. His team designed the program with scale and efficiency in
mind from the outset: They wanted
scalability at the back end through
technology, scalability at the front
end through technology and process, and a business model that allowed multiple organizations to
become enrolling agencies. There
were more than 100,000 people in

sb83_024-028_ESY_SocialEntrprnshp_fin.indd 28

made the system scalable and robust.


Nilekani leveraged the assets of businesses and government agencies to
get hundreds of millions of people
registered in less than a decade.
Shifting the Balance

For social entrepreneurs, good


enough simply isnt good enough.
They confront the societal structures that leave too many behind,
roll up their sleeves, and undertake
the hard, exhilarating, and important work of transforming what is
into what can and should be.
Nilekanis efforts to transform
India by giving every resident a formal identity, and thus the opportunity to become an engaged member
of the economy and to participate
in society, illustrate how powerful
equilibriums can be jolted off balance and supplanted by new ones.
By 2014, when Nilekani stepped
down as chairman of the UIDAI,
more than 600 million people had
been issued their unique 12-digit
Aadhaar number, the numbers were
tied to 60 million bank accounts,
and more than 100 agencies were
using the identifier for authentication. Perhaps most telling, the initia-

tive has continued even through the


2014 Indian national government
election, in which Singh was replaced by an opposition party leader, Narendra Modi. Modi met with
Nilekani in July 2014, after publicly
backing Aadhaar. By January 2016,
it was reported that 92 percent of
Indias adult population had been
assigned numbers.
The program is not without its
critics, some of whom raise privacy
concerns or question the decision
to provide a number to residents
as well as citizens. But its impact
in demonstrating social entrepreneurship in action is undeniable.
From a world in which hundreds of
millions of people had to live without formal identity, without real
citizenship, and without access to
the formal economy, the UIDAI
has created a world in which every
resident can be counted moving
closer a world in which every individual in India truly counts. +
Reprint No. 16206

Roger L. Martin
martin@rotman.utoronto.ca
is a writer, a strategy advisor, and former
dean and current institute director of the
Martin Prosperity Institute at the Rotman
School of Management at the University
of Toronto.
Sally R. Osberg
sosberg@skoll.org
is CEO of the Skoll Foundation, a philanthropic organization that invests in social
entrepreneurship worldwide.
Jennifer Riel
jennifer.riel@rotman.utoronto.ca
is managing director of strategy and
innovation at the Martin Prosperity
Institute at the Rotman School.
Reprinted by permission of Harvard
Business Review Press. Adapted from
Getting Beyond Better: How Social
Entrepreneurship Works. Copyright 2015
Roger L. Martin and Sally R. Osberg.
All rights reserved.

strategy+business issue 83

essay global perspective


28

UIDAIs capital costs and distributed risk across the ecosystem.


4. Scaling the solution. Scalability is a critical feature of effective
social entrepreneurship. Models that
require constant reapplication of the
same investments regardless of scale
will commonly fail to produce sustainable equilibrium change. It will

4/14/16 1:09 PM

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4/15/16 10:34 AM

30

Will You Be Mine?


As they look to enhance digital capabilities through
mergers and acquisitions, traditional companies
have to heed a new set of dating rules.
by Joerg Krings, J. Neely,
and Olaf Acker

n the space of about 17 days


in the spring of 2015, Boeing
bought a company that develops
aerial imaging software, Spanish
bank BBVA bought a design studio
that specializes in the online user
experience, and MasterCard purchased an analytics company that
helps convenience store owners figure out what they should sell at the
checkout counter.
The three deals barely registered on Wall Street. The imaging company that Boeing bought
for US$25 million, called 2d3
Sensing, was a tiny 40-employee
outfit. Spring Studio, BBVAs acquisition, had just 38 workers.
Although MasterCards deal for
Applied Predictive Technologies was
larger, the $600 million purchase
price (and the addition of some 300

sb83_030-035_ESY_WillYouBeMineDigital-fin.indd 30

employees to MasterCards payroll)


had virtually no impact on the companys share price.
Yet to dismiss these deals as inconsequential because of their limited immediate impact would be to
miss the point. None of the deals
was a one and done. The deals

In their determination not to be


left behind, many traditionally nondigital companies have jumped into
the market by becoming serial acquirers. The acquisitions have given
these companies access to software
and cloud technologies that they
probably wouldnt have developed
on their own. But the spate of deal
making is presenting traditional
companies with a new set of challenges. In the red-hot market for
digital M&A M&A in which the
target is a hardware, software, IT service, or Internet company leaders
of traditional companies must not
only pick the right deals but figure
out how to leverage them. Corporate
development staffs and business unit
managers are learning as they go.
Globally, digital deals accounted
for about 32 percent of all transactions in 2015, according to a study by
Strategy&, PwCs strategy consulting business, and data provided by
Dealogic. That was up from about
20 percent in 2011. The real spike has
been seen in acquirers in non-digital
industries, including automotive,
natural resources, retail and wholesale, and hospitality (see exhibit).
Companies in non-digital industries

Companies in non-digital industries


completed 48 percent more digital
deals in 2015 than they did in 2011.
were among the at least seven, eight,
and 10 digital acquisitions made
by BBVA, MasterCard, and Boeing, respectively, since 2011. Other
brick-and-mortar companies were
even more active during that period.
For instance, Siemens has bought or
invested in at least 28 digital properties, General Electric at least 22.

completed 48 percent more digital


deals in 2015 than they did in 2011.
They are embarking on multiyear efforts to protect their franchises and
get ahead of their competitors.
Clear Objectives

Of the roughly 20,000 digital deals


announced between 2011 and 2015,

Illustration by Lars Leetaru

essay innovation

INNOVATION

4/14/16 1:13 PM

1. Acquisitions of digital products and services. Some deals are

intended to give the acquirer a new


product or service it can sell. The
new product could be something
that helps the acquirer expand its offering in an area of growing importance to customers, such as smart
meters. It could be an analytics service, such as the tools for assessing
patient data that 3Ms healthcare
business obtained through its acquisition of Treo Solutions.
The new product could also
be a digital version of a product the
acquirer was previously selling in a
physical form. The acquisition of
Elektrobit Automotive by Continental AG in May 2015 exemplifies
this. Continental had already been
introducing digital products and
moving beyond its roots as a maker
of physical car parts tires, brake
systems, and powertrains. Elektrobits software for driver assistance
and infotainment may allow Continental to cement its position in the
digital realm.
2. New digital business models. Adding a new way of generat-

ing revenue that isnt closely bound


to the physical world is a second
major objective of those pursuing
digital deals. This can mean a new
delivery model for a similar set of
products the goal that Walgreens
had when it bought Drugstore.com
in 2011. In other instances, the acquisition may allow for the possibil-

sb83_030-035_ESY_WillYouBeMineDigital-fin.indd 31

ity of entirely new service offerings;


the French bank Socit Gnrale
bought Fiduceo in 2015 to get into
the burgeoning area of financial account aggregation.
As consumers of information
and entertainment have increasingly
shifted online, media and publishing companies have been among the
most avid users of M&A to re-create
their business models. Since 2011,
for instance, German media conglomerate Axel Springer, publisher
of Bild, one of Europes largestcirculation newspapers, has used 25
acquisitions of digital properties to
increase its presence in areas such
as online classified ads and social
media. The information and analytics company Relx Group (previ-

ously known as Reed Elsevier) has


been equally active, buying dozens
of information and software companies while disposing of some offline properties, including the print
magazine Variety.

essay innovation

about a third involved a non-technology, non-telecom buyer, according to Strategy&s analysis. (The total deal count excludes investments
in digital properties made strictly for
the purposes of getting a financial
return, including investments made
by venture capital and private equity
firms.) These deals fit into three basic categories.

3. Digitization of the value chain.

The digital acquisitions that traditional companies make arent always


designed to sell something new.
Sometimes these deals are aimed
at helping companies do a better
job of identifying promising new
products or of speeding the delivery of products they already have or
are developing.
For instance, when it bought
Definiens, an identifier of biomarkers, in 2015, pharmaceutical
company AstraZeneca was seeking

31

Exhibit: Non-Digital Industry Investments in Digital Assets


In the last several years, mergers and acquisitions have become a more popular way for companies
to gain access to much-needed technological capabilities.
Percentage-point increase in the share of deals that were digital, 2015 vs. 2011

Automotive

% digital
deals
2015
10.0

Natural Resources

8.9

Retail and Wholesale

11%

7.8

Hospitality

16%

21%

7.1

9%

Consumer Products

6.4

12%

Personal and Professional Services

6.4

24%

Financial Services

6.2

Chemicals

13%

6.0

Entertainment

10%

5.7

21%

Healthcare

5.2

12%

Agriculture and Forestry

5.1

7%

Basic Manufacturing

4.8

Pharmaceuticals

11%

3.5

7%

Transportation and Logistics

3.4

8%

Construction

3.3

8%

Utilities
Machinery and Equipment
Aerospace and Defense
4

7%

2.3

15%

1.3

25%

2.1
2

10

Note: Data excludes investments by venture capital and private equity firms.
Source: Dealogic data for January 2011December 2015, Strategy& analysis

4/14/16 1:13 PM

Digital Deal-Making Challenges

Many of these acquisitions thrust


the acquirers into circumstances
where they dont feel as sure-footed
as with other types of acquisitions.
For many traditional companies,
digital deals are what we call enhancement deals, since they are
meant to enhance the acquirers existing set of capabilities. Both our
experience working with buyers and
research weve conducted show that
these deals are among the trickiest
to pull off (see Deals That Win,
by J. Neely, John Jullens, and Joerg
Krings, s+b, July 14, 2015).
Certainly a company would be
making a colossal mistake if it tried
to jam an enhancement deal through
the same M&A apparatus (with an

sb83_030-035_ESY_WillYouBeMineDigital-fin.indd 32

emphasis on cost synergies) that it


might use for a more conventional
deal. Such deals face overarching
obstacles that include cultural differences and the acquiring companys
typically light experience with digital
M&A. Digital M&A presents challenges at every phase of the process:
Identification. Who do we want
to buy? With traditional deals
one company buying another in the
same industry the answer to this
question is usually straightforward.

area that allows them to identify the


most promising digital targets.
To deal with the complexity of
the identification stage, companies
must be clear about how they choose
to create value and how different
technologies might contribute to the
process. And if the buyer is making
a set of acquisitions in a given area
in the hope of building up a specific
capability, the task gets even more
complicated. The people scouring
the landscape for M&A ideas must

In the overheated state of the


digital M&A market, time is not
on the buyers side.
The number of targets is limited
by the strategic intent: to buy an
adjacent product, get into a particular geographic market, or consolidate. A companys managers may
be able to generate a preliminary
list based solely on their knowledge
of the market, and the initial contact could easily be one executive
calling another.
Very little of this framework
applies to digital deals. Instead of
one main person to approach, there
may be four or five a company
founder, investors, key members of
the team. Instead of a short set of
acquisition candidates, the list may
contain dozens, some of them extremely small. The acquisition ideas
could come from just about anywhere contacts at major research
universities, patent searches, partners at venture capital firms. The
technologies are generally new and
highly specific, and their viability
is often untested. In essence, traditional companies must now develop
a brand-new capability in the M&A

have a sense of how different technologies might interconnect and


must be good judges of the feel and
fit of different target companies.
These situations require a new set of
screening tactics.
Valuation. Whats it worth? In
digital deal making, there is often
no obvious answer to this question.
There may be no cash flow to which
the buyer can attach a multiple. The
overheated state of the digital M&A
market makes the appraisal process
more difficult; with these deals,
time is not on the buyers side.
The concept of strategic value
looms large. A traditional company
may have great potential in a given
area but may need to chain together
a few new digital capabilities to realize the opportunity. Maybe what its
missing is a way of delivering a product digitally, or of interacting with
customers through the cloud. A
target company that has or appears to have the missing link in
the capabilities chain may be able to
drive a hard bargain.

strategy+business issue 83

essay innovation
32

technology that would help it identify the best patients for clinical trials of cancer drugs. BBVA was certainly thinking about its value chain
in 2015 when the bank bought
Madiva for its speedy mortgageapproval software. Targets 2014
purchase of Powered Analytics was
driven by a desire to give customers
interactive recommendations and
guidance when they were shopping
in Targets retail stores. And a steady
stream of acquisitions in the Internet of Things arena, particularly of
sensor and cloud technologies, is
offering traditional manufacturers
a way to track their products in the
aftermarket and play a bigger role in
service and support.
To some extent, the deals in
the value chain category are related
to IT investments that traditional
companies have been making for
years, including investments in
products like SAP. This makes deals
in this category less experimental, in
a sense, and increases the likelihood
of a fast payback.

4/14/16 1:13 PM

2016 PwC. All rights reserved. PwC refers to the US member firm or one of its
subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member
firm is a separate legal entity. Please see www.pwc.com/structure for further details.

sb83_ad_layout_fin.indd 33

4/19/16 2:56 PM

sb83_030-035_ESY_WillYouBeMineDigital-fin.indd 34

and 1990s. Ray Ozzie, developer of


Lotus Notes, likewise stayed at Microsoft for five years (2005 to 2010)
as chief technical officer and chief
software architect, after Microsoft
bought a company he had founded.
Retention is potentially more
difficult in deals where the buyer is
a traditional company. But traditional companies can improve their
chances at retention and the
commitment of the technologists
working for them after deals close
if they go beyond money and try
to identify goals the technologists

discontinuing a free food or beverage benefit may have a subtly crushing effect on morale. Yet an acquirer
also needs to be sensitive to the impact on the broader organization if it
allows an acquired unit to continue
to operate by its own, more flexible
or more generous rules.
In short, integrating even a
small digital property requires a
considerable amount of thoughtfulness on the part of a traditional
company. And it isnt only the
managers or executives doing the
deal who must be committed to

Because digital deals dont


naturally lend themselves to
cost rationalization, acquirers
need to tread lightly.
can best accomplish with the help
of their new, bigger organization.
Money means a lot to the people
who have founded a company and
are selling it. But it isnt everything,
and earn-out clauses have their limits in terms of influencing behaviors.
Deal integration. How will
we integrate this company into our
larger operation? Traditional deals
are often driven by the prospect of
cost synergies. But because digital
deals dont naturally lend themselves
to cost rationalization, acquirers
need to tread lightly.
To start with, it sometimes
makes sense to let the acquired company stay in its geographic location,
and to limit any attempts at operational efficiencies, at least initially,
to back-office integration. Acquirers
must also respect cultural differences. Pushing change in a seemingly
minor area such as dress codes or

the deals success. The challenges


of traditional-on-digital M&A are
such that before an offer is ever
made, other professionals at the acquiring company, including human
resources, information technology,
and line managers, must buy into,
support, and contribute to the postdeal integration plan.
Advocating for a light touch is
not the same as suggesting that traditional companies should not ask
their digital acquisitions to make
any adjustments at all. In conjunction with the new companys management team, the buying company
(usually through an executive acting
as a sponsor) needs to set milestones
for product development, talent
retention, and broader company
collaboration. Avoiding such challenges, and instead allowing the
operation to be ring-fenced, runs
the risk of forestalling a linkage to

strategy+business issue 83

essay innovation
34

And in some situations, strategic value leads to prices that simply dont make sense for traditional
companies. For instance, suppose a
commercial security company sets
its sights on a startup specializing
in optical recognition, perhaps in
hopes of using the startups technology to create a product that would
control access to buildings. At $10
million or $20 million, that might
be capital well spent. But if Facebook sees the technology as something it could run across all the
photos its 1.5 billion users upload
and decides to enter the bidding, the
contest is likely to become one the
traditional company should quit. As
the CFO of a Fortune 500 company
once said to us, you have to know
your walk-away price.
We think traditional companies
largely understand this dilemma.
And it helps explain why at this relatively early stage of their digital deal
making, they tend to emphasize
small deals over large ones. They
understand the need to take a little
leap of faith, but dont want to be
foolish about it.
Talent retention. How can we
make sure the team stays? When
AstraZeneca bought Definiens, it
gained access to Gerd Binnig, a
physics Nobel laureate who had
founded the company. Walmart, in
buying Adchemy, acquired the services of a former engineering lead at
WebEx and a former head of search
innovation at Yahoo.
In digital-on-digital acquisitions, these exceptionally talented
scientists and technologists sometimes do stay. Nathan Myhrvold
came to Microsoft after the company bought his startup for $1.5
million and played a prominent
role at the software company during its dominant run in the 1980s

4/18/16 4:01 PM

Motivated Sellers

Weve resisted putting it so bluntly


up to now, but when digital and traditional companies enter a relationship, things can get messy. We are
reminded of the problems that arose
when one of the biggest U.S. consumer packaged goods companies
started to advertise on Google. The
companys structure was complex
and the number of employees it had
interacting with Google at one point
would have come close to filling a
Broadway theater. Neither Google
nor the packaged goods company
was happy with the results.
Applying this experience to
M&A, big traditional companies
should maintain some degree of
centralized oversight of their digital deal-making process. Not all of
them do. Given the organizational
complexity of traditional companies, it would not be unusual if
employees from separate functions
were off trying to buy largely similar
digital companies at the same time.
The process works better when a
single person or group oversees all
the companys digital deals and
figures out how a given deal might
benefit other parts of the enterprise.
Without such centralized oversight,
companies will miss opportunities opportunities to learn, share
ideas, preserve capital, and take advantage of new technology.
A final point: Even when they
are acquiring, traditional companies
have to do a sales job. They have

sb83_030-035_ESY_WillYouBeMineDigital-fin.indd 35

to convince the digital company to


accept their offer instead of a competitive offer from a rival suitor. To
succeed, they will need as much
empathy as they do cash. The offer cant just be a certain amount of
money, take it or leave it. Executives at traditional companies must
place themselves in the shoes of the
target companys key decision makers and figure out what, on top of
the payout, might matter to them.
The key factor might be the chance
to vastly increase the distribution
of the digital companys product.
It might be the stature of being
associated with a prominent brand.
It might be the traditional companys reputation for taking the longterm view. These acquisition offers
are akin to a marriage proposal.
When you say, Im the one for you,
and ask your partner to commit to
you for life, it has to ring true. +

New from University


of Toronto Press

essay innovation

the companys broader strategy. The


question is how to get the linkage.
Multiple post-deal operating models
exist, and companies have to select
the ones that work for them on the
basis of their own identity and the
unique circumstances of the acquired asset.

Leadership is Half the Story

A Fresh Look at Followership, Leadership,


and Collaboration
by Marc Hurwitz and Samantha Hurwitz
This book introduces the first model to
seamlessly integrate leadership,
followership, and partnerships and
provides new ideas and practical advice
for anyone working in an organization.

Reprint No. 16207

Joerg Krings
joerg.krings@strategyand.de.pwc.com
is an advisor to executives in the automotive and industrials sectors for Strategy&,
PwCs strategy consulting group. He is a
partner with PwC Germany based in
Munich. His focus is organic and M&A
growth strategies.
J. Neely
j.neely@strategyand.pwc.com
is a thought leader in M&A transformation
with Strategy&. He is a principal with PwC
US based in Cleveland. His specialty is
mergers and restructurings in consumer
products and industrial sectors.
Olaf Acker
olaf.acker@strategyand.de.pwc.com
is a leading practitioner in digital services
and technology strategy for Strategy&.
He is a partner with PwC Germany based
in Frankfurt. His focus is technology and
digital transformation.

Small Business and the City


The Transformative Potential of Small
Scale Entrepreneurship
by Rafael Gomez, Andre Isakov, and
Matthew Semansky
An inspiring account of the dynamism
of urban life, Small Business and the City
introduces a new main street agenda
for the twenty-first century city.

utppublishing.com

4/14/16 1:13 PM

36

Safety in the Cloud


The next generation of cybersecurity prevents
attacks by monitoring online behavior of
intruders, customers, and everyone else.
by David Burg and Tom Archer

or most businesspeople, the


word cybersecurity suggests a
shield. When people think
about protecting their enterprise
from intrusion with information
technology, they typically think of
the much-publicized breaches of
the past few years: those at Target,
Sony, JPMorgan Chase, Goodwill
Industries, Snapchat, the U.S. Office of Personnel Management, and
a wide range of other organizations.
Its understandable that most companies take a defensive posture with
respect to digital security. They
know that hackers from around
the world are continuously probing
corporate networks, looking to steal
data of value information about
customers, personnel, finances, proprietary research, trade secrets, and
other critical assets and to com-

sb83_036-043_ESY_SafetyInCloud_fin.indd 36

promise their technology in other


malicious ways.
But imagine a different kind
of cybersecurity, one that no longer
depends strictly on the IT departments engagement in a desperate,

man behavior, opposite sides of the


same coin.
This approach would use technology to sense and respond to
threats, and it would be just as effective indeed, more effective
at eliminating vulnerabilities. But it
would not be a purely technological
or defensive solution. Nor would it
view digital intrusion as a siege that
must be defended against, at considerable cost. Rather, it would embrace
an entirely new concept of cybersecurity as a source of strength that
is, as an opportunity to rethink the
foundations of a companys operations and customer relationships.
If your company followed this approach, you would monitor attacks
through sophisticated pattern recognition, deflect them through the
use of digital decoys, and learn from
any attacks that did occur, in order
to better prevent future threats. You
would also gain a richer understanding of your business environment,
and a better sense of what legitimate
customers want and need.
Cybersecurity of this type exists
today. The key is cloud computing.
For many companies, keeping data

Moving to the right kind of


advanced cloud system represents
a more dynamic approach to risk.
never-ending arms race with intruders. Instead, a company would use
cybersecurity as a way to better understand its business environment.
It would defend itself by monitoring
activity across all its online systems,
studying not just the moves of hackers but the actions of legitimate customers as well. Both types of visits,
after all, are forms of repetitive hu-

in the cloud has become a fact of


life. But some business leaders
even as they recognize the benefits
of greater operational agility, lower
cost, and adaptability that come
with the cloud continue to express concerns about its security.
They worry that they will have less
control over sensitive corporate data
when it is stored in remote inter-

Illustration by Lars Leetaru

essay technology

TECHNOLOGY

4/14/16 1:24 PM

The Best Defense Is Analytics

The standard approach to protecting on-site corporate networks from


cyber-attacks involves the use of
IT systems to detect and prevent
unwanted efforts to gain entry.
Such efforts are premised on the
conventional view that a companys
network is like a castle inside walls.
The castle is protected by bolting
on more and more security measures
in hopes of keeping out the bad
guys without rendering these networks so impervious as to make
them unusable.
Yet no such purely defensive
tactical system can ever be truly effective, especially as companies digitize more and more aspects of their
internal operations and external
contacts with the outside world. Operational technologies are becoming
too complex to be protected this

sb83_036-043_ESY_SafetyInCloud_fin.indd 37

way, and hackers will always be one


step ahead. The problem calls for an
entirely different type of solution,
and thats where the cloud comes in.
Its important to note, before
going any further, that not all cloudbased systems are equal. Some are
more advanced than others. Some
services billed as cloud computing
do little more than replicate an onpremises installation in a network
of interlinked computers. When we
talk about the cloud in this article,
we are referring to offerings such as
Google Cloud Platform, Amazon

platforms, it is innately virtual


code runs on other code, not on devices. This makes it easier to adapt,
often immediately, to intrusions and
other changes in the environment.
The cloud also offers simplicity. It creates fewer points of vulnerability and makes it easier to keep
up with technological advancements because companies can
now rely on their service providers
to build the infrastructure, hardware, software, and services required. It also enables companies to
scale up their systems as needed, to

essay technology

linked computers. They assume that


computer firewalls are like locks on
a brick-and-mortar door: The more
solid the barrier, the more impervious the system.
The truth is that applications
and data maintained in the cloud
can be more secure than data held
in on-premises corporate systems.
Thats because moving to the right
kind of advanced cloud system represents a more dynamic approach to
risk. The security of your enterprise
is based not just on keeping people
out, but on watching people who
come in. You learn from every attempted attack and even from every
use of your data. You integrate cybersecurity with marketing, customer service, and logistics, to develop a
single way of tracking the behavior
of everyone who interacts with your
company. With this type of system,
the more attacks the cloud faces, the
stronger it becomes.

37

No purely defensive system can


be truly effective. Technologies
are too complex, and hackers will
always be one step ahead.
Web Services, and Microsofts Azure.
These advanced cloud services represent major investments in interoperability, protections, and ongoing
innovation that allow off-premises
enterprise IT to realize its potential.
From a pure security perspective, the virtues of the advanced
cloud are many. It can provide almost unlimited low-cost computational power, which is often needed
to identify the kinds of suspicious
activity that indicate the movements
of hackers and who they might be.
Without the cloud platform and its
analytical power, it would be almost
impossible to detect such patterns,
especially when monitoring huge
volumes of data, highly complex
and interconnected applications,
and time intervals as long as months
or years.
Because cloud software is independent of particular hardware

a degree not possible with on-premises computing.


For example, Bluecore, a New
York Citybased startup, provides
about 100 high-end e-commerce
companies with the ability to send
customers emails in response to
their online behavior. A shopper
might make several purchases on
a website, but then reach the shopping cart page, feel put off by the
shipping costs, and fail to complete
the transaction. Bluecores app can
detect that motive in the online behavior of the customer; it can also
be set up to send an automated, personalized response that, say, offers
to waive shipping costs. According
to Bluecore cofounder and CTO
Mahmoud Arram, the ability to
track security was a critical factor in
the companys use of cloud computing in this case, of Google Cloud
Platform. One of our customers

4/14/16 1:24 PM

essay technology
38

needed confirmation of certain levels of security, and we were able to


show them that we could meet their
security requirements, he says, in
a report that Google produced. It
made me realize that if we were running our own data center, we probably would have run into trouble in
that regard.
Most importantly, a cloudbased system offers vast improvements in a companys ability to
counter cyber-threats because of
the way it responds to intrusion. A
typical cyber-attack begins with a
hacker detecting a vulnerability in
a companys systems or network
that allows the intruder to plant
malware on a computing device.
The malware may never have been
seen before. It is very hard to detect;
the so-called command-and-control

computer that manages it and receives information from it could


be located anywhere in the world.
The malware is designed to move
through the companys IT systems,
profiling their data structures and
the information they store, and then
to copy or remove any valuable data
it finds, transferring it to the command-and-control hardware.
By the time a cyber-attack is
detected in a typical computer system on your premises, the security
technologies have already failed in
at least three ways. The perimeter
technology failed to keep the unauthorized activity out; the network technology failed to detect the
ongoing communications between
the command-and-control computer and the infected end points;
and the end-point technology failed

Romans

to detect the malware as well as


the suspicious behavior occurring
among the end point, network, and
perimeter.
The standard defense against
such attacks is limited to remediation and repair. First, the malware is
removed anywhere it can be found.
Then the vulnerable points must be
repaired and the losses and damage
assessed. Since many on-premises
IT technologies are not designed
to work with one another, any analytical capability that the companys
systems have cant pull together the
pieces of the puzzle to see and understand what is happening, so its
highly difficult to learn from this
experience. Instead, there is always
another cybersecurity application
the company can bolt on, as it hopes
for the best next time.

Aqueducts
Strategy that works
builds empires.

2016 PwC. PwC refers to the PwC network and/or one or more of its member
rms, each of which is a separate legal entity. See www.pwc.com/structure.

sb83_036-043_ESY_SafetyInCloud_fin.indd 38

4/14/16 1:24 PM

identified, the operational data


about the hazard is injected into
the analytics platform and compared to the entire body of accumulated security technology information. At the same time, any
threatened applications and their
associated data are immediately respawned in a new, software-defined
network beyond the reach of the attackers, and the vulnerability is immediately patched.
The result is a dramatic reduction in the time elapsed between
detecting and countering the threat.
Moreover, because all interactions
with cloud-based applications are
browser-based, users must be authenticated each time they log on.
This authentication information,
and the increased information about
the browser session itself, adds to the

The Model T

analytics firepower of cloud-based


security. Any damage assessment
necessary is minimal, and remediation is almost instantaneous.
Frontiers of Cybersecurity

When companies move their cybersecurity to the cloud, they typically


start by leaving some applications
typically the most valuable, whose
breach would create the most problems on their premises. But your
company cant fully reap the benefits
of this new approach until it makes a
cloud-based cybersecurity program
an integrated element of its overall
analytics program and business operations. You may have moved other
aspects of your digital activities into
the cloud already. Now is the time
to integrate cybersecurity fully into
the mix.

essay technology

In the cloud, by contrast, security technologies are fused together


into an analytics platform, which
is maintained across a wide variety
of computer hardware systems. In
real time, the system logs and analyzes all activities taking place on
the computers, including all clicks,
keystrokes, and Web requests. An
advanced cloud service can then
compare this activity against its
own continuously compiled repository of intelligence about large
threats as well as an ever-expanding group of algorithms to detect
anomalies. The system also continually checks the integrity of the
security controls in place, and evaluates the critical entry points of the
system and what alternatives might
exist if they had to be shut down.
The moment a new threat is

39

The Assembly Line


Strategy that works
revolutionizes industries.

2016 PwC. PwC refers to the PwC network and/or one or more of its member
rms, each of which is a separate legal entity. See www.pwc.com/structure.

sb83_036-043_ESY_SafetyInCloud_fin.indd 39

4/14/16 1:24 PM

essay technology
40

The best way to begin is by analyzing how your organization operates, both internally and externally.
Identify how the key people you
need to protect, including the customers and employees whose sensitive information you handle, work
and communicate. Where are they
usually located? Where are they
traveling to? Youll want to secure
those locations. Whos coming to
work, and in which offices? Look at
the devices they use to connect with
you, the systems in your own back
office, and the communication patterns of everyone involved.
One primary goal of this analysis is to set up early indicators of
intrusion. Hackers can often be
recognized through their entry credentials, machine identification,
geolocation, and (increasingly) bio-

metric data as well as how they


behave online, where they go, and
what they appear to be looking for.
Moreover, every individual has an
electronic fingerprint based on
the pace, rhythm, and recurring sequences of their keystrokes. Analysis
of all these patterns can help companies detect criminal intruders and
the bots that make up more than 60
percent of the traffic on the Internet
before they do any damage.
Another primary goal is to identify and understand the people you
should be engaging with (customers,
suppliers, partners) and distinguish
them from the people out to do you
harm. For example, you might analyze your presence in supply chain
networks and the vulnerabilities to
which they expose you. How can
you optimize, protect, and monitor

Better Health

those logistics? What kinds of efficiencies will arise as you look for
ways to streamline your contacts
with outsiders?
You can also integrate cybersecurity with insights into customer
behavior and preferences. The task
of monitoring intruders efforts to
break into your online systems is
very similar to the task of authenticating legitimate entrants as they
log in and move around your websites. A single cloud-based analytics
system can monitor the activity of
customers, employees, and intruders simultaneously. The resulting
insights can enable your company
to paint a picture of all the activities
going on in your systems, good and
bad. This picture will become ever
more detailed as the system gathers
more data by tracking online behav-

Big Data
Strategy that works
improves lives.

2016 PwC. PwC refers to the PwC network and/or one or more of its member
rms, each of which is a separate legal entity. See www.pwc.com/structure.

sb83_036-043_ESY_SafetyInCloud_fin.indd 40

4/14/16 1:24 PM

increasingly shared among companies and governments, it will be


important to openly exchange information about the attackers identities and the nature of the threats

Analysis of patterns can help


companies detect criminal intruders
before they do any damage.
involves low-probability events that
have a high impact just the kinds
of activity that big data analytics is
especially good at pinpointing.
The final strength of the cloudbased system lies in its ability to
combine authentication and analytics from multiple sources. As the
problem of cyber-attacks becomes

they pose. With a cloud-based system, this can be done without compromising anyones secure data, and
it can be set up in a way that benefits
the entire knowledge base shared by
cloud participants.
One industry that relies on integration is healthcare, wherein concerns about cybersecurity and legal

Strategy& creates
strategy that works.

protection go hand in hand. The


organizations that make the integration work are those that build a single system, sometimes from multiple
cloud vendors, that incorporates patient information, operations, and
regulatory compliance. For example, Beth Israel Deaconess Medical
Center in Boston, a teaching hospital of Harvard Medical School, has
publicly explained the transition it is
making, which it is undertaking in
part because the lease on the building housing its data center is about
to expire. Instead of seeking a new
facility, Beth Israel embraced the
public cloud, as chief information
officer John Halamka put it.
Halamka, who is himself a
practicing emergency physician, arranged for an independent audit of
security issues at three vendors

essay technology

ioral paths, detecting threatening


patterns and anomalies that humans
simply cant see. It can then devise
further heuristics to counter those
activities. A great deal of cybercrime

41

Strategy that starts with your


greatest strengths and builds in
execution at every step.

Lets talk about what works for you.


strategyand.pwc.com

2016 PwC. PwC refers to the PwC network and/or one or more of its member
rms, each of which is a separate legal entity. See www.pwc.com/structure.

sb83_036-043_ESY_SafetyInCloud_fin.indd 41

4/14/16 1:24 PM

pability. Every company these days


must guarantee the security of its
customers data. A company with a
distinctive capability in this domain
goes further. If its a business-tobusiness company, it may offer the
highest level of security for clients
and suppliers, given the proprietary
and often secret nature of the data
they exchange. If its a consumeroriented company, it may use security, monitoring, and tracking to offer personalized services that no one
else can match.
But no large company can
make the move all at once, given its
investments in massive legacy systems and databases. Instead, it must
take a logical, systematic, risk-based

The cloud enables you to think


of security as a truly differentiating
business capability.
level, not the data level encryption of data [in itself] would not
have helped.
Making the Move

Moving a corporations technology


infrastructure into the cloud is an
enormously attractive proposition,
and the promise of cloud-based
cybersecurity only makes it more so.
It can allow your company to avoid
spending the millions of dollars that
would be needed to bolt more security onto your on-premises systems. The capital saved this way
can be put to better use funding the
move itself.
Among the virtues of moving
cybersecurity into the cloud is that it
enables you to think of security not
as a technical specialty but rather as
a truly differentiating business ca-

sb83_036-043_ESY_SafetyInCloud_fin.indd 42

approach to protecting its most sensitive data as it moves it to the cloud.


Your first step should be to
conduct a pilot program on an application or data set that isnt hugely
sensitive or mission-critical, paying attention to what is involved in
making the move, how well the system functions in the cloud, and how
it is interoperating with the associated cloud-based security systems.
Then, once you are comfortable
with the pilot, you can begin moving more sensitive data and systems
to the new environment.
For each part of your operations, you can build a business case,
thinking strategically about the economic benefits of moving your information technology into the cloud
and the way such a shift can affect
your overall cost management. If

you continue to invest in on-premises IT systems, you will trap yourself


in the ongoing sunk costs of conventional cybersecurity approaches.
Each year, as intruders grow more
sophisticated, youll have to grow
more sophisticated along with them.
Youll have to invest in countering
them. And they only have to break
past your defenses once to unleash
a horrendously expensive and debilitating attack.
But if you move your IT systems and cybersecurity into the
cloud, youll spend much less on cybersecurity, because youll be drawing on the expertise of many other
companies. You wont have to fund
it all yourself. That money can now
be moved into more strategically relevant endeavors which in turn
will also help you finance any further cloud-based expansion.
As you plan your move to the
cloud, consider the applications
and related data that power your
most important capabilities, those
linked most closely to your strategy.
They should be moved first, because
they will benefit most from the operational flexibility and analytical
power of the new system. This capabilities set might include customer
service, consumer insight, logistics,
or innovation. Financial systems
and data that are sensitive, but that
do not support distinctive capabilities, can be moved later.
This is the approach Netflix
took in moving most of its systems
to Amazon Web Services, just as the
companys business model shifted
from mainly mailing DVDs to
mainly streaming video. The switch
began back in 2010, when Netflix
decided that converting most of its
operations to the cloud, including
the actual streaming of content
which at peak times accounts for

strategy+business issue 83

essay technology
42

Amazon, Google, and Athenahealth,


an electronic services company that
specializes in this industry and that
is also moving rapidly toward the
cloud. Halamka checked into the
physical security of the vendors data
centers and their encryption, as he
would with any stand-alone system.
But the compelling factors had more
to do with the ability of the system
to maintain regulatory standards for
patient confidentiality, to improve
administrative tasks, and to track
behavior. Encrypting data is sometimes seen as a panacea, he wrote in
a blog post about the subject, but if
we study the major security breaches
of the past year, well find that most
accesses occurred at the application

4/14/16 1:24 PM

sb83_036-043_ESY_SafetyInCloud_fin.indd 43

including Amazons S3 and Microsofts Azure storing not just credit


card data but information on video,
music, and book purchases. This
approach is noteworthy because
Apple tends to be very deliberate in
its choices about both outsourcing
and security.
Googles cloud platform, for
its part, lists a variety of enterprises that base their operations in the

its private information leaked to the


public, much of its business would
likely be destroyed.
Within the next five or six years,
we expect that most companies will
fully integrate cybersecurity into
their digital business processes. If
your company is one of the first, it
will help you outpace your competitors. The combination of advanced
technologies and cloud architectures

Netflix decided that converting


most of its operations to the cloud
would free up its engineers to
focus on creating new services.
Google cloud. They include Autism
Speaks, which maintains a massive
database of DNA samples linking
family genetics to the possibility
of learning disabilities; Image32,
which allows doctors to share visual images of X-rays and CT scans,
always under strict patient privacy
rules; the American Precious Metals
Exchange, which serves millions of
customers in buying and selling such
commodities as silver, gold, platinum, and palladium; Brand Vegas,
which sells 2,000 tickets per minute
to attractions in Las Vegas, including to some of its risqu nightclubs;
Energyworx, which compresses and
stores electric power usage data from
European homes and businesses;
the Khan Academy, which provides
video courses to students around
the world, and keeps track of their
onscreen behavior; and Workiva, an
online service used by companies to
compile and analyze the highly sensitive data that goes into their annual reports. If any of these enterprises
got caught in a cyber-attack and had

essay technology

37 percent of all Internet traffic


would free up its software engineers
to focus on creating new services
rather than managing its systems. In
the summer of 2015, the company
finally shuttered the last of its own
data centers, although it still maintains several in-house commodity
systems, such as human resources.
Netflixs data is sensitive because in addition to billing information, it contains lists of subscribers
movie preferences and a history of
what they have watched. The move
to the cloud represented a recognition that this was the only way to
protect the companys 62 million
subscriber accounts in the face of a
rapidly changing and growing operational environment. Netflix is a
firm believer in applying the concept of development operations a
combination of agile software development and automated software releases to constantly maintain and
improve its cloud-based security. It
has developed several security applications of its own. These include
Security Monkey, which constantly
monitors and analyzes the companys security efforts; and FIDO, or
Fully Integrated Defense Operation,
which automatically analyzes and
prioritizes security events depending
on their severity. Although no system is foolproof (indeed, Netflix has
experienced the leakage of customer
passwords onto public websites),
the cloud has enabled the company
to respond quickly to such events,
while maintaining its ability to design and implement new services
quickly and efficiently.
Netflix is just one of a number
of enterprises with significant cybersecurity concerns that have moved
their operations this way. Another
example is Apple, which runs its
iCloud services on multiple systems

43

will enable your business to respond


more flexibly to the changing business environment, to understand
your customers in greater depth, and
to innovate at faster velocities, all at
lower cost and all while keeping
your data more secure. +
Reprint No. 16208

David Burg
david.b.burg@us.pwc.com
is a principal with PwC US. Based in
McLean, Va., he leads PwCs global and
U.S. cybersecurity practice. He helps corporate clients, law firms, and the U.S. government in matters involving cybercrime
investigations, complex data analysis, and
operational initiatives.
Tom Archer
thomas.archer@us.pwc.com
is a partner with PwC US and serves on
the board of partners for the global PwC
network. Based in Silicon Valley, he is
PwCs leader for its global alliance with
Google. He was previously the U.S. leader
of the PwC technology industry practice,
and has advised multinational technology
companies for more than 25 years.

4/14/16 1:24 PM

feature global perspective


strategy+business issue 83

44

sb83_044-051_FEA_GlobalPowerShift-fin.indd 44

4/14/16 1:51 PM

PowerShift
Global

feature global perspective

Winners, losers, and


strategies in the new world
economic order.
BY DENNIS CHESLEY,
MILES EVERSON,
AND JOHN GARVEY

Illustration by Otto Steininger

During the mid-2000s, when emerging markets


were growing at breakneck speed, the cavernous gap
separating industrial and developing economies began
to close. This convergence took place against a backdrop of economic liberalization, built on the idea that
the financial systems of all nations would dovetail.
That period is now over. Emerging nations are no
longer growing as rapidly as they were, particularly in
comparison with developed economies; further, the
fissures among different systems have become more
evident. In PwCs 19th Annual Global CEO Survey,
released only 35 percent of the corporate leaders who
responded said they believed the world was moving toward greater economic union. Instead, 59 percent of
these chief executives believe that multiple models will
coexist and compete. Consider, for example, how differently government and business investment is conducted in the United States, China, India, Japan, and
the European Union. These nations and regions operate with fundamentally different assumptions about
the way an economy should be organized. The tension
among these assumptions is growing, not diminishing.

sb83_044-051_FEA_GlobalPowerShift-fin.indd 45

In short, a new global economic order is now emerging to replace the one that has existed since the end of
World War II. For the foreseeable future, the global
economy will be defined by a complex and continuously shifting set of economic relationships. They will be
increasingly interconnected, to be sure, but with everchanging rules for conducting business across borders.
As a business leader, how can you manage this complexity? How can you cross the threshold to the next
economic order with confidence and skill? The most effective way is to pay attention to three basic trends: the
dispersion of economic power, the continuing evolution
of state-directed growth models, and the accelerating
disruption felt by business from technological change.
These trends may seem self-evident. But none of them
is quite what it seems to be at first glance. Further, they
will continue to evolve along uncertain paths. None is
likely to progress simply as a continuation of what we
have seen in the past few years. By looking at these
trends closely, you can help your organization take the
substantive steps needed to thrive in the new global
economic order.

45

4/14/16 1:51 PM

Miles Everson
miles.everson@pwc.com
is PwCs U.S. advisory
business leader, overseeing
the U.S. firms capabilities
in consulting, deals, and
forensics. Based in New York,
he is a principal with PwC
US and the advisory leader
for PwCs Asia, Pacific, and
Americas cluster.

Trend 1: Economic Power Disperses

feature global perspective


46

A fundamental change is taking place. The U.S. dollar is losing its exclusive position as the worlds reserve
currency. For the next few decades, no single country
will be able to dominate the balance of payments as the
United States has done for more than 70 years.
The last time something like this happened was at
the end of World War II, and it was catalyzed by the
1944 Bretton Woods Conference. At that session and in
its aftermath, the United States brokered international
agreements to keep financial affairs running smoothly.
It has embraced a global leadership role ever since. The
multilateral institutions that emerged then, such as the
World Bank, the World Trade Organization, and the
International Monetary Fund (IMF), were subject to
strong U.S. influence, and they worked fairly well for
a long time. That isnt to say the sailing was always
smooth. When the U.S. unilaterally abandoned the gold
peg in 1971, for example, the Nixon Shock set off two
years of negotiations before major economies agreed to
float their currencies against the dollar. But throughout
the postwar period, the U.S. generally sat at the head of
the table with other large economies in making key decisions, with the intent of mutual gain among friendly,
mostly democratic, liberalized economies.
During the 70 years after Bretton Woods, the economic prominence of the United States was based on four
strong pillars. The first two were its burgeoning postwar
economy and the trade networks that the U.S. established
and dominated. These were also the engines of global
growth. The other two pillars were the dollars status as
a global reserve currency and U.S. influence over multilateral institutions. These provided stability to the global
economy and a platform for international cooperation.

sb83_044-051_FEA_GlobalPowerShift-fin.indd 46

John Garvey
john.garvey@pwc.com
is the U.S. banking and capital
markets leader for PwC, and
the financial-services advisory leader for PwCs Europe,
Middle East, and Africa cluster.
He is a principal with PwC US,
based in New York.

Also contributing to this


article was PwC vice chairman
and global leader of advisory
services Juan Pujadas.

Today, emerging economies are challenging all


four pillars. The most notable among the challengers is
China, whose global economic influence has grown
rapidly over the past decade. In 2014, China became
the largest economy in the world, in terms of purchasing power. It has been the fastest-growing G20
economy. One indication of Chinas powerful global
economic role is the fact that its recent slowdown has
rippled across global markets. This role has already
weakened the first pillar, the strength of the postwar
U.S. economy.
China is also now the worlds largest exporter. Its
rapid move into this role has given it enormous leverage in developing and influencing trade networks,
which has weakened the second pillar of American prominence. Not coincidentally, the effectiveness of multilateral trade agreements is deteriorating;
witness the fading momentum of the World Trade
Organization. In their place, regional agreements
have begun to dominate. The ongoing negotiations
over the China-backed Free Trade Area of the AsiaPacific (FTAAP) and Regional Comprehensive Economic Partnership (RCEP) are pitted against the recently completed Trans-Pacific Partnership (TPP),
backed by the United States. These regional deals represent an erosion of the U.S.s ability to set the rules for
the whole world, and of any nation to oversee a global
consensus that favors its trade agenda alone.
Chinas progress on establishing the renminbi
(RMB) as an international trade-settlement currency,
which has undermined the third pillar, has been even
more rapid. The RMBs status as an elite global currency was enshrined in November 2015, when the IMF
decided to include the RMB in the basket of currencies

strategy+business issue 83

Dennis Chesley
dennis.l.chesley@pwc.com
is the global risk leader
for PwC. Based in Washington,
DC, he is a principal with
PwC US.

4/14/16 1:51 PM

Although China will not replace

the United States, the U.S. will find it


increasingly difficult to regain its
global economic dominance.

sb83_044-051_FEA_GlobalPowerShift-fin.indd 47

dent Xi Jinping, as quoted by the state-sponsored Xinhua News Agency in February 2015, said that the AIIB
will finance Chinas ambitious One Belt, One Road
initiative to build overland and maritime infrastructure
linking East Asia, the Middle East, Africa, and Europe.
The resulting New Silk Road, as it has been dubbed,
will help develop emerging economies, increase trade between China and the rest of the world, and make use
of excess capacity in the Chinese domestic economy. It
will also support Chinas political and economic interests
around the world.
To be sure, these efforts may be tempered by the
recent decrease in the rate of Chinese economic growth.
The U.S. economy remains strong, and the legacy of
its postwar economic dominance continues to influence
the behavior of many globally focused multinational
companies and investors. Investors are also waiting
for Chinas capital account to open further before they
adopt the RMB. And capital market investors are cautious about China because they dont yet see its business
environment as friendly enough to their interests.
Nonetheless, the creation of a new global economic
order is inevitable. Although China will not replace
the United States, the U.S. will find it increasingly difficult to regain its position of global economic dominance. Dont forget that other economies are building
their power and influence, too. India, the worlds thirdlargest economy by purchasing power, is forecast by the
IMF to grow fastest among G20 economies in 2016.
It will emerge as an influential economic actor with its
own interests.
In this world of dispersed economic power, stability
will be more prized than ever. But the nature of that stability will not be dictated by one or two major players.

features title
feature
global
of the
perspective
article

that make up the IMFs special drawing rights (SDRs).


The RMB will have a larger weight in the five-currency SDR basket than the Japanese yen and the British
pound sterling. Over time, the RMBs reserve currency
status will create an alternative to the dollar, with support from the many nations that see an advantage in
having a multipolar global economic order.
As for the fourth pillar, China is pushing hard
to expand its presence in existing multilateral institutions and to build new ones of its own. According to
the Economist, Chinas contribution to the United Nations budget doubled between 2010 and 2015, and now
represents 5 percent of total U.N. contributions. China
is increasingly engaged with U.N. efforts in peacekeeping, climate change mitigation, and poverty reduction.
China also led the creation of the Beijing-based
Asian Infrastructure Investment Bank (AIIB), which
began operations on January 16, 2016. While cooperating with its counterparts to promote and support
sustainable development in the Asia-Pacific region,
this bank will operate on a model designed for the
new global economic order lean, clean, and green,
according to its website. A total of 57 nations, which
have committed US$100 billion in capital, are members
of the AIIB. Despite the skepticism of the U.S. government, the signatories included four of the United States
G7 partners Germany, France, Italy, and the United
Kingdom. China also joined with Russia, India, Brazil,
and South Africa to form the Shanghai-based New
Development Bank. Beyond highlighting the institutional underpinning of the new global economic order,
these two multilateral development banks will amplify
Chinas influence on global development finance.
How will that financing be deployed? Chinese presi-

47

4/14/16 1:51 PM

Trend 2: The State-Directed Model Evolves

feature global perspective


48

This current shift in global economic power will be


different in one important respect from the last major shift, in 1944. Then, the baton of global economic
influence was passed from the U.K. to the U.S., two
countries that had a similar world view. Even so, it had
taken 40 years for economic polarity to move across the
Atlantic; that shift had begun in the early 20th century.
Today, in contrast, were seeing a much faster rebalancing among disparate economic and political systems,
each with a different level of reliance on markets and
state control. Chinas state-directed model has delivered
significant growth over the past decade, making it clear
that the state-directed model will not be superseded by a
traditional form of capitalism anytime soon.
Some argue that any state-directed economy, be it
China or another country, will by definition become
stagnant. But stagnation is not inevitable. As with the
effective management of a large corporation, success
requires the ability to adapt to evolving economic pressures. One example is Chinas liberalization of stateowned enterprises, which included measures allowing
partial privatization. This has lessened state control in
sectors categorized as competitive (such as retail and
manufacturing) and concentrated state influence in
public interest sectors (such as energy, rail, shipping,
and telecom).
The state-directed approach remains popular because it is associated with robust growth in emerging
economies. Governments in Latin America and Russia, among other areas, have exerted a stronger guiding
hand in their national champions in recent years. Major infrastructure projects will further diffuse Chinas
model of state-driven investment to countries along the

sb83_044-051_FEA_GlobalPowerShift-fin.indd 48

New Silk Road. Some governments will manage this


process better than others, and the collapse of oil prices
will stress state-directed energy exporters. But some are
responding by streamlining state-owned enterprises and
strengthening the quality of their management; there
will be enough of these to sustain the state-directed
growth model. Indeed, the more it is stressed, the more
it is likely to evolve.
Similarly, there will probably be more forms of
welfare-oriented capitalism, as well as hybrid systems,
emerging during the next decade, as each country and
region addresses the challenges of the turbulent global
economy. Although it is possible for these different economic systems to coexist harmoniously, the new multipolar global economic order will add friction to multinational business operations.
The dispersion of economic power, and the resulting incompatibilities, will be most evident in the areas
of logistics, telecommunications, software, and infrastructure. With parallel systems in competitive spheres
of influence, the movement of supplies, goods, services,
capital, and talent from one sphere of influence to another will be less aligned. Businesses can expect periodic disruptions and obstacles, including transaction
payment settlement delays and trade tariffs.
One potential example involves the global payment
system. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, which exchanges global payment information among more than
9,000 financial institutions around the world, is heavily influenced by American and European banks. In
2015, the China-backed Cross-Border Inter-Bank Payment System (CIPS) was announced as an alternative
to SWIFT. If it proceeds as planned, CIPS will process
cross-border payments denominated in RMB. It will
not replace SWIFT, because 45 percent of cross-border
transactions are dollar-denominated. Every international bank will still need access to the U.S. banking system.
Yet with a well-functioning CIPS on the horizon, some
international banks could decide to operate without a
U.S. banking license, and the U.S. would be less able to
exert its banking rules over non-U.S. banks. This would
affect the interoperability of transaction payment systems, making global business harder to conduct.
Nations will have to choose their levels of exposure
to and interaction with different spheres of influence. For
businesses, however, rationalizing operations and finance
among environments with different approaches to market direction and state direction will be more challenging

strategy+business issue 83

It will depend on the quality of economic relationships


among leading nations, even those that have different
economic systems. A good example of the new type of
relationship is the natural resource investments made
recently by a few countries, including China, in frontier nations. These have caused some concern over the
potential for exploitation. Yet Chinas investments in
Africa (as scholars Wenjie Chen and Heiwai Tang have
pointed out) are more diverse than is widely acknowledged. China is popular in many parts of Africa, and
exploitation concerns may be overblown. The ultimate
fate of these investments depends on the ability of the
outsiders to build mutual trust with the local communities where they invest.

4/14/16 1:51 PM

Technology innovators are

more distributed around the world today, and


capital seeks them out wherever they live.

Trend 3: Technological Disruption Accelerates

Technology has always been a disruptive force. After


1945, governments invested heavily in military and
space research. Game-changing technologies such as
satellite-based navigation and the Internet were products of these investments.
Today, a variety of new technologies are emerging,
including potentially dramatic breakthroughs in robotics, nanotechnology, and medicine. All of these will affect
our societies and businesses. But from the perspective of
economic influence, three developments stand out. They
are not technologies themselves. They are political and
commercial reactions to technology disruption.
The first involves cybersecurity, which is required as
Internet hackers continue to gain access to intellectual
property, intimidate adversaries, and disrupt public and
private affairs. The number of attacks on industrial control systems worldwide rose fourfold from 2013 to 2014,
according to a Dell Security report cited by the New
York Times in October 2015. This level of malfeasance
ensures cybersecuritys presence on every businesss
agenda. A global defense against cyber-threats may not
be feasible, because it would require an unprecedented
and ongoing level of international cooperation.
The alternative, however, may lead to draconian
measures that constrain business. It has been widely reported that many governments have intervened in their
countries cyber-activity, to the point where it affects the
use of the Internet. Regardless of the motive, these actions can also limit the potential for economic growth.

sb83_044-051_FEA_GlobalPowerShift-fin.indd 49

Accordingly, governments will have to calibrate their actions, much as they have with foreign exchange markets
in the past, to balance the intended objectives of intervention with the potential impact on economic growth.
The second technology-related development is the
shifting geopolitics of energy. The power of oil-producing nations has been evident at least as far back as the
oil crisis of 1973. Now, technologies designed to recover
unconventional sources of oil and gas have overturned
the balance of supply and demand. The U.S. Energy Information Administration estimates that the U.S. could
become a net exporter of energy as early as 2019, on the
strength of the fracking revolution. Even if oil prices rebound somewhat, the increasing use of renewables will
reduce the geopolitical importance of oil producers.
It should come as no surprise that the two largest
oil-consuming nations, the U.S. and China, are also the
biggest investors in renewable energy. Another sign of
the shift in fortunes is the Breakthrough Energy Coalition announced by Microsoft cofounder Bill Gates and
Facebook CEO Mark Zuckerberg in November 2015.
This multibillion-dollar research partnership between
the public and private sectors is not just a war on climate change. It is an effort by information technology
industry leaders, including Gates; Zuckerberg; Amazon
CEO Jeff Bezos; Salesforce.com founder Marc Benioff;
Hewlett-Packard CEO Meg Whitman; and venture
capitalists John Doerr, Vinod Khosla, and Reid Hoffman to carve a position of influence over the energy
supply for the technology industry.
The third important technology-related trend is the
geographic distribution of technological developments,
which are no longer limited to developed economies.
Technology innovators are more distributed around

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than tax and regulatory compliance. And those alignments will change over time, requiring companies to develop a more adaptive approach to cross-border business.

49

4/14/16 1:51 PM

Prescription for Business


50

Trends dont exist in isolation. They interact with one


another to create patterns of change. Although you
cant predict the ways they will combine, you can prepare for the types of uncertainty you know lie ahead.
For example, some energy industry observers recognized that fracking would combine with geopolitical
tension to disrupt the established oil production system,
leading to a long slump in energy prices. They saw that
this would reduce the value of investments in clean energy production and upend the economies of oil-rich
emerging markets.
Combine this shift in oil price with the dispersion
of economic power, and you have a potential global economic crisis, as the Economist suggested in a scenario
published in October 2015. But such a crisis could yield
significant benefits. With no dominant economy calling
the shots, a crisis of this type would give Asian government-owned banks and large U.S.-based commercial

sb83_044-051_FEA_GlobalPowerShift-fin.indd 50

banks a stronger awareness of their common interest.


They might then seek to establish, with their governments approval, a global lender of last resort.
With luck, it wont take a global crisis like the
one the Economist imagined to spur mutual recognition of common interests in a world of dispersed economic power. But even crises are not necessarily bad.
In fact, all this uncertainty can lead to great opportunities for companies that can learn to be appropriately
competitive.
The new environment is unfamiliar, even to experienced decision makers. If you are in a position to make
major decisions for an enterprise, we believe you should
focus on six key areas.
1. Develop a cyber-focused center of excellence.

Cyber-attacks are a reality. Like all other major risks,


they demand that you closely examine your risk appetite, revisit business processes to minimize their impact,
and align your infrastructure and talent to address the
technical and business challenges involved. You will
need, at a minimum, to be able to respond effectively
to attacks and breaches ideally knowing in advance
what you will do when an attack occurs (see Safety in
the Cloud, by David Burg and Tom Archer, page 36).
2. Master the RMB. Economic weakness and government intervention in the U.S. and Europe, combined
with Chinas economic growth and liberalization, have
broadly legitimized use of the RMB as both a trade and
a reserve currency. One source of competitive advantage
in the coming years will be access to the RMB. Another
will be cost-effective correspondent banking and clearing arrangements, which enable banks to conduct crossborder transactions on each others behalf. You will
need to stay current on the changing economic landscape and integrate your treasury capabilities such
as capital forecasting, foreign exchange, and liquidity
management with the rest of the business.
3. Recognize government relations as a key competency. As power devolves to regional, national, and

local levels, and trade agreements are regionalized, the


ability to legitimately influence government stakeholders will often mean the difference between success and

strategy+business issue 83

feature global perspective

the world today, and capital seeks them out wherever


they live. For example, according to the latest Global
Innovation 1000 study conducted by Strategy&, PwCs
strategy consulting business, 94 percent of large publicly held companies conduct research and development
outside their home country. Moreover, those with a
more global R&D footprint tend to outperform their
less-globalized competitors financially.
Important technologies are emerging where they
are needed the most. For mobile payments, thats in
Africa, where millions of people have no access to standard banking or landline telecommunications. In the
industrialized world, financial institutions are scrambling to study blockchain, a technology for automated
verification that enables digital currencies, such as bitcoin. If the right mix of new financial technologies
emerges on a global scale, it could dramatically change
the structure of the financial-services industry. Indeed,
game changers in any industry can come from anywhere. This creates unpredictability and makes it even
harder to rely on the established sources of geopolitical
power and stability.

4/14/16 1:55 PM

sb83_044-051_FEA_GlobalPowerShift-fin.indd 51

tions do exist in most countries, the markets learn to


embrace them, and they develop staying power. It has
happened in every country that has made the transition
to a global industrialized economy. Todays volatility
doesnt change any of that. There may never be a new
normal of stability, but the institutions of stability will
continue to use their influence to promote sustained
growth and resilience, the kind that can support business because civilization needs it. The most farsighted leaders of these institutions are beginning to realize
how they can play this role. +
Reprint No. 16209

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failure. This no longer applies solely to regulated industries such as banks and utilities, but to all organizations.
Geopolitical risk management, government stakeholder
management, and the ability to master publicprivate
partnerships will become requirements for companies
that want to prosper on a global basis.
4. Manage effectively in a multipolar world. Start by
assessing how your business or policy objectives are affected by the economic and political power shift to a
multipolar world, particularly in Asia, where China will
increasingly compete for dominance and India is rapidly evolving. You will also need to prepare your organizations logistics capabilities, so that you can move supplies, goods, services, capital, and talent across spheres
of influence.
5. Cultivate talent wherever you do business. The
local knowledge and language skills of the workforce,
particularly the management team, must reflect your
business footprint and opportunities around the globe.
Although global rotations will still be valuable, differences between markets under various spheres of influence will require more local or regional talent development. In addition, governance models will need to
adapt, carefully balancing local decision making with
regional and global considerations and requirements.
6. Nurture innovation everywhere. Competitive dynamics in this rapidly evolving world could easily be
disrupted by upstart companies whose leaders anticipate trends and get ahead of them. To fight back, incumbents will need to establish an innovation culture
that spans the globe. The savviest companies will establish innovation centers with a relatively open-ended
brief, to keep the company thinking ahead, regularly
looking five years into the future. These efforts will extend beyond simple technological disruptors. Work together with other enterprises to develop complex new
industrial ecosystems.
As you put all these practices into place, maintain
an intense focus on your own distinctive goals in
part to balance the pressures of near-term volatility. Be
mindful that it takes time to build institutions and
even longer to build trust in them. Yet those institu-

Resources
Barry Jaruzelski, Kevin Schwartz, and Volker Staack, Global Innovation
1000: Innovations New World Order, s+b, Oct. 27, 2015: Asia is now
the top regional destination for R&D spending, a dramatic example of
the issues described here.

51

Art Kleiner, Carlota Perez: The Thought Leader Interview, s+b,


Nov. 29, 2005: A long-wave model of technological change and financial
capital may help explain todays dynamics.
John Plansky, Tim ODonnell, and Kimberly Richards, A Strategists
Guide to Blockchain, s+b, Jan. 11, 2016: Introduction to the distributed
ledger technology that could be a game changer for the global financial
system.
PwCs 19th Annual Global CEO Survey, Redefining Business Success in
a Changing World, Jan. 2016: Chief executives express aspirations and
concerns related to the global economy.
Bob Sullivan, John Garvey, Justo Alcocer, and Antony Eldridge,
Capital Markets 2020: Will It Change for Good? (pdf), PwC, 2015:
How the structural changes affecting the financial industries can, sooner
or later, lead to equilibrium.
We All Hang Together: The Crisis of 2023, Economist, Oct. 3, 2015:
How global forces could spin into an economic crisis.
More thought leadership on this topic:
strategy-business.com/global_perspective

4/14/16 1:55 PM

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strategy+business issue 83

52

sb83_052-063_FEA_OutsideIn-fin.indd 52

4/14/16 2:12 PM

Faced with volatility, more companies are looking


beyond their own ranks to find new leadership.

feature strategy & leadership

From
theOut
sideIn
by DeAnne Aguirre, Per-Ola Karlsson, and Gary L. Neilson

Illustration by John Klotnia

53

In September 2015, Ralph Lauren, founder and chief executive officer of the
fashion empire that bears his name, made news by announcing he would step
down from his post as CEO. His decision to hand off the reins of his company
wasnt surprising Lauren was about to turn 76, and the companys financial
performance had been slipping. Rather, the announcement was noteworthy
because Lauren is known for favoring continuity in his clothing design and in
management. During his nearly 50 years at the company, he had made it a
practice to promote from within. And yet Laurens handpicked successor would
be a newcomer to the firm, Swedish retail executive Stefan Larsson. Larsson
had not lived and breathed Polo. And his prior experience was at discountoriented retailing brands. But he was nonetheless a rising star in the business
of fashion. Larssons accomplishments include driving successful international
expansion over a 15-year career at H&M, and engineering an impressive
turnaround of Gaps Old Navy division, of which he was named president in 2012.

sb83_052-063_FEA_OutsideIn-fin.indd 53

4/14/16 2:12 PM

DeAnne Aguirre
deanne.aguirre@pwc.com
is an advisor to executives
on organization topics for
Strategy&, PWCs strategy
consulting business. She
is a San Franciscobased
principal with PwC US.

feature strategy & leadership


54

Per-Ola Karlsson
per-ola.karlsson@
strategyand.ae.pwc.com
leads Strategy&s organization
and leadership practice in the
Middle East. He is a partner
with PwC Middle East.

This episode is indicative of a broader trend evident


in the high-stakes arena of CEO succession. Hiring
an executive from outside a company to serve as chief
executive officer has historically been a last resort
a move companies typically made only when a board
of directors needed to force out the incumbent CEO
suddenly, or had failed to groom a suitable successor,
or both. Sometimes companies would interview outsiders as they were planning to make a change. But
often those interviews were simply pro forma, and the
board would revert to an insider as the final choice.
Thats changing. Over the last several years, we have
seen more companies deliberately choosing an outsider
CEO. And when they do, more often than not, it is part
of a planned succession.
As part of the 2015 edition of the annual Strategy&
CEO Success study, we looked back at 12 years of detailed data on incoming CEOs at the world 2,500
largest public companies. In the latest four-year pe-

Gary L. Neilson
gary.neilson@pwc.com
is a thought leader on
organization design and leadership for Strategy&. Based
in Chicago, he is a principal
with PwC US.

Also contributing to this


article were s+b contributing
editor Rob Norton and
Spencer Herbst, a Strategy&
researcher and senior
associate with PwC US.

riod (201215), boards chose outsiders in 22 percent


of planned turnovers, up from 14 percent in 200407.
That represents a 50 percent increase in the rate of outsider selection. And 74 percent of all the incoming outsider CEOs in 201215 were brought in during planned
turnovers, up sharply from 43 percent in 200407 (see
Exhibit 1).
Why are a higher proportion of newly chosen
CEOs at large companies coming from outside? Several major structural factors are encouraging boards to
widen their search for a more diverse set of competencies and backgrounds. Businesses in a wide range of
industries are facing significant discontinuities including industry convergence, digitization, and regulatory change. That appears to be leading boards to look
harder for CEOs whose backgrounds, perspectives, and
skill sets are different from those the in-house candidates possess. Boards of directors are also growing
more independent, meaning there are fewer company

Exhibit 1: Going Outside


Companies are more often choosing outsiders as CEOs as the result of planned successions.
Incoming CEOs via planned turnover, by pedigree

Incoming outsider CEOs, by turnover type

1,200

300

748

800
600
400

560

949
78%

83%

200
150

86%

50
14%

200407

17%

213
42%

57%

200811

43%

58%

74%

22%

201215

Note: Excludes turnover events resulting from M&A and interims.


Source: Strategy& 2015 CEO Success study

sb83_052-063_FEA_OutsideIn-fin.indd 54

183

281
26%

100

200
0

250

FORCED turnover
PLANNED turnover

200407

200811

201215

strategy+business issue 83

1,000

Incoming INSIDER CEOs


Incoming OUTSIDER CEOs

4/14/16 2:12 PM

CEO Turnover
in 2015

high rate of planned turnovers de-

continued to favor hiring CEOs from

spite the surge of activity in M&A and

the country and region in which the

forced turnovers this year confirms

company was headquartered. Only

that companies have made significant

17 percent of incoming CEOs in 2015

EO turnover at the 2,500

improvements in succession planning

hailed from a different country. This

largest companies in the

and practice.

close-to-home trend was particu-

world rose from 14.3 percent in 2014

Brazil, Russia, and India had the

larly visible in Japan (where only

highest percentage of total turnovers

3 percent of new CEOs came from

high for the CEO Success study. The

in 2015, at 24 percent, close to the

another country) and China (6 per-

higher rate was driven by a com-

all-time high for these countries set

cent). Western European countries

bination of unusually strong M&A

in 2012. Japan had the next-highest

were most likely to hire a foreign CEO,

activity and a rise in the rate of forced

rate, at 19 percent up sharply from

with 19 percent coming from a dif-

turnovers. The overall rate of planned

12 percent in 2014. Nearly all those

ferent country within Europe and an

turnovers decreased slightly, but

turnovers were planned. The lowest

additional 11 percent coming from a

remained near the record high levels

rate of total turnovers was in North

different region. Globally, 72 percent

of the last five years (see Exhibit A).

America: Only 14 percent of U.S. and

of incoming CEOs had never worked

Canadian companies changed their

in another region.

In 2015, M&A-related turnovers


accounted for 17 percent of all turnovers, the highest share since 2007.

CEO in 2015.
The telecommunication services

Exhibit A: A Rising Tide

Thats not surprising, given the record

business had the highest percentage

CEO turnover rate, by succession reason

US$5 trillion global deal volume

of turnovers in 2015, at 25 percent,

20%

in 2015. Of the turnovers not related

followed by energy (23 percent, up

to M&A, 22 percent were forced.

from 18 percent in 2014) and ma-

Thats up from the low of 14 percent in

terials (20 percent). These three

2014 and back to levels seen in 2012

industries, together with consumer

and 2013.
Planned turnovers in 2015 were
78 percent of the total not related

year-high turnover rates. Information

to M&A near the 81 percent aver-

technology had the lowest turnover

age over the last five years. From

rate, at 11 percent, and was followed

2000 through 2010, the proportion

by healthcare (12 percent).

of planned successions was only 65


percent. We believe the stable and

Despite the increasingly global


nature of business, companies

insiders on them than ever before. These independent


board members have a broader network of experiences,
and have exposure to a broader network of executives.
Meanwhile, investors of all types but especially large
institutional investors and activists are bringing
greater scrutiny to board decision making. Aggressive

sb83_052-063_FEA_OutsideIn-fin.indd 55

16%

M&A

12%

55

Forced

discretionary, consumer staples, and


financial services, all reached five-

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to 16.6 percent in 2015 a record

8%

Planned

4%

0%
2000

2005

2000

2015

Source: Strategy& 2015 CEO Success study

activist investors often explicitly state that bringing in a


new CEO is part of their agenda.
For our part, we view the increasing attention given to outsider CEOs as a new step in the continuing
evolution of CEO succession planning. As we demonstrated in last years study, the most important reason

4/14/16 2:12 PM

Boards may recognize that insider


candidates are too steeped in the
companys past practices to envision
new approaches.

sb83_052-063_FEA_OutsideIn-fin.indd 56

boards and senior leaders can bring them into the fold
to give them the best chance of succeeding.
The Outsider Trend

Discontinuous change is the principal reason that more


companies are turning to outsiders. Some industries,
such as energy, are reeling from large and unusual
swings in supply, demand, and prices. Others, such as
telecommunication services, are moving from an assetintensive to a consumer-intensive business model. Industries such as utilities and banking are adapting to
major changes in regulatory policies. And in nearly all
sectors, companies are rethinking their business models
in reaction to the rise of digitization.
Companies that find the context in which they
operate changing so rapidly often need leaders with
experiences and skill sets that are different from the
ones that can be found within the companys current
management ranks. Internal CEO candidates may have
excellent records executing past and even present
business models. But these candidates may lack the
skills needed to lead companies through the transformations that will be necessary to succeed in the future,
and the boards know it. Boards may also recognize that
insider candidates are too steeped in the companys past
practices to envision new approaches.
Our data supports this explanation. The industries that have been most affected by discontinuities are
those that have brought in a higher-than-average share
of outsiders over the last several years. In telecommunication services, for example, outsiders made up 38 percent of incoming CEOs from 2012 to 2015, compared
with the 24 percent average for all companies. Utilities
had the next-highest share from 2012 to 2015 (32 per-

strategy+business issue 83

feature strategy & leadership


56

for succession planning is to ensure orderly transitions


of business leadership. If this delicate maneuver isnt
carried off successfully, companies can lose momentum
and see their financial performance decline significantly
(see The $112 Billion CEO Succession Problem, by
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson,
s+b, May 4, 2015). This years study shows that succession planning at large companies continues to improve.
The rate of planned CEO turnovers as opposed to
those in which CEOs were forced out remained near
its relatively high levels of the last few years. At the same
time, the total number of turnovers rose in 2015, driven
primarily by an unusually high rate of merger and acquisitionrelated turnovers, as well as by an uptick in
forced turnovers (see CEO Turnover in 2015, page 55).
To be sure, the large majority of companies have
continued to promote insiders to the CEO position. We
think this will remain the preferred and predominant
outcome, even though outsiders have now become legitimate choices rather than last-resort options. Boards
of directors and senior leaders following well-designed
succession practices should have a deep bench of internal candidates. They will know the candidates well,
and will have played an important role in their career
development. In many cases, insiders will continue to
be the strongest candidates. But the discontinuities and
other factors driving the outsider CEO trend suggest
that boards and senior leaders may want to factor the
outsider option into their succession planning.
In this years study, we look at the circumstances in
which outsider CEOs are being hired and examine the
characteristics of the companies that are hiring them.
We also consider the attributes that boards should look
for when considering outsider candidates, and how

4/14/16 2:12 PM

2015: Not the


Year of the
Woman CEO

executives. Since 2004, incoming

over for a CEO role. The likelihood

women CEOs in the U.S. and Canada

that some companies arent recogniz-

have made up 4 percent of the total,

ing the potential of internal women

compared with the global average

executives may cause them to be

of 3 percent. In fact, 42 percent of

receptive to recruitment efforts for

all the women CEOs who have been

outside CEO positions. Given the rise

ven though many large

appointed over the last 12 years were

of outsider CEOs noted in the main

enterprises continue to be

appointed at North American compa-

article, however, the fact that more

run by women, 2015 represented a

nies. But in the U.S. and Canada, only

companies are considering outsid-

departure from the growing gender

one woman CEO was appointed in

ers might improve the chances for

diversification in the C-suite. Just 10

2015 to our sample set of the worlds

women CEOs in the future.

women were among the 359 incom-

2,500 largest public companies

ing CEOs at the worlds 2,500 largest

Andrea Greenberg, who became CEO

CEOs in 2015 is that female CEOs are

companies in 2015. At 2.8 percent,

of MSG Networks in the spin-off from

no longer more likely to be forced out

that was the lowest share since

Madison Square Garden. At 1.1 per-

than their male counterparts. From

2011, and far below the 5.2 percent

cent, this was the lowest percentage

2004 to 2015, women CEOs were 27

peak reached in 2014. Although the

of incoming women CEOs in the U.S.

percent more likely to be forced out

numbers of incoming female CEOs

and Canada since we began tracking

than men CEOs. But in 2015, for the

have always been low, there had

the incoming class of CEOs in 2004

first time, the difference was not

seemed to be a slow trend toward

(see Exhibit B).

statistically significant.

Women CEOs continue to be

years. Despite this years reversal, we

hired from outside more often than

remain confident that demographic,

men. From 2004 to 2015, 32 percent

educational, and societal forces will

of new women CEOs have been out-

continue to promote greater diversity

siders, compared with 23 percent of

in the C-suite. By 2040, as much as

men. In the past, we have attributed

a third of the incoming CEO class

this to the relatively low number of

around the world will be female (see

women in senior leadership roles

Women CEOs: A Slow but Steady Up-

within companies. Only 14.2 percent

ward Trend, in The Lives and Times

of the top five leadership positions

of the CEO, by Ken Favaro, Per-Ola

at S&P 500 companies are held by

Karlsson, and Gary L. Neilson, s+b,

women, according to a CNNMoney

May 30, 2014).

analysis.

One of the least impressive

There could be another factor at

results in 2015 was in North America,

work. Senior female executives, like

which has historically been the most

senior male executives, often leave

welcoming of all regions for women

companies when they are passed

cent), followed by healthcare (29 percent), energy (28


percent), and consumer staples and financial services
(both 26 percent). The share of incoming insiders was
below average from 2012 to 2015 in industrials (21 percent), consumer discretionary and materials (both 19
percent), and information technology (15 percent). The
share of incoming outsiders at information technology
companies, in fact, was much lower than in 200407,
perhaps because the industry has been maturing and

sb83_052-063_FEA_OutsideIn-fin.indd 57

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higher numbers over the last several

One positive trend for women

Exhibit B: Losing Ground


Share of incoming women CEOs in the
U.S./Canada
8%

6%

4%

57

2%

0%
2005

2010

2015

Note: Includes turnover events resulting from


M&A and interims.
Source: Strategy& 2015 CEO Success study

leadership development practices are now providing


more internal candidates.
Institutional changes in the governance and leadership of companies, as well as in capital markets, are also
making it more likely for companies to choose an outsider. Boards of directors have become much more independent in recent years, due both to regulatory changes
made in the wake of the many post-2000 corporate
governance scandals and to an overall drive for better

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sb83_052-063_FEA_OutsideIn-fin.indd 58

had been in office for four years or less, an outsider was


selected as successor 28 percent of the time. When the
outgoing CEOs tenure was between four and eight
years, the outsider share fell to 21 percent. When the
outgoing CEO had been in office for eight or more
years, the share of outsiders chosen as successor fell to
17 percent.
Whether the board chair was formerly the company CEO also affects the likelihood of an outsider appointment. Over the last six years, companies at which
the board chair was not the former CEO hired outsiders 28 percent of the time, compared with 16 percent at
companies where the board chair was the former CEO.
The choice of an outsider CEO also seems to be
somewhat self-reinforcing. We found that companies
whose outgoing CEO was an outsider were more than
twice as likely to choose an outsider as the new CEO.
From 2004 to 2015, only 18 percent of companies with
an outgoing insider chose an outsider in planned and
forced successions; this compared with 36 percent of
companies with an outgoing outsider.
A final reason for the growing prominence of outsiders in CEO turnovers is that the nature of employment has changed dramatically over the last several
decades. New employees joining a large company as
late as the 1970s especially those pursuing executive careers had good reason to believe their career
at the company might continue until retirement. Few
people who have entered the workforce since then
have been under any such illusion. And given that the
median age of incoming CEOs in 2015 was 53, most
CEOs assuming office recently and in the future will
be more comfortable with the idea of moving to another company.
Financial Performance

Historically, there has been a strong correlation between


poor financial performance and the subsequent hiring
of outside CEOs. Companies have been one-third more
likely over the last 12 years to select an outsider CEO
in both forced and planned successions when the company has been underperforming financially, as mea-

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58

corporate governance. In 2015, according to the Spencer Stuart Board Index, 84 percent of all board directors
of S&P 500 companies were independent, and 29 percent of boards had a truly independent chair, up from
9 percent in 2005. The idea of separating the board of
directors from company management has taken hold
around the world, and the days of the 20th-century
imperial CEO presiding over a board made up of insider directors are fading. The share of incoming CEOs
also named board chair has fallen precipitously over the
last 12 years, and hit a record low of 7 percent in 2015.
This sea change in board independence has
brought greater diversity to the way boards evaluate
CEO candidates. Company insiders are often unable to
imagine that anyone from outside the company could
understand or manage the business better than insider
managers, particularly when the board chair was once
the CEO. Outside directors, by contrast, look at the
universe of potential future CEOs through a wider aperture. (There is one area in which diversity seems to be
in retreat, however: gender. See 2015: Not the Year of
the Woman CEO, page 57.)
Another reason boards have become more independent and, we would argue, more professional is
shareholders demand that they do so. Institutional
shareholders have become more willing to use their
power and their voices to push for changes in governance, strategy, and leadership. Since the 1990s, large
public employee pension funds have become more active, and more recently, hedge funds have become a
force for shareholder activism. In 2015, according to
Activist Insight, 551 companies around the world were
subjected to public demands by activists, up 16 percent
from 2014. Almost half the companies at which an
activist investor gains a board seat replace their CEO
within 18 months, according to SharkWatch, the corporate activism database of FactSet Research Systems.
Our data shows that the background of the incumbent CEO also affects the likelihood of choosing
an outsider. We found that the longer the tenure of an
outgoing CEO was, the less likely it was that the successor would be an outsider. When the outgoing CEO

4/14/16 2:12 PM

Better-performing companies tend


to have better succession planning,
and they are better able to judge when
an outsider is the right choice.

Exhibit 2: Performance on Par


In recent years, CEOs hired as outsiders have matched the performance
of CEOs promoted from within.
Median total shareholder returns, by outgoing CEO pedigree
12%
8%

Outgoing INSIDER CEO


4%
0%

Outgoing OUTSIDER CEO


4%
8%

2000

2005

Source: Strategy& 2015 CEO Success study

sb83_052-063_FEA_OutsideIn-fin.indd 59

2010

2015

cause the companies had not been performing well,


these outsiders started with a performance disadvantage. Since we began tracking succession data in 2000,
departing insider CEOs have delivered higher median
shareholder returns over their entire tenure in all but
a few of the years we tracked often by a meaningful margin. In the last three years, however, the insider
performance premium has disappeared (see Exhibit 2).
One reason, we believe, is that the recent crop of outgoing CEOs includes a higher number who were hired
in planned rather than forced turnovers, and fewer of
them were themselves forced out.

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sured by total shareholder return (TSR) over the tenure


of the outgoing CEO. From 2004 to 2015, 25 percent
of outsider CEOs who were appointed in planned successions replaced CEOs who had generated TSRs in the
bottom quartile, compared with 16 percent of the incoming insiders. In the last two years, however, boards
in all regions have become more likely to appoint an
outsider in a planned succession even when the outgoing CEO has performed well. In 2015, for example,
high-performing companies (those in the top performance quartile) hired a larger share of outsiders than
did low-performing companies. The reason, we believe,
is that better-performing companies tend to have better
succession planning, and they are better able to judge
when an outsider is the right choice.
Insider CEOs have historically outperformed outsiders over their tenure due in part to the fact that
most outsiders were hired in a forced succession. Be-

Geographic Range

There are significant regional variations in the way that


companies with different performance characteristics
hire outsiders.
North America. Over the last 12 years, poorly performing companies in the United States and Canada
were just as likely to hire an outsider CEO in forced
turnovers as in planned ones. High-performing North
American companies in planned successions tended
not to choose outsiders. Their superior performance
suggests that choice may be because they also have
good leadership development and succession planning.
North American companies were also less likely to hire
serial outsiders than were other companies, particularly
Western European companies. Again, we believe this
shows that superior succession planning enables these
companies to choose outsiders for strategic purposes
to change direction, for instance and these firms
are then able to follow the outsiders with internal candidates who can continue the new direction. In forced
successions, high-performing North American compa-

59

4/14/16 2:12 PM

60

Exhibit 3: Forced Exits


Western European companies that forced CEOs out were most likely to
hire outsiders.
Incoming outsider CEOs, by company performance and region, 200415
60%
50%
51%

55%

LOW-performing companies
HIGH-performing companies
47%

40%
40%
30%

34%
26%

20%
10%
0%

Western Europe

BRIC/Other
Emerging

U.S./Canada

Note: Excludes turnover events resulting from M&A and interims.


Source: Strategy& 2015 CEO Success study

sb83_052-063_FEA_OutsideIn-fin.indd 60

Emerging markets. Companies in countries such as

Brazil, Russia, India, and other emerging markets are


hiring a much larger percentage of outsider CEOs than
companies in Western Europe and North America. In
Brazil, Russia, and India, for example, 38 percent of
incoming chief executives in the 201215 period were
outsiders, up from 25 percent in the preceding four
years. We believe emerging markets companies are hiring more outsiders partly because of a lack of talent in
these fast-growing markets and partly because these regions governance practices and leadership development
programs are less effective than those in North America
and Western Europe.
Looking Outside

When should a board of directors consider choosing


an outsider CEO rather than promoting from within?
Once they have made the determination to go outside,
how should they identify and evaluate the best candidate? And how can they create the right conditions to
enable the new CEO to succeed?
One circumstance in which an outsider makes
sense, as weve described above, is when the company
must surmount a disruptive challenge or threat to its
established business model. When this happens, internal candidates may not have the skills to lead the company in its next incarnation. But outsider candidates
may have already demonstrated, in past jobs, the new
skills the board is seeking. Boards may also determine
that the company needs to make a discontinuous, stepchange improvement in its performance, which will
require wholesale changes in its former strategic and
operating plans. Because they dont have biases and
commitments built up over the years, outsiders can
make changes more objectively. They also may be able
to look at the organization from a broader perspective
that is based on an understanding of what the world
will require in the future.
The board may find it difficult to judge whether
an internal candidate has the right capabilities to meet
future needs when the company is facing discontinuity. Past performance is measurable, and thus easier to

strategy+business issue 83

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nies hire a large proportion of outsiders. The reason is


that forced departures among these companies are the
result of boardroom struggles (as well as, in some cases,
ethical lapses) rather than performance problems.
Western Europe. In comparison with North American companies, Western European companies in general are hiring outsiders more reactively than proactively, and have evolved less in improving leadership
development and succession practices. Between 2012
and 2015, companies in Western Europe hired far more
outsider CEOs (30 percent) than did companies in the
U.S. and Canada (18 percent, combined). Moreover,
the outsider hiring rates in Europe were clearly higher
than in North America for both low- and high-performing companies in forced and planned turnovers.
Whats particularly interesting is that low-performing
European companies were much more likely to hire an
outsider CEO in forced turnovers 51 percent of the
time, compared with only 34 percent for North American companies (see Exhibit 3). In addition, outsiders
at European companies underperformed from 2012 to
2015 a third were in the lowest TSR quartile, compared with 20 percent in North America and they
were more than twice as likely to be forced out.

4/14/16 2:12 PM

Companies in emerging markets are


hiring a much larger percentage of
outsider CEOs than companies in
Western Europe and North America.

Exhibit 4: Double Outsiders

Incoming outsider CEO from same prior industry, 201215


Financial Services

92%

Telecom Services

77%

Healthcare

75%

Energy

70%

Consumer Staples

64%

Information
Technology

58%

Materials

56%

Industrials

44%

Consumer
Discretionary
Utilities

41%
28%

Note: Excludes turnover events resulting from M&A and interims.


Source: Strategy& 2015 CEO Success study

judge, but it may not be a good predictor of success in a


new context. Boards may therefore feel more comfortable with outsiders in these situations. But outsiders
should also be legitimate candidates in cases where discontinuous change is not an issue. Even in companies
with robust CEO succession programs in place, internal candidates sometimes are simply not ready to lead
the company. This typically happens when a company
has let too many promising executives leave the company for greener pastures, or when the board has planned
poorly or delegated the responsibility for choosing a
successor to the incumbent chief executive.
Once a determination has been made to consider
an outsider candidate, the board should begin by identifying the key desired characteristics. A candidate must

sb83_052-063_FEA_OutsideIn-fin.indd 61

have expertise in the areas where the company faces future challenges. In some cases, the board may be specifically looking for a background in the companys industry. Among financial-services companies, for example,
risk management and regulatory requirements are highly specific to the industry and require deep knowledge
of products and business practices. For that reason, 92
percent of the industrys incoming outsider CEOs from
2012 to 2015 came from other financial-services companies. But in other industries where technological
discontinuity or industry convergence is an issue experience in a different industry may be more important. In the utilities industry, where unbundling and
regulatory liberalization are changing the competitive
context, 72 percent of incoming outsiders from 2012 to
2015 came from other industries (see Exhibit 4 ).
In addition, many boards will want a candidate
with prior experience as a CEO, and will have a strong
view of the kind of management style they deem necessary for the company and its future success. Boards
may also want to test potential future CEOs by recruiting them first to senior positions on the leadership team
(such as chief operating officer or chief financial officer)
or as members of the board of directors. This affords an
opportunity for the potential candidate to get exposure
to the company and its culture, and for the board to get
to know the candidate.

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Utility companies were the most likely to hire outsider CEOs who came
from a different industry.

61

Easing the Transition

The boards work is not over once it has made a selection. It must also carefully consider the way the outsider
CEO is introduced to the public, to the management
team, and to the rank and file. When an outsider is
brought in to deal with discontinuous change, the new

4/14/16 2:12 PM

Methodology

dustries, we have identified four critical practices for


outsider CEOs.
1. Do only what only a CEO can do. The CEO needs
to focus rigorously on issues that are unique to the
position: shaping the companys definition of success;
breaking the frame (for example, by changing some
fundamental aspect of the companys business model);
resetting expectations; and integrating the companys
parts with the whole. Decisions made and actions
taken in previous years might have made sense at the
time, but a new marketplace requires different ways of
doing business. To break down human inertia, the outsider CEO should make clear that the company needs
to be forward looking, and declare amnesty for any
past mistakes.
2. Find the right pace for change. Only the CEO can
set the pace for change within the company, and it may
require pushing back against expectations of what can
be achieved in the first 100 days. The outsider CEO
will benefit from moving coherently and with deliberate
haste. However, trying to accelerate too quickly for

Each company that appeared to

business, separately validated

have changed its CEO was investi-

each succession event as part of the

gated for confirmation that a change

effort to learn the reason for specific

he CEO Success study identi-

occurred in 2015. Additional details

CEO changes in their region. To

fied the worlds 2,500 largest

such as title, tenure, chairman-

distinguish between mature and

public companies, defined by their

ship, nationality, and professional

emerging economies, Strategy&

market capitalization (from Bloom-

experience were sought on both

followed the United Nations Develop-

berg) on January 1, 2015. We then

the outgoing and incoming chief

ment Programme 2015 ranking.

identified the companies among

executives (as well as any interim

Total shareholder return (TSR) data

them that had experienced a chief

chief executives). Company-provided

over a CEOs tenure was sourced from

executive succession event between

information was acceptable for most

Bloomberg and included reinvest-

January 1, 2015, and December 31,

data elements except the reason for

ment of dividends (if any). TSR data

62

2015, and cross-checked data using a the succession. Outside press reports
wide variety of printed and electronic and other independent sources were

was then regionally market adjusted

sources in many languages. We also

used to confirm the reason for an

the companys return and the return

used Bloomberg to compile a list of

executives departure.

of the main regional index over the

companies that had been acquired or


merged in 2015.

sb83_052-063_FEA_OutsideIn-fin.indd 62

Finally, consultants from


Strategy&, PwCs strategy consulting

(measured as the difference between

same time period) and annualized.

strategy+business issue 83

feature strategy & leadership

leader needs time early on to develop his or her


perspective on the industry, to establish the companys
position in the marketplace, and to determine how he
or she plans to change the game. The board needs to be
closely involved in providing support, offering an unvarnished view of the companys position, and defining
expectations clearly. The board members should also set
a standard for how they want to be involved in agenda
setting and execution, particularly if the company is experiencing performance difficulties, or if ethical problems have drawn public scrutiny. The chairman should
invest extra time in listening to and guiding the new
CEO, sharing his or her reflections on the company, the
industry, and the path forward.
The new outsider CEO must try to operate confidently in uncharted terrain that is studded with
pitfalls and land mines. He or she must balance the
pressure for quick results with the imperative to make
fundamental changes while creating the space
needed to learn on the job. From our experience
working with chief executives in many sectors and in-

4/18/16 4:09 PM

The new outsider CEO must


balance the pressure for quick
results with the imperative
to make fundamental changes.

4. Continually engage the board as a strategic partner. Given the pressure being placed on todays boards,
and the level of accountability expected from them,
board members need to take part in the strategic conversation as it develops. The CEOs responsibility is to
lead the board to be bolder than it otherwise might be
in challenging the companys leadership and direction.
Boards today also provide complementary skills by design, with specific members offering guidance in their
areas of expertise, such as finance, compensation, operations, or markets. The CEOs relationship with the
board can leverage that expertise.
CEO transitions remain a difficult and perilous
task. But our years of conducting this study have made
us optimistic. We have seen that corporate governance

sb83_052-063_FEA_OutsideIn-fin.indd 63

in general, and succession practice in particular, have


been improving. The increased willingness, desire, and
capacity to consider outsider CEOs is a new element
that may further improve the sophistication of succession planning. Although most companies will continue
to promote from within, in line with their long-term
succession plans, the stigma associated with hiring
outsiders is dissipating. As globalization continues, the
pool for available talent has never been deeper or more
densely populated. To their credit, more boards are
casting wider nets. +
Reprint No. 16210

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example, in order to cut costs immediately risks the


prospect of the CEO not only addressing the wrong issues, but also missing opportunities to learn where the
real problems lie. Managing pace is a way of managing
expectations, which is essential for building sustainability and preparing the organization for the major
changes that will be needed to meet its ultimate goals.
Outsider CEOs have an advantage in creating a new
day by resetting expectations and redefining roles with
senior executives or with new executives if needed.
3. Get the culture working with you. Culture can be
the primary impediment to an incoming outsiders ability to lead transformational change. The CEO needs to
address business priorities and change in ways the organization can reasonably accommodate. Understanding how the companys culture influences both formal
and informal behaviors is therefore essential. Outsider
CEOs can become more like insiders by skillfully working with the informal elements of the organization.

Resources
Strategy&s 2015 CEO Success study, strategyand.pwc.com/
chiefexecutivestudy: The full report and data analysis of this years study.

63

PwCs 19th Annual Global CEO Survey, Redefining Business Success


in a Changing World, Jan. 2016: The latest PwC Annual Global CEO
Survey shows that chief executive officers are less confident than in 2015
about the outlook for the global economy and for their companies, and are
particularly concerned about more stringent regulation and geopolitical
uncertainty.
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, The $112 Billion
CEO Succession Problem, s+b, May 4, 2015: The financial penalties
companies pay when they plan poorly for changes in leadership and the
payoff from getting it right.
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, The Lives and Times
of the CEO, s+b, May 30, 2014: From 100 years back to a quarter-century
ahead, the evolution of the chief executive officer.
Ken Favaro, Per-Ola Karlsson, Jon Katzenbach, and Gary L. Neilson,
Lessons from the Trenches for New CEOs: Separating Myths from Game
Changers, Strategy&, Jan. 29, 2010: A guide for new CEOs negotiating in
a changing business, financial, and regulatory environment.
More thought leadership on this topic:
strategy-business.com/strategy_and_leadership

4/14/16 2:12 PM

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64

sb83_064-075_FEA_NinthCircle-fin.indd 64

4/14/16 2:58 PM

To raise employee morale


and productivity, improve the
design of internal software.

Illustration by eBoy

by Elizabeth Rosenzweig

Several years ago, a brilliant engineer devised a new software tool for
augmenting decision making. He was justifiably proud of it and immediately released it for use among a small group of colleagues in his company.
He assumed that they would take it up, use it to transform their work, and
develop innovative breakthroughs accordingly.
The program might have achieved all this, but it was too hard to figure
out. Even its inventor struggled at times to remember how to make it work.
Nonetheless, he did not empathize with his users. He blamed them. He actually told me he thought they werent smart enough to use it. He didnt say
this to be harsh; it was simply an observation, grounded in a common cognitive error. Most of us expect everyone to think and feel the same way we do.
But peoples reactions vary, especially in response to subtle cues like those in
user interfaces.
One day, after much prodding, I got the engineer to visit my usability
lab at Bentley University. For the first time, he stood behind a one-way window and watched people trying out his software. They had been told that
their work would help improve the product for other users, so they were
willing to invest their time. The engineer was sure, before coming in, that
some people the smarter ones would jump right in and succeed with
it. And he didnt care about the rest.

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Beyond
the Ninth
Circle
of Help

65

4/14/16 2:58 PM

Elizabeth Rosenzweig
erosenzweig@bentley.edu
is a principal consultant at
the User Experience Center
at Bentley University in
Waltham, Mass. She holds
four patents in intelligent user
interface design and is the
founder and director of World
Usability Day. She is the author
of Successful User Experience:
Strategies and Roadmaps
(Morgan Kaufmann, 2015).

sb83_064-075_FEA_NinthCircle-fin.indd 66

systems regardless of UX quality, and, if they dont


understand them, relegated to spending hours on the
phone seeking help. How much of their time do these
systems squander? And what does that cost you in call
center expense, potential turnover, and loss of commitment? (See How to Tell if Your Internal Software Is
Well Designed.)
When a software interface is poorly designed, like
that of the software many employees use at work, not
only does it guarantee poor UX, but it diminishes capabilities in the company. A poor user interface sends
a message to employees that their time and commitment have little value, and that just as my engineer
colleague believed the problem is their own fault.
Then leaders wonder why their people dont innovate
or embrace change, and why it is so hard to execute the
companys strategy. In this way, poor UX design can
become a root cause of some of the most intractable,
passive-aggressive cultural resistance in business today.
It doesnt have to be this way. Enough is known
about how the human mind works, and about user
interface design in general, to create better, more satisfying internal software experiences. When companies
build such experiences into their basic way of operating,
they can transform not only their employees experience, but their own retention rates, employee satisfaction levels, and capabilities.
The Dynamics of Bad UX

Interest in user experience is much higher than it used


to be, especially among business leaders. This was one
finding, for example, in PwCs 2015 Digital IQ study.
Nearly 2,000 senior executives, representing 10 industries and 21 countries, were asked about their com-

strategy+business issue 83

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66

But in our lab, he saw people he thought were


smart struggling to learn his tool, asking for help, even
pounding the desk in frustration. This time, he couldnt
blame their intelligence. He recognized that he needed
to rework his user interface design that, like most
other software designers, he had taken its effectiveness
for granted. Until he saw their frustration firsthand, he
hadnt realized that other smart people didnt process
information the way he did, and that his design was
hurting company sales, sucking up company resources,
and wasting peoples time, including his own.
This story demonstrates the strategic importance of
good user experience and why so few companies realize
its value, especially in systems for employees. Though
the concept of user interface has long been an integral
aspect of computer science, it did not gain its rightful
prominence until 1995, when Donald Norman, director of the Design Lab at the University of California,
San Diego, coined the abbreviation UX as a universal
shorthand for user experience. As it happens, that was
the same year Netscape, the first widely used consumer
Web browser, went public. The transparency and interoperability of the Web have led to a steady advance
in knowledge about user interface design since then.
Unfortunately, too little of that knowledge has
trickled down to systems inside large enterprises. Many
businesspeople are attuned to the importance of UX
for their customers, but ignore it for their employees.
Yet, user experience is arguably even more strategically
important inside the enterprise than out. Consider the
digital tools people use in your company every day to
track time and expenses, check their email, manage
travel, and conduct other routine tasks. These employees are trapped, forced to use your companys software

4/14/16 2:58 PM

How to Tell if Your


Internal Software Is
Well Designed

pull-down menus, radio buttons,

feel natural? (The swipe moves you

rollover commands, and keystroke

left, just like you were sweeping the

commands with no apparent logic

picture to the side.)

behind which is used when?

15. Do users spend a lot of time

8. Is it evident what each command

looking for onscreen cues before they


can take an action?

9. Does the software make people

16. Can people see the full document

1. Do you have a large and well-

choose between technical options

and all essential commands without

staffed internal call center that

(such as file formats) that are not

having to scroll or search?

answers the same questions again

otherwise relevant to their job?

17. Do employees post complaints

and again?

10. Is there a universally recognized

about the internal systems in online

2. On the most-visited screens, is it

and consistently designed Undo

forums?

obvious where to look first?

command for all your in-house ap-

18. Does every important screen

3. Are there several ways to conduct

plications?

include a call to action so people

a single activity, such as Search

11. Do menu commands require

know what to do next?

or Import, each with its own

definitions before they can be

idiosyncrasies?

understood by a novice for exam-

If you answered yes to the even-

4. When people try out the software,

ple, Find replica, Parent preview,

numbered questions, and no to the

do they smile and look relaxed?

or Open mail file copy of contacts?

others, your interface probably makes

5. Do people keep notes at their

12. Is there an easy way to return to

people feel smart. If you answered yes

workstations so they can remember

previous screens?

to the odd-numbered questions, your

the steps to follow?

13. Are menu elements that have

software is probably making people

6. Is the command syntax and

little to do with one another placed

feel frustrated. The next steps are

design consistent from one screen

together for example, Insert

to confirm your findings by watching

to the next?

WordArt, Equation, and File?

people use the interface, and then to

7. Does the same screen include

14. Is there a clear match to the phys-

translate your observations into a new

multiple types of interface cues

ical world that makes a command

and better design.

panys acumen with incorporating digital technologies.


Seventy-four percent of the respondents said user experience and human-centered design skills were important
to their business. Almost as many, 72 percent, said they
had all the user experience and human-centered design
skills they needed to deliver on their digital enterprise vision. And customer-facing software is indeed improving.
Why, then, does the quality and user experience of
internal enterprise software remain a problem? The answer has a lot to do with expedience. Good UX requires
iterative, intensive attention. It is thus often neglected
by enterprise software developers, whether in-house or

features title
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technology
of the article

will do?
Answer yes or no to each question.

67

external, as they scramble to meet internal deadlines or


remain within budget.
Sometimes the problem is exacerbated when technical designers chase the next new thing in their field.
Because they have a captive audience of employees, the
developers see this as an opportunity to experiment
with something new. Another cause can be the agile
or lean techniques that software companies turn to for
development. These may well speed up the release, but
they do not, in themselves, promote good interface design. Good design is complicated. Faster development
offers no guarantees of better interfaces.
(continued on page 70)

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4/14/16 2:58 PM

by Dan Bricklin

pressed separately. Interacting with a

binding people together.

smartphone or tablet involves a much

The rise of the smartphone thus

wider range of continuous motion.

raises a fundamental issue involv-

Like molding clay with your hands, it

ing user experience an issue

gives you a more physical, free-form

that is not just technological, but

connection to what youre doing.

that concerns the nature of human

For years, businesses have tried

feature technology

umanity has arrived at a

relationships. Businesses (and other

to use digital technology for strate-

technological turning point

organizations) that can figure out how

gic advantage. They automate just

created by mobile devices, especially

to adapt to this type of user experi-

about everything they do, but they

smartphones. For the first time,

ence will thrive. Those that can-

find themselves unable to gain the

people routinely carry around pocket-

not will become irrelevant. Tens of

productivity they should. The reason

sized devices with great computing

thousands of computer applications

is right in front of them or, rather,

power. The mobile phone is also one

and the business processes they

right in front of the people who are

of the most ubiquitous devices in

embody, including thousands used

forced to use their internal systems.

human history far more popular

by businesses to connect with their

Most businesses invest very little

than the personal computer. As of

customers and employees, may need

in appropriately addressing their

2015, about 7 billion people had cell

to be reengineered for smartphones

software user experiences, and all

phones (whereas only 4.5 billion had

and tablets, or created for them.

but a few of their systems provide a

access to indoor plumbing). Of those

Business has gone through such

terrible user experience.

phones, about 2 billion are smart-

a change before, when, in the 1970s,

The smartphone will, at long

phones: portable devices with voice

1980s, and 1990s, it reengineered its

last, force businesses to change.

and Internet access, touch interfaces,

paper-based information systems

Most businesses have let smart-

cameras, sensors, and animatable

for mainframes and then personal

phones and tablets become gate-

screens. The phones can be custom-

computers. That seemed like a major

ways to their systems. They do this

ized with downloadable applications

shift at the time. But in retrospect, it

because workers who are comfort-

that allow owners to evolve how they

was smaller than the change intro-

able with, and proficient at, their tools

make use of it.

duced by smartphones. The graphi-

make fewer mistakes and are more

cal user interfaces of Macintosh and

productive. Employees, for their part,

actions between people and orga-

Windows computers, with their text-

naturally expect to use smartphones

nizations, making the connections

heavy look and feel and typewriter-

at work, because the devices are so

radically intimate. Because the

like keyboard input, were designed

closely connected to the rest of their

smartphone is integrated with a

to evoke paper. People shuffled

lives. It seems silly not to do things

persons physical movement, held

windows on those computers as they

at work the same way they do things

in the hand, and (when carried in a

had once shuffled paper documents.

elsewhere.

jacket pocket) kept next to the heart,

The computer system was simply a

it supplants all the other tools people

way to maximize the output of people

use their mobile devices, these

have traditionally used to communi-

working at desks.

extensions of the self, a new orienta-

Smartphones change inter-

68

at large, a visceral connection point,

cate, gather information, and express

The smartphone and tablet, by

But when businesses let people

tion is required. The institution has

themselves. Its the device through

contrast, are creating a new way

decidedly less control over its infor-

which they get innumerable things

of interacting with and through

mation, or the time and place of using

done. The more people choose and

machines. These devices are, as

it, because of the personal nature of

use their applications, the more

everyone knows, essentially comput-

the connection. The workforce also

the devices become an extension of

ers. But they are no longer relegated

has a new, richer form of expression,

their owners. Every smartphone is

to a desk or an office. Interacting with

in both providing information and col-

potentially a wormhole between the

the old devices is like playing a piano;

lecting it, and business applications

persona of its owner and the world

each key is a discrete input normally

need to adapt.

sb83_064-075_FEA_NinthCircle-fin.indd 68

strategy+business issue 83

Radical
Intimacy and the
Smartphone

4/14/16 2:58 PM

Freedom from the Form

of what they are doing, and requiring

photographs, and then they translate

To realize the depth of this change,

them to fill in data as they would on

it into data that is easy to manipulate

consider something that most people

paper, or with a keyboard, increases

and retrieve.

take for granted. The form, a docu-

their chances of making a mistake,

ment in which people record data

especially over time.

from the field, is at least as old as the

The smartphone is qualitatively

Smartphone apps depend on


having a user experience that people
find natural and comfortable. (That

Old Testament. In Chapter 13 of the

different from a tablet. It provides

may not, by the way, mean easy to

book of Numbers, Moses sends 12

freedom from the form. It enables

learn, if learning the app is part of

spies to scout ahead and gather infor-

a new approach to humandevice

learning the job.) As a result, the rise

mation about the land of Canaan, and

interaction: an approach that doesnt

of smartphones has brought much-

he gives them the equivalent of fields

mimic an individual sitting at a desk

needed attention to the question of

to fill in and boxes to check, telling

with a piece of paper, doing a task.

user experience.

them to report on the land, what it is

For example, a real estate app

like; and the population that is settled

called MagicPlan uses the motion-

that information technology profes-

in it: are they strong or weak, are they

detection and photographic capa-

sionals often think they are making

few or many; and what the land is like, bilities of the smartphone to capture

As a software developer, I know

work better simply because theyre

the dimensions and features of its

computerizing it. When we think that,

ill; and what the towns are like, where

environment. You can point a phone

we are wrong. We rarely even try to

they are settled therein: are they

or tablet toward the corners, doors,

track the fatigue, friction, and loss of

encampments or fortified places; and

windows, furnishings, and other fea-

commitment that stems from poorly

what the land is like: is it fat or lean,

tures of the room and it will draw a

designed technology. And poorly

are there in it trees, or not? (This

floor plan for you. There are apps for

designed technology is everywhere.

passage is from The Schocken Bible,

physicians that display customized

Vol. 1: The Five Books of Moses, transl.

images of the human body, mak-

stick dies, wrote the Twitter come-

Everett Fox; cited on www.bricklin

ing it easier to talk to patients about

dian Cluedont, theyll gently lower

.com/tabletforms.htm.)

their situation, and other apps that

the coffin, then pull it back up, turn

measure patient indicators such as

it the other way, then lower it again.

quests today of the field representa-

heart and respiratory rates, without

The time spent figuring out the right

tives they send to take inventory of

requiring the medical professional to

way to insert a USB stick may not

store shelves. To be sure, instead of

look away. There are apps for fixing

seem like much, but the distraction is

parchment or paper, the form is now

boilers, which allow building inspec-

real. If someone has to call customer

on an electronic tablet, a device that

tors and engineers to more easily

service because the buttons on the

can take photographs, record and

recognize problems without having

computer interface all look the same,

play audio and video, and manage

to look up the technical specs. And,

thats more lost time. If a doctor wont

many other forms of media. Yet in

of course, there are a wide range of

use a patient records system be-

gathering information, most people

GPS-based navigation apps, which

cause its too hard to figure out or too

still use the form on a tablet as

must be simple enough for drivers to

cumbersome and error-prone to use,

though it were paper on a clipboard.

use safely.

thats even worse. All these things add

Companies make similar re-

The doctor seeking data during sur-

When the inventor of the USB

69

up. You cant measure the productiv-

gery or the building inspector looking

The Business Response

ity and quality that you would have

at a boiler must turn away from the

All these apps, and many more like

gained if things were better. So every

task at hand and look down at the

them, are beginning to change the

company loses the time, trust, and

screen, to check for information or

way businesses connect with their

benefits of the skills of its employees,

enter data, just as on paper. This is

employees. The apps transcend the

while assuming that it is winning.

not only an inconvenience, but also a

limitations of the paper form. They

possible danger, because people are

gather information automatically,

prone to errors. Interrupting the flow

or through gestures, voices, and

sb83_064-075_FEA_NinthCircle-fin.indd 69

features title
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technology
of the article

where are they settled: is it good or

(continued on next page)

4/14/16 2:58 PM

cially those they work for. A purely

ships and behavior, the connection

As smartphones become the primary

transactional relationship has many

point between the person and the

computer in employees lives, compa- benefits for the individual, including

organization. At first glance, it may

nies will have to apply design thinking

the expectation that he or she could

seem like a minor thing to focus on,

a focus on people, how they work,

negotiate a better deal, and leave if

even inconsequential but it is

and how they use tools to their

it falls through. The senior decision

actually profound.

interfaces. The process of creating

makers in most companies dont

internal systems will change, incor-

want radical intimacy either. They

porating great amounts of feedback

have thousands of employees, and

from customers, potential customers, they believe that close relationships


workers, and potential workers. Busi-

will require an untenable amount of

nesses will gain radical intimacy, a

time and attention. Blindly emulating

close connection with the people who

the social world is inappropriate.

buy from them and work for them.


Certainly, radical intimacy pre-

But mobile devices will force


businesses to overcome these ob-

sents certain problems for business.

stacles. They can start by improving

Most people, as a rule, dont want to

their user interfaces. User interface

be intimate with companies, espe-

is the touch point for human relation-

The designers often know that the software is


counterintuitive and frustrating, but they assume
that the employees will figure it out. In other words,
they expect that people will come up with workarounds: unofficial procedures that make the best of
a bad situation. Work-arounds might include avoiding a particular browser because it freezes up in combination with the given software; keeping a command
sequence written on a note next to the computer; or
clicking on an empty part of the screen, because a
button is supposed to be there, even though it never
shows up.
A work-around may seem innocuous in itself. But,
rather than fixing the problem, it reinforces it. With
enough work-arounds in place, bad interface design becomes part of the culture, ingrained in ways of doing
things, perhaps even celebrated for the ingenious workarounds it inspired. Companies that depend on workarounds lose countless hours in productivity. People
spend time in training, or on support lines, when they
could be doing something more valuable.

sb83_064-075_FEA_NinthCircle-fin.indd 70

Dan Bricklin
danbricklin@bricklin.com
is the chief technology officer of
Alpha Software Corporation and president
of Software Garden. He is the co-creator
of VisiCalc, the pioneering electronic
spreadsheet released in 1979. His other
innovations include the prototyping
tool Dan Bricklins Demo Program (1985),
the website creation tool Trellix (late
1990s), and the handwriting capture
app Note Taker HD for the iPad (2010).

Meanwhile, like my engineer colleague, many user


interface designers dismiss those who cant figure out
the technology. It is a time-honored tradition in some
IT circles to blame users, especially seniors or hurried
people, for not understanding an interface. This tradition surfaces in jokes about stupid user tricks, in the
slow response times for fixing user interface problems,
and in the lack of interest in watching people try to use
the software in the first place.
It also shows up in the experience of incoming
staff. In many companies, new employees encounter
what amounts to an involuntary hazing when they are
introduced to the companys technology. They are told,
We all went through it. A few employees leave, if they
have opportunities elsewhere. Others chafe and groan.
Many blame themselves. Ultimately, everyone who
stays surrenders and gets used to it. Eventually, they forget how it felt at first, and they inflict the same hazing
on others. After all, they endured this rite of passage, so
why shouldnt everyone else?
All of these experiences reinforce the perception

strategy+business issue 83

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(continued from previous page)

4/14/16 2:58 PM

Good design is transparent;


people feel as if they already
know how to control the
technology. They dont have
to be taught how to use it.

A UX Ethic for Internal Systems

When interfaces are done well, its magic. Good design


is transparent; people feel as if they already know how
to control the technology. They dont have to be taught
how to use it. I learned this in the 1990s as a research

scientist and designer at Kodak. Kodak thrived for a


century because it took something hard and made it
simple. When cameras first emerged in the 1860s, they
were big and complicated. A photographer needed a wet
plate measuring 11 by 14 inches to produce an image,
not to mention a portable darkroom and the cart and
donkey to pull it around.
George Eastman, who was a skillful inventor, applied his talent to creating a camera with a good user
experience. He figured out how to break all this technology into small, user-friendly pieces. He created a
dry form of photographic film, a flexible roll to let the
dry film unspool, and a carrying case. His slogan was
You press the button, we do the rest. His first handheld camera was expensive. But in 1900 he came out
with the Brownie, an affordable box camera that was
simple to use.
The Brownies simplicity was possible because of
Eastmans user-centered approach to design. That simplicity, in turn, made the camera extraordinarily popular. Eventually the everyday photographs that this camera enabled changed the way people perceived events,
including the horrors of war (soldiers took it to the
front) and the milestones of family life (it was energetically marketed to children). I like to say it was the first
mobile device.
Now imagine if your own companys internal software and devices were just as intuitively obvious to use.
Instead of making employees feel inadequate, your
companys user interfaces could make them feel smart.
And that would be the start of a self-fulfilling prophecy.
In 2005, I founded World Usability Day because
I was concerned about the problems of poor interface
design and its role in blocking people from taking

features title
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technology
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that the company doesnt value its employees. Subpar


UX also makes the company more vulnerable to potentially serious events through human error. When
medical employees make mistakes, for instance, it can
be life-threatening to patients; when database managers
use a work-around, it can inadvertently open doors to
cyber-attack; and when errors are made in data entry, it
can lead to misguided decisions.
Even companies known for their excellent user
interface sometimes have breakdowns in design thinking. As a shopper, I love Amazon for its interface. The
recommendation engine, for example, allows me to sort
and scan an enormously complex body of user-generated reviews and comments in a way that makes it easy to
choose a purchase. Furthermore, Amazon continuously
improves its onscreen product and checkout pages. This
in itself reinforces my interest in coming back to the
store as a shopper.
But Im also a book author which, in effect,
makes me a supplier to Amazon. And the user experience makes me feel like a second-class citizen. The author profile pages on its system are difficult to set up,
so much so that I have yet to create one for myself, despite the fact that my own expertise in software should
allow me to do so fairly easily. I and presumably a
fair number of other authors havent been able to get
past my perception that the company does not value my
time and interest.

71

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4/14/16 2:58 PM

1
Why Good UX Works
These examples, drawn
from historical research and
from our work at the Bentley
University User Experience
Center, show how user experience overcomes complexity.
They are from customerfacing systems, but the
principles apply to internal
systems as well. Indeed,
bringing employee systems
up to par with the systems
facing consumers should be
seen as a priority for engaging
and retaining talent.

Brownie, the Original


One-Button Camera
Introduced in 1900, this camera
was the first modern handheld
communications device, with
only one button needed to
capture an image on film.

2
TurboVote Home Page
This voter registration and
reminder site created by
Democracy Works was
instigated by a graduate
student in public policy who
kept missing elections. It puts
the most-needed essentials
at the center, including a
call to action (What are you
waiting for? and a prominent
Get started button).
Lower-priority options and
information are placed around
the periphery.

Waze Navigation Screen


The Waze navigation interface,
for all the complexity of its
terrain, makes it easy to spot
where you are now (the blue
arrow), where youre going (the
blue line), and what youll find
along the way.

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strategy+business issue 83

72

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4/14/16 2:58 PM

Medicare Home Page


The U.S. Medicare system
home page has been iterated
upon and improved over
the years through in-depth
research into the needs of
users, many of whom are aging
or highly stressed. The home
page simplifies their search
by grouping similar options
through visual cues green
for those starting out, yellow
for data, and blue for particular
types of help. The system
responds to clicks quickly,
which reassures visitors.

Medicare Nursing Home


Comparison Screen
The Medicare website has
a five-star rating system
that, like the ratings in
Consumer Reports, makes
it easy to compare options.
The commands and user
experience are common on all
of the sites pages.

6
Medicare Nursing Home
Search Page
The images of happy people
benefiting from the services
described here provide an
emotional boost, and direct the
visitors gaze left to the most
critical element for a nursing
home search: location.

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4/14/16 3:19 PM

sb83_064-075_FEA_NinthCircle-fin.indd 74

was at Kodak, MIT researcher Henry Lieberman and I


designed an electronic shoebox that automatically sorted images. If you took photos at a wedding in San Francisco, it would link those images to the date on your
calendar (through the time stamp), and it was smart
enough to recognize an entry about a wedding there.
It would use the metadata to connect the dots and automatically organize your wedding photos, separating
them from other photos. If you typed an email to someone about the wedding, it automatically put those photos at the top of your images folder, so theyd be the first
you saw when you clicked to attach a photo. The more
you used it, the better organized it became. The effectiveness of that user experience was not just a matter of
the screen design. It had to do with the way the screen
design, the functionality, and the information architecture all fit together, evoking a form (the shoebox full of
pictures) that people already felt comfortable with.
One of the best current examples of an organization thinking through good user experiences comes
from the U.S. Centers for Medicare & Medicaid Services (CMS) and its website www.medicare.gov. This
group deployed extensive usability testing and focus
group research to understand how its users, including
care providers and patients, would use the site. CMS
was particularly interested in how people under stress
experienced the site, because most visitors to the site
are probably concerned about their health or that of a
loved one.
Consider just one part of the site, the section on
nursing homes and other living situations covered by
Medicare. Usability studies conducted between 2011
and 2014 helped the Medicare designers learn how
to make the task of comparing facilities less stress-

strategy+business issue 83

feature technology
74

advantage of the products and services important to


life, especially in the developing world. Indeed, better user interface design, a seemingly narrow solution,
could be the key to helping humanity deal with a broad
array of challenges. And the user experience of internal
enterprise software is a good place to start.
Companies that want to take their internal UX seriously need an ethic to guide development. It should
be based on a single, simple premise: Every technological system that people interact with should present an
obvious interface. There should be no manual. There
should be no need to look up a command on Google,
build a cheat sheet, or consult an online forum, chat
line, or help desk. Sound impossible? Like the Brownie
of yore, the iPhone is built upon a remarkably complex
system, but people nonetheless find it remarkably easy
to use. Take it as a model.
The first step is to look at your existing user interfaces. How many of them reinforce what you want
your employees and customers to experience? Consider
each one in terms of whats good for the people using them. Not whats good for accounting. Not whats
good for engineering. Not whats good for people who
love figuring out technology. Make the interfaces inviting and clear for people who want to get their job
done without having to become an expert in your tool.
Redesign may seem expensive, but consider how much
youll save on internal guidance and support, and potentially on turnover.
Interfaces that feel right, even for people with different styles of processing information, arent as hard to
develop as you might think. In software, a good interface incorporates artificial intelligence and an awareness
of what constitutes a positive user experience. When I

4/14/16 2:58 PM

Better user interface design,


a seemingly narrow solution,
could help humanity deal with
a broad array of challenges.

sb83_064-075_FEA_NinthCircle-fin.indd 75

permission, support, and encouragement not just


from you, but from the culture around them to keep
iterating and testing until they get it right. Paying attention to user experience may mean that it takes longer to
release a product or internal system. But when its right,
the result is far fewer headaches down the road, happier
customers, and happier employees. That should mean a
happier bottom line. +
Reprint No. 16211

features title
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technology
of the article

ful. They learned, for example, that the information


about nursing homes wasnt detailed enough; among
other things, it didnt tell users whether a facility
offered short-term or long-term care. It also was not
easy to find out how recent the data on nursing homes
was. Although the site included a five-point rating system that consumers liked, the nursing home administrators felt it was unclear why facilities earned the
ratings they did. CMS took these lessons to heart and
revised the site accordingly. Then it again tested the
site with users. The organization continues to test to
see how it can improve user experience for the broadest
possible audience.
Another good example is the mobile mapping and
navigation app Waze, which is linked to its users calendars. If a user has an appointment, Waze will automatically send that person an alert when its time to leave
and suggest directions for how to get there. It makes life
easier. Because it incorporates and amalgamates user information (about real-time traffic patterns), it also has
to combine a huge amount of complex data into a few
indicators, generated instantaneously. Wazes user interface was apparently one of the main factors in Googles
decision to buy the company, and its features are being
incorporated into Google Maps (see pages 7273 for
images).
The key question for your product or app or system: What is it meant to help users do? Consider what
will make them feel rewarded, and what will make
them feel hurt. Then watch people use the system, and
see how many (or how few) of your assumptions are
borne out by actual experience.
Many of your IT design professionals probably already know how to make things better. But they need

Resources
Frank Burkitt, A Strategists Guide to the Internet of Things, s+b, Nov.
10, 2014: The digital interconnection of billions of devices is todays most
dynamic business opportunity.

75

Don Norman, The Psychology of Everyday Things (Basic Books, 1988; later
republished as The Design of Everyday Things): How pleasure and usability
go hand in hand.
Elizabeth Rosenzweig, Successful User Experience: Strategies and Roadmaps
(Morgan Kaufmann, 2015): A hands-on guide for pulling together a UX
strategy, informed by an ethic of simplicity and clarity.
Christopher A.H. Vollmer, Matt Egol, and Naseem Sayani, Reimagine
Your Enterprise, s+b, Apr. 14, 2014: How to make human-centered
design the heart of your companys digital agenda.
Nielsen Norman Group website, www.nngroup.com: Source of articles
on usability by two leaders in the field, Jakob Nielsen and Don Norman,
and their colleagues.
PwC Digital IQ study, 2015, pwc.to/YourDIQ: Developing your UX
(and other digital) capabilities.
World Usability Day website, www.worldusability.org: Point of contact
for design efforts aiming at simplicity and accessibility (Nov. 10 in 2016).
More thought leadership on this topic:
strategy-business.com/technology

4/14/16 2:58 PM

feature innovation
strategy+business issue 83

76

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4/14/16 2:57 PM

Intels Andy Grove pioneered


high-stakes, high-speed, high-tech
manufacturing and made the
computer age possible.

feature innovation

Moores
Lawman

Illustration by Marco Ventura

by Jeffrey E. Garten

In From Silk to Silicon, a colorful history of globalization,


Jeffrey E. Garten, former dean of the Yale School of
Management, has identified 10 people who fundamentally
changed the world over the past millennium by making
it smaller, more connected, and otherwise better. The roster
of characters includes military genius Genghis Khan and
Cyrus Field, the pioneer of the transatlantic telegraph. The
individuals profiled were not just thinkers they were doers.
And each ushered in an age that continues to echo loudly today.
In the following excerpt, Garten tells the story of Andy Grove,
the Silicon Valley pioneer and former Intel CEO who passed
away at age 79 on March 21, 2016, and the person most
responsible for putting Moores Law into practice.

sb83_076-085_FEA_MooresLawman-fin.indd 77

77

4/14/16 2:57 PM

feature innovation
78

Excerpted with permission


from From Silk to Silicon:
The Story of Globalization
through Ten Extraordinary Lives,
by Jeffrey E. Garten (HarperCollins, 2016).

Andy Grove was not a pathbreaking scientist. He


did not author anything so important as the law associated with Gordon Moore. He was never a household
name like Bill Gates. Unlike Steve Jobs, he was not a
design genius, nor did he have the same intuition for
consumer sentiment. But no person had as much to do
with making possible the third industrial revolution as
this Hungarian immigrant who arrived in the United
States in 1956.
The first industrial revolution began in late 18thcentury England with the mechanization of the textile
industry. The second took off in early 20th-century
America with innovations such as the assembly line
and mass production. The third the one were living through today gestated in Silicon Valley, and is
powered by communications technology, particularly
the Internet and digitization (see A Strategists Guide
to Industry 4.0, by Reinhard Geissbauer, Jesper Veds, and Stefan Schrauf, page 86). The driving force behind this latest industrial revolution is the tiny microprocessor, the closest thing to the brains of a computer.
Historian John Steele Gordon has called the microprocessor the most fundamental new technology since the
steam engine.
It is unappreciated just how much the very industrial process of making the devices has contributed to
contemporary globalization. In large part, the computer
age arrived as a result of a revolution in the management of high-technology industries. Andy Grove was
the leader of that revolution. An Eastern bloc disciplinarian with modish sideburns and a clunky hearing aid,
Grove whipped a motley crew of early industry pioneers
at a startup into the worlds most important and global
technology company: Intel. He built the products

sb83_076-085_FEA_MooresLawman-fin.indd 78

the semiconductors, the transistors, the integrated circuits, the microprocessors that drove the consumer
electronics revolution. And he gave us a vivid picture
of how to survive and thrive in business when the only
constant is mind-bending change.
Grove became famous for urging his staff to maintain an attitude of acute paranoia toward Intels rivals.
He traced his natural anxiety to his experience as a
child. For he was born Andrs Grf on September 2,
1936, in Budapest, an inauspicious time to be a Jew
in Hungary. In 1942, Andrss father, George Grf,
a partner in a small dairy business, was conscripted
by the fascist Hungarian government, which sent
him to the Russian front. For years, Andrass mother
Maria shuttled her son between their apartment and a
friends house in the countryside, trying to avoid the
war between the Germans and the Russians, not to
mention the German search to round up Jews for eventual extermination.
At the age of 4, Andrs had contracted scarlet fever, which permanently damaged his hearing. To compensate, he learned to lip-read and would always sit in
the front of the class. Over the next 20 years, he would
undergo five reconstructive ear operations. In the postwar years, Grf developed into a good student, and was
interested in pursuing journalism. But after 1952, when
the Soviets began clamping down on free expression,
Andrs turned his interest to chemistry, a profession less
susceptible than journalism to capricious interference
from Communist mandarins.
In 1956, after Soviet tanks rolled into Budapest to
crush an incipient revolution, Andrss aunt, an Auschwitz survivor, urged her nephew to escape immediately. George gave him the name of a cousin in the United

strategy+business issue 83

Jeffrey E. Garten
teaches courses on the
global economy at the Yale
School of Management,
where he was formerly the
dean. He has held senior
positions in the Nixon, Ford,
Carter, and Clinton administrations, and was a managing
director at the Blackstone
Group. His website is
www.jeffreygarten.com.

4/14/16 2:57 PM

Grove in 1969, holding up


an ad for the Intel 3101, the
companys first product.
The 3101 was the worlds first
solid-state memory device.

Photograph: Intel Free Press / Creative Commons

The Roots of a Revolution

Having escaped a violent political revolution, Grove


found himself at ground zero of a peaceful technological one. After World War II, scientists at Bell Telephone
Laboratories, including William Shockley, invented the
transistor a tiny metal slab that was much smaller
and more powerful than the vacuum tubes that powered the earliest computers.
In 1954, Shockley set up his own semiconductor
lab, Shockley Semiconductor, in an old shed outside
Palo Alto and recruited some of the best minds from
around the country, including Robert Noyce and Gordon Moore. But the company was plagued by problems.
Customers such as the Department of Defense and IBM
required a highly reliable and repeatable process for
mass-producing ever-smaller transistors. And although
Shockley showed an ability to create pathbreaking technology, he lacked the managerial skills to produce reli-

sb83_076-085_FEA_MooresLawman-fin.indd 79

able devices in large quantities. Worse, Shockleys autocratic and narcissistic temperament led him to ignore or
reject any proposal that was not his own.
Noyce and Moore started looking to break away
and start another company. Sherman Fairchild, an eccentric, wealthy playboy and entrepreneur who had
founded the Fairchild Camera and Instrument Corporation, agreed to bankroll the defectors. They set up
Fairchild Semiconductor about two blocks from Shockleys operation. The defectors from Shockley came to be
known in Silicon Valley as the Traitorous Eight.
It was an ideal time to start a new technology
business. In 1957, the space race between the United
States and the Soviet Union had elevated the microelectronics business to national prominence. Fairchild
began to achieve pioneering breakthroughs, including
the discovery of a process that could produce complex
microelectronic devices far more cheaply, and radical
advances in the operation of transistors. Working separately and unbeknownst to one another, Jack Kilby of
Texas Instruments and Robert Noyce both invented
what became known as the integrated circuit, a silicon
chip that replaced first hundreds and then millions
of transistors.
As Fairchild became the largest semiconductor
company in the world, with 11,000 employees and sales
of more than US$150 million per year, the organizational culture began to change, much to the dismay of
Noyce and Moore. Fairchilds corporate headquarters
in New York imposed an East Coasttype bureaucracy
on the company. Noyce was being forced to assume a
senior management role that he did not want or enjoy.
In addition, Fairchild had not solved the quality problems that were endemic at Shockley. Years later, Grove

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States. And Andrs, with nothing but the clothes he was


wearing and a knapsack, set out with two friends. They
crossed the Austrian border by foot, made their way to
Vienna, and received permission to go to America. After crossing the Atlantic in a rusty U.S. troop carrier, he
moved in with his cousins in Brooklyn, N.Y. Andrs,
who would change his name to Andrew Grove, entered
Brooklyn College and soon transferred to City College
of New York. He graduated first in his chemical engineering class, and married Eva Kastan, an immigrant
from Austria, who had come to the U.S. after living for
many years in Bolivia. After earning a Ph.D. at the University of California at Berkeley in 1963, he took a job
at Fairchild Semiconductor in the town of Mountain
View, south of San Francisco.

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Grove was a surprise choice for director


of operations at Intel, as he was more of
a physicist than an engineer and more
of a professor than a businessman.

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margin and high volume, as Fairchild did, Intel wanted to get so far ahead of the competition that it could
sell its products in high volumes for high margins. Although the market was driven by Americas powerful
defense establishment, Noyce and Moore also saw the
rapidly growing opportunities in consumer markets.
At the time, the number of transistors that worked
relative to the number produced was often well under
20 percent an obscenely low proportion. Even making a small batch was highly complicated, a task that
has been aptly compared to doing surgery on the head
of a pin, in circumstances where the slightest impurity in the air or on the material would kill the patient.
Workers could not eat, smoke, or even wear cosmetics on the job. Noyce and Moore had to find a tough
manager who could run this operation while overseeing an organization that would have to be preeminent
in research and development, marketing, and after-sales
service all the while being ruthlessly competitive.
They chose Grove, with whom they had worked closely
at Fairchild.
A Surprise Choice

Grove was a surprise choice for director of operations


at Intel, as he was more of a physicist than an engineer
and more of a professor than a businessman. His English was heavily accented and his cumbersome hearing aid looked like it had been made behind the Iron
Curtain. Nevertheless, he clearly had the necessary
toughness. Whereas Noyce and Moore could articulate
goals, Grove was riveted on achieving them. Noyce and
Moore could explain where the train should be heading
and when it should arrive; Grove had the ability and desire to get it there on time, in good condition. Over the

strategy+business issue 83

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80

would recall, The research lab and the manufacturing location were seven miles apart. Those seven miles,
from the standpoint of collaboration, could have been
7,000 miles.
The critical importance of these organizational
flaws began to come into focus after April 1965, when
Gordon Moore presented a paper in Electronics magazine that described what others would later call Moores
Law. Its essence was that the number of transistors that
could be placed on an integrated circuit could double
at regular intervals every 18 months to two years.
Moores Law pointed to the mind-blowing opportunity,
or perhaps the inevitability, of sustained exponential
growth of computer technology. To maintain the pace
of progress, a company would have to combine the freewheeling open-plan creativity of Fairchilds early years
with a level of organizational discipline that had never
been achieved in any company in the transistor era.
In 1968, Noyce and Moore decided to leave Fairchild. They wrote a three-page business plan, describing their intention to build one corner of the transistor
business the one focused on computer memory
into an industry. Within 48 hours they had raised $2.5
million over the phone.
A month after leaving Fairchild, Noyce and Moore
established Integrated Electronics Intel for short
in a half-abandoned 30,000-square-foot concrete
building one hour south of San Francisco. At the time,
big mainframe computers were storing information in
crude devices called magnetic cores. Noyce wanted to
replace them with tiny transistors that could store more
information in much less space, accelerating the speed
of the entire computer by allowing different parts to
communicate more quickly. Rather than go for low

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next four decades, Grove was the person most responsible for putting Moores Law into practice.
In the early days at Fairchild, Grove, who was assistant director of research and development, had a reputation for being extremely well organized and direct,
sometimes abrasive. Noyce and Moore were gracious
and low-key. But Grove could yell, pound the table, and
intimidate anyone. But there was a deeper difference.
The two bosses would give instructions and assume
they would be followed. There were no penalties for ignoring them. Not so with Grove. He imposed consequences on every employee and action in the company,
wrote journalist and historian Michael S. Malone. And
he ruthlessly enforced cost accountability on every office at Intel Grove did not accept excuses for a failure
to hit ones numbers.
Grove became Intel Employee Number Three. Unlike Noyce and Moore, he did not identify himself as
a self-starting, job-hopping entrepreneur. The position
was terrifying, he later recalled. But Grove quickly
found the secret to solving Shockleys quality problems.
He taught himself the manufacturing techniques that
would dominate the computer age. It came down to
shaping and inspiring a workforce that functioned and
adapted smoothly and swiftly enough to keep up with
the accelerating speed of the computer chip.
In 1969, Intel introduced its first chip, which could
store 64 numbers (and was called a 64-bit DRAM, for
dynamic random-access memory). Within a year, Intel could store 256 numbers in a chip, and within two
years it could store 1,024 in a chip (called the 1103) that
was smaller and more energy-efficient than its predecessor. Thanks to Groves relentless refining of the manufacturing process, the 1103 became the answer to the

sb83_076-085_FEA_MooresLawman-fin.indd 81

problem Intel had been created to solve replacing the


magnetic core that was the bulky memory center of the
mainframe computer. Within two years, the 1103 was
the biggest-selling semiconductor in the world, making
Intel the largest global producer of memory semiconductors. It has maintained that status ever since.
Grove later wrote about the pathbreaking lessons
he learned in these early days in his widely read book
High Output Management (Random House, 1983).
First, Grove wrote, every person at Intel, whether he
or she worked on the manufacturing line, in the marketing office, or in the R&D lab, was responsible for
attaining specific targets and was held accountable for
that output. Second, output was measured by the team,
and the critical role of a manager was to increase the
output of his or her teams. Third, a responsible organization had to shed management layers. Supervisors and
subordinates had to be in direct and constant communication. These ideas may seem commonplace today,
but at the time they broke critical ground in the science
and practice of management.
Early on, Grove kept a journal to record his
thoughts on management. In his writings, he mused
about the balance required to keep the whole of Intel
inspired and ahead of its rivals. How does a manager
best deal with a complex problem when a number of
specialists must be involved? How fast can an organization grow and stay highly productive? Not only was
he preoccupied with these fundamental issues of managing, but he was defining them clearly, debating them
with colleagues, writing about them, and exploring
them with students at Stanford University, where he
became a part-time professor. By 1971, the year a local
paper coined the term Silicon Valley, Intel was becoming

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Photograph courtesy of Intel Group

Grove with Intel founders


Robert Noyce (middle)
and Gordon Moore (right)
in 1979.

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a polestar of the tech industry and Grove was becoming


the axis on which Intel turned.

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The Cult of Management

Grove came to embrace what he called a culture of


constructive confrontation as the best means of coaxing maximum performance out of his teams. Fiercely
argumentative and well prepared, he could be brutal
in challenging the less well prepared, grilling subordinates to the point of demoralizing them. Craig Barrett,
Groves longtime Number Two and his eventual successor, later told the Washington Post, Occasionally we
suggest [to Grove] there may be an alternative to grabbing someone and slamming them over the head with
a sledgehammer.
In 1976, Grove became chief operating officer of
Intel, and in 1979 he became president as well. In these
combined posts he subjected every production process
and every administrative process to numerical measurement. All employees had to make exceedingly detailed
budget projections, establish targets for their work, prepare constant updates, and explain discrepancies. He
would ask how many functioning integrated circuits
a section produced, and how long it took. How many
recruits were interviewed, and what was the yield? Obsessed with cleanliness, Grove and his assistants would
make surprise inspections of bathrooms, janitors closets, and offices, and would criticize staffers for having
too many papers on their desks. Grove was the exact
opposite of the leaders he saw at Fairchild Semiconductor who couldnt translate ideas into products. He exemplified high-quality commercial output.
In 1969, the Busicom calculator company from
Japan asked Intel to design specialized chips for print-

sb83_076-085_FEA_MooresLawman-fin.indd 82

ing, display, calculations, and other functions for an


advanced calculator. Intel responded with a proposal to
build a single calculator that would include some 2,000
electronic elements. No bigger than an index card, this
device packed the same computing power as had the
room-sized mainframe in 1947. Then Intel struck a deal
with Busicom that allowed it to keep the rights to sell
the brainy chip for non-calculator applications to other
customers. The new device would soon be called a microprocessor, literally, a computer on a chip. It would
become the brains of the personal computer and many
other devices we use today, such as tablet computers
and smartphones.
For the first few years, Intel and several of its rivals, including Motorola and Texas Instruments, were
engaged in a fierce race to design, manufacture, and acquire customers for the new microprocessor, and Intel
eventually emerged as the leader. In 1974 the company
built and introduced a more advanced microprocessor,
called the 8080. Intels edge was the organization Grove
had created, which could not only design and build microprocessors with unprecedented efficiency but also
provide an unmatched package of training and services
to customers.
The 1970s ushered in the first cycles of shortages
and gluts in the tech industry. Here Groves insights
constituted another major advance in high-technology
manufacturing. The cyclical downturns were devastating to the industry, and the natural response of most
companies was to cut back on all spending, including
R&D. Grove thought differently. He was following
Moores Law, not the business cycle. Alone among the
industry leaders, Grove responded to industry slumps
by cutting budgets, cutting jobs, and forcing staff to

Photograph: Getty Images

The Intel 386 microprocessor,


introduced in 1985, was a
multitasker. With 275,000
transistors, it could process 32
bits of information at a time.

4/14/16 2:57 PM

Alone among the industry leaders, Grove


responded to industry slumps by cutting
budgets. At the same time, he pushed
Intel to expand R&D during downturns.

Facing Competition

The company saw yearly revenues grow from $9 million (with a profit of $1 million) in 1970 to $854.2 million (with a profit of $96.7 million) by the end of the
decade. It was in the 1970s, too, that Intel expanded
operations around the United States and the world,
eventually to have facilities in several parts of California, in Oregon and Arizona, and in Malaysia. But by
the end of the 1970s, Intel would start to face serious
rivals for technological leadership in memory chips at
home and abroad.
The domestic threat came from the Motorola
68000, which many experts declared superior to Intels latest model, the 8086. Determined not to relinquish Intels global lead in the memory business, Grove
launched Operation Crush. He mobilized the sales and
marketing force, offering rich bonuses to every staffer
who could keep an Intel customer or potential
customer from choosing Motorola. After a year of
trench warfare, Intel had won, preserving its lead and
reputation in the field. Operation Crush was the per-

sb83_076-085_FEA_MooresLawman-fin.indd 83

fect expression of [Groves] conception of business as a


contact sport, said biographer Richard S. Tedlow.
Next, Intel had to cope with competition from Japan. By the early 1980s, Japanese companies were better than American ones at making memory chips; the
Japanese chips had high-quality yields of 80 percent,
compared with U.S. yields on the order of 50 percent.
When recession hit the U.S. economy in the early
1980s, Japanese companies used their superior efficiency to lower prices and increase market share setting
off a global trade battle over the Japanese dumping of
products in the United States.
Then, in one of the great turnarounds for a global company, Intel simply changed the contours of the
battlefield. As the companys profits fell from $198 million in 1984 to less than $2 million in 1985, Grove and
Moore held a quiet but intense discussion about the dire
situation. If we got kicked out and the board brought
in a new CEO, what do you think he would do? Grove
asked. Without hesitation, Moore replied, He would
get us out of memories and focus on microprocessors.
Grove felt numb, but then recovered. Why
shouldnt you and I walk out the door, come back, and
do it ourselves? Thats what they did: Grove led Intel
out of memory chips and into microprocessors, a move
that required firing some 8,000 people and spending
more than $180 million to rebuild the company around
a new core business. It was transformative leadership in
its purest and most decisive form.
Years later, when Grove wrote about the shift in his
second major book, Only the Paranoid Survive (Currency Doubleday, 1996), he underlined the idea of an
inflection point a moment, or a period of time,
when a set of forces are so overwhelming that they com-

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work longer for less money. At the same time, however,


he pushed Intel to become the first major company to
expand R&D during downturns. This required Grove
to ignore screaming shareholders who wanted spending cuts to protect quarterly earnings in order to
come out of recessions much stronger than Intels rivals.
During the recession of 1974, when Grove cut staff
but dramatically boosted R&D, Intels stock dropped
80 percent. Two years later, when the cyclical recovery
came, the companys stock quadrupled in value, from
$21 per share to $88, as earnings rose 65 percent from
1975 and the payroll nearly doubled.

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pel a fundamental change in the rules of the game for


a company or an industry. In his book, Grove admits
he failed to see the Japanese challenge coming and
counsels other business leaders to remain vigilant to,
even paranoid about, the inevitability of such inflection
points. Involving employees who are closest to the market salespeople, middle management can help
executives understand what is happening in the minds
of customers. Responding to inflection points requires
an organizational structure that makes it possible for
information and advice to travel quickly from the field
to the top officials, but then empowers leaders to fully
mobilize the company behind a chosen plan of attack.
Amid all that unstructured interaction, you have to be
organized, too, he explains. Allow chaos, he advises,
then rein it in. When inflection points come, be ready
to drop all previous assumptions and start from scratch.
Open your mind to multiple sources of information
and to advice that is frank, even confrontational, and
possibly contrary to what you want to hear.
Golden Decade

After becoming CEO in 1987, Grove presided over a


golden decade in his corporate castle. Establishing Intel
as the industry standard meant that manufacturers of
other computer products software, keyboards, sound
systems had to make their products compatible with
Intels microprocessors. The company had become a de
facto monopoly with profit margins of 90 percent. In
the 1990s, the PC became the gateway to the Internet,
which would open a new age of communication and
collaboration, afford opportunities for other upstarts to
challenge incumbents, and destroy and create billions
in shareholder wealth. The company prospered further.

sb83_076-085_FEA_MooresLawman-fin.indd 84

Success did not have a calming effect on Grove,


who had learned to use the fear that had stalked him
since childhood to his advantage as a leader and manager, always on the watch for new inflection points. I
worry about products getting screwed up, and I worry
about products getting introduced prematurely. I worry
about factories not performing well, and I worry about
having too many factories, he admitted in 1996, at the
pinnacle of his career.
A year earlier, Grove had encountered the most
personal of inflection points: He was diagnosed with
prostate cancer. He attacked it using the same approach
he applied to invaders in Intels market. He saw quickly
that medical science was divided on the best course of
treatment. So over the course of eight months, he read
countless books and articles and delved into the medical literature, burying himself in technical research
papers. He contacted physicians from different specialties around the country. He plotted the information he
gathered on charts that correlated various treatments
with outcomes. Ultimately he selected high-dose radiation treatment as opposed to surgery or a number of
other options. The cancer went into remission.
During Groves tenure at the helm, Intels stock
market value grew from $4.3 billion to $114.7 billion,
and it rose from Number 200 on the Fortune 500
list to Number 38. Sales grew from $1.9 billion to
$26.3 billion, profits from $246 million to $6.1 billion.
The company was doubling in size every two years.
It seemed that its own growth was following Moores
Law. Intel even became one of the leading sources of
venture capital for new startups. By August 31, 2000,
when its stock reached $78 per share, Intel, now valued
at nearly $500 billion, had become the most valuable

Photograph: Associated Press

Grove with Bill Gates in


1992, as Intel and Microsoft
prepared to launch a new
Windows video feature.

4/14/16 2:57 PM

Grove helped create a corporate


culture that cultivated individualism,
innovation, and miraculously in light
of all that exquisite teamwork.

Processor at the Core

Intel stands out not only because its product sits at the
core of the computer revolution but because Grove did
so much to define and spread the management ideals
that are now at the core of many other technology companies throughout the U.S., Europe, and Asia. Groves
influence came equally from his business achievements,
from his capacity to communicate his thoughts and experiences via his teaching and writing. He helped create
a corporate culture that cultivated individualism, egalitarianism, innovation, and miraculously in light of
all that exquisite teamwork.
Moreover, Grove defined a management process
that continues to generate the production of computer
chips that are ever smaller, cheaper, and more powerful.
Between 1971 and 2011, Intel increased the number

sb83_076-085_FEA_MooresLawman-fin.indd 85

of transistors on a microprocessor by 1 million times.


Today you can fit more than 6 million transistors into
a space the size of the period at the end of this sentence.
In the same time frame, the price of a transistor dropped
to one-fifty-thousandth of the original. By 2013, Intel
was producing 6 billion transistors per second, or 20
million per year for every person on the planet. Groves
Intel had become a symbol for our age. +
Reprint No. 16212

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manufacturing company in the world, worth more than


all the U.S. automakers combined. And Intel had become a truly global corporation, earning 63 percent of
its revenues outside the United States. In 1990, it had
operations in six other regions: Malaysia, the Philippines, Singapore, the West Indies, Japan, and Israel.
By 2008, it would add dozens more nations, including
India, China, Vietnam, and Brazil. It employed approximately 82,000 people around the world. Grove,
for all his paranoia about Intel secrets, was one of the
first American high-tech CEOs to establish R&D labs
outside the United States.
In 1998, Grove stepped down as CEO and became
chairman, pulling back from day-to-day operations to
manage the board of directors. He became a sage public
voice for a nation that seemed to be losing its way on
management issues.

85

Resources
Andrew Grove, Only the Paranoid Survive: How to Identify and Exploit
the Crisis Points That Challenge Every Business (Currency Doubleday,
1996): The best-selling memoir/high-tech management manual by the
longtime CEO of Intel.
Art Kleiner and Juliette Powell, Bran Ferren on the Art of Innovation,
s+b, Oct. 21, 2015: A celebrated proprietor of R&D ateliers explains how
companies can cultivate the rare people who create miracles.
Michael S. Malone, The Intel Trinity: How Robert Noyce, Gordon Moore,
and Andy Grove Built the Worlds Most Important Company (Harper
Business, 2014): A definitive account of Intels origin story by a veteran
chronicler of Silicon Valley.
Michael Schrage, Genius Is a Team Effort, s+b, Aug. 1, 2014: A look at
collaborative charisma and a review of Michael S. Malones Intel Trinity.
More thought leadership on this topic:
strategy-business.com/innovation

4/14/16 2:57 PM

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86
42

sb83_086-095_FEA-Industry4.0_finR.indd 86

4/14/16 5:17 PM

A
Strategists
Guide to
Industry
4.0

by
Reinhard Geissbauer,
Jesper Veds, and
Stefan Schrauf

sb83_086-095_FEA-Industry4.0_finR.indd 87

feature operations & manufacturing

Global
businesses
are about to
integrate their
operations
into a seamless
digital whole,
and thereby
change
the world.

Industrial revolutions
are momentous events.
By most reckonings,
there have been only
three. The first was
triggered in the 1700s
by the commercial
steam engine and the
mechanical loom. The
harnessing of electricity and mass production
sparked the second,
around the start of
the 20th century. The
computer set the third
in motion after World
War II (see Moores
Lawman, by Jeffrey E.
Garten, page 76).
It might seem too
soon to proclaim that
the fourth industrial
revolution, spurred by
interconnected digital
technology, has begun.
But Henning Kagermann, the head of
the German National
Academy of Science and
Engineering (Acatech),
did exactly that in 2011,
when he used the term
Industrie 4.0 to describe
a proposed governmentsponsored industrial
initiative.

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4/18/16 4:16 PM

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88

Jesper Veds
jesper.vedso@dk.pwc.com
is a partner with PwC
Denmark, based in Copenhagen. He is part of PwCs
leadership team for the
industrial products sector, and
is responsible for the firms
global Industry 4.0 survey.
He advises leading industrial
and transportation companies
on how they can incorporate
Industry 4.0 principles in their
business models.

When you look closely at the rapid pace of digitization


in industry today, the name doesnt seem hyperbolic
at all. It is a signal of sweeping change that is rapidly
transforming many companies and may catch others
by surprise.
The term Industry 4.0 refers to the combination of
several major innovations in digital technology, all coming to maturity right now, all poised to transform the
energy and manufacturing sectors. These technologies
include advanced robotics and artificial intelligence;
sophisticated sensors; cloud computing; the Internet
of Things; data capture and analytics; digital fabrication (including 3D printing); software-as-a-service and
other new marketing models; smartphones and other
mobile devices; platforms that use algorithms to direct
motor vehicles (including navigation tools, ride-sharing
apps, delivery and ride services, and autonomous vehicles); and the embedding of all these elements in an
interoperable global value chain, shared by many companies from many countries.
These technologies are often thought of separately.
But when they are joined together, they integrate the
physical and virtual worlds. This change enables a
powerful new way of organizing global operations:
bringing the fungibility and speed of software to largescale machine production. Under the Industry 4.0
model, product design and development take place
in simulated laboratories and utilize digital fabrication
models. The products themselves take tangible form
only after most of the design and engineering problems have been worked out. The networks of machinery that have engendered industrial society become
hyper-aware systems of highly flexible technology, responding rapidly not just to human commands but to

sb83_086-095_FEA-Industry4.0_finR.indd 88

Stefan Schrauf
stefan.schrauf@
strategyand.de.pwc.com
is a leading practitioner
with Strategy&, overseeing
its Industry 4.0 practice for
Germany. He is a partner
with PwC Germany, based
in Munich. He advises global
corporations on developing
operations capabilities and
becoming digital enterprises.

Also contributing to this article


were Usha Bahl-Schneider,
senior manager with PwC
South Africa; Elizabeth
Montgomery, manager
with PwC Germany; and
Stefanie Zuberer, consultant
with PwC Germany.

their own perceptions and self-direction.


This technological infrastructure is still in its
early stages of development. But it is already transforming manufacturing. Companies that embrace
Industry 4.0 are beginning to track everything
they produce from cradle to grave, sending out upgrades for complex products after they are sold (in
the same way that software has come to be updated).
These companies are learning mass customization:
the ability to make products in batches of one as
inexpensively as they could make a mass-produced
product in the 20th century, while fully tailoring the
product to the specifications of the purchaser. As the
movement develops, these trends will accelerate. So will
the invention of new products and services, including
new ways of tackling todays most difficult problems:
climate change and pollution, energy demand, the pressures of urbanization, and the problems that accompany aging populations.
The Industry 4.0 movement started in Germany,
and many of that countrys leading industrial companies have strong initiatives. According to the Economist,
the list includes BASF, Bosch, Daimler, Deutsche Telekom, Klckner & Co., and Trumpf. The momentum
is rapidly growing elsewhere as well, particularly in the
United States, Japan, China, the Nordic countries, and
the United Kingdom. Such influential global industrial
behemoths as Siemens and GE have fully embraced the
approach; both companies CEOs and senior executives
have declared that it is now a core part of their identity
(see The Thought Leader Interview: Joseph Kaeser,
by Daniel Gross, page 96).
In 2015, PwC surveyed more than 2,000 companies from 26 countries in the industrial production

strategy+business issue 83

Reinhard Geissbauer
reinhard.geissbauer@
strategyand.de.pwc.com
leads the Industry 4.0 practice
in Europe, the Middle East, and
Africa for Strategy&, PwCs
strategy consulting business. Based in Munich, he is
a partner with PwC Germany.
He supports industry leaders
in developing digital product
and service portfolios, digital
ecosystem solutions, and
strategies and applications
for smart supply chains and
smart manufacturing.

4/14/16 5:17 PM

Exhibit 1: Adoption of Industry 4.0, by Sector


Respondents were asked: How would you classify the current level
of digitization and integration [in operations, supply chain, and related
activities] in your company? What levels are you expecting in the next
five years?

NOW

IN FIVE YEARS

45%

Electronics

77%

32%

Aerospace and Defense

76%

35%

Industrial Manufacturing

76%

32%

Chemicals

75%

38%

Forest Products, Paper, Pkg.

72%

28%

Transportation and Logistics

71%

30%

Engineering and Construction

69%

41%

Automotive

65%

31%

Metals

62%

89

The Web of Technologies

s your company becomes active in Industry


4.0, youll find the benefits go far beyond
extending your digital reach or selling new
types of products and services. It will establish your company, your employees, and your
entire ecosystem of suppliers, partners, distributors, and
customers as a fully interconnected, integrated digital
network, linked to other networks around the world.
Three aspects of digitization form the heart of an
Industry 4.0 approach.
The full digitization of a companys operations,

Source: Industry 4.0: Building the Digital Enterprise, PwC

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The cost savings are largely a result of greater


efficiency and technological integration. Industry 4.0
replaces redundant legacy systems, such as those for operations management and enterprise resource planning,
with a single, enterprise-wide, interoperable whole
which is much less expensive. Because user experience
in operational systems has improved in recent years,
employees tend to be happier and more productive with
Industry 4.0 (see Beyond the Ninth Circle of Help,
by Elizabeth Rosenzweig, page 64). This lowers costs
for training, support, and staff turnover, and raises operations speed. Predictive analytics, when used to support real-time quality control and maintenance, contributes to the savings by smoothing operations and
reducing breakdowns.
The revenue gains, for their part, come largely from
offering new digital features and products, or from introducing analytics and other new digital services to
customers. In addition, the availability of real-time data
enables companies to offer more personalized products and customized solutions, which usually generate
significantly higher margins than mass-manufactured
offerings. The opportunities are promising enough that
about 55 percent of survey respondents expected to see
their investment returned within two years, a short
time considering the amount of capital required.

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sectors, including aerospace and defense; automotive;


chemicals; electronics; engineering and construction;
forest products, paper, and packaging; industrial manufacturing; metals; and transportation and logistics.
In this global Industry 4.0 survey, one-third of the
respondents said their company had already achieved
advanced levels of integration and digitization, and
72 percent expected to reach that point by 2020 (see
Exhibit 1).
This momentum reflects expectations of rapid payoffs in business results. An overwhelming majority (86
percent) of the survey respondents said that on the basis
of their experience to date, they expected to see both
cost reductions and revenue gains from their advanced
digitization efforts. Nearly a quarter expected those improvements, in both cost savings and revenues, to exceed 20 percent over the next five years.

integrated vertically (to include every function and the


entire hierarchy) and horizontally (linking the suppliers, partners, and distributors in the value chain and

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work around problems. The manufacturers can use this


data to develop profitable new products and services.
For example, the manufacturers of printing machines
have traditionally made the bulk of their revenues from
selling and servicing presses. When the presses generate
usage data, the manufacturers can become brokers of
press time, knowing when customers presses are available, and negotiating printing prices accordingly.
Closer interaction with customers, enabled by
these new processes, products, and services. Industry
4.0 makes the value chain more responsive, allowing
industrial manufacturers to reach end customers more
directly and tailor their business models accordingly.
Products as diverse as aircraft engines and software are
increasingly offered as services, often on a subscription
basis. One of many examples is Atlas Copco, a manufacturer of air compressors based in Nacka, Sweden,
which is moving away from selling its equipment directly, and, instead, is billing only for the compressed
air that is used. The machines installed at customer
sites can monitor the flow of compressed air and adjust
the output according to customer need.
Industry 4.0 also enables business models that take
advantage of the economics of mass customization,
where every product is, in effect, created as a batch of
one. Currently, digital fabrication is used primarily for
prototyping. But as it becomes more sophisticated, and
as software and robotics are integrated into new types
of assembly lines, high levels of specification will become the norm. The appliance manufacturer Haier,
for example, already makes its washing machines and
refrigerators in China to order. Customers specify the
features they want on their computers or phones, or at
kiosks in Haiers retail stores, and those specs are transmitted directly to the assembly line.
Making Industry 4.0 work requires major shifts in
organizational practices and structures. These shifts include new forms of IT architecture and data management, new approaches to regulatory and tax compliance,
new organizational structures, and most importantly
a new digitally oriented culture, which must embrace
data analytics as a core enterprise capability.

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transferring data among them seamlessly). One example


is leading-edge inventory management systems, which
connect retailers, distribution centers, transporters,
manufacturers, and suppliers. Each transparently receives data about the others supply levels, places and
fulfills orders automatically, and triggers maintenance
and upgrades. This smooths out the gluts and shortages
of a typical supply chain, and enables the chain to compensate for sudden interruptions (such as those from
natural disasters) and to easily test new products and
services in particular geographic locations.
A more advanced example is the design of flexible
fabrication facilities, which use programmable robots to
perform most of the operations. These represent the virtualization of the physical world. New products and,
indeed, entirely new assembly lines can be prototyped in software before being put in place. It is almost effortless to simulate a new plant design, test it for
flaws, and invest in the physical machinery only when it
is clear it will work well. These advances make it much
easier and less expensive to bring new products to market, which in turn makes it easier and less expensive to
test new offerings without a full launch.
The redesign of products and services to be embedded with custom-designed software, so that they
become responsive and interactive, tracking their own
activity and its results, along with the activity of other
products around them. When captured and analyzed,
the data generated by these products and services indicates how well they are functioning and how they are
used. For example, the equipment used in a shipping
port or on a construction site can now detect an impending mechanical breakdown and prevent it. The
next generation of this equipment will be able to compare the efficiency of various machines and suggest
more efficient deployment. Another example is motorvehicle software, which is evolving to enable cars,
trucks, and other vehicles to be repaired via downloaded software upgrades instead of mechanics.
Industrial products that track their own activity will
also provide powerful insights into those who use them:
how they operate, where they face delays, and how they

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Industry 4.0 brings fine-grained


awareness into the machines
themselves; it makes the value chain
self-conscious.

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customers daily and seasonal use of machinery can help


you improve production schedules. Data about employee recruiting can help you predict your next talent
shortfalls. Production data can illuminate opportunities
to eliminate downtime or speed up throughput. Analytics can also help you balance trade-offs: for instance,
the data might help an oil company decide to place a
refinery offshore, even though the costs are higher, because it will yield more uptime and thus more profits.
Analytics can also help you meet aspirations that
seemed nearly impossible before. For example, many
companies struggle to improve their ecological footprint. Analytics can identify wasted materials and suggest ways to reclaim them, or to use them as inputs for
other industrial processes. Analytics can also reveal new
markets, or opportunities for growth in existing markets, that were not obvious before.

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To understand why analytics are so important to


Industry 4.0, consider the last major operational revolution, the quality and lean production approach that
began in the Japanese auto industry and spread around
the world. Exercises such as the five whys and statistical analyses taught manufacturing engineers and
people on the assembly line to monitor the variance
in their efforts, seek opportunities for improvement,
and attune themselves to the flow of the work. This resulted in unprecedented levels of quality and reliability.
Industry 4.0 brings that same fine-grained awareness
into the machines themselves; it makes the value chain
self-conscious. The machines can be programmed, for
example, to detect when they are wasting material, taking an inefficient supply chain route, or going awry in
some other fashion. They can bring that information
to the attention of company leaders, in the same way
that a GPS navigator can relay information about traffic
congestion to help a driver change course en route.
In the PwC study of Industry 4.0, the most commonly cited difficulty in building an analytical capability was the lack of people with the expertise to conduct
the analysis. Other prominent concerns poor data
quality, lack of access to the right data, and lack of toplevel support reinforce what has long been known:
Doing analytics is difficult. The processes of Industry
4.0 provide mountains of data about customer demands
and value chain logistics. But if you cant make sense of
that data and use it to boost efficiency, grow closer to
your supply chain partners, and develop products and
services your customers actually want, much of the effort is wasted.
Analytics can yield insights that help you reshape
your operational designs. For example, analysis of your

91

First Movers and Platforms

here are, of course, many challenges associated with Industry 4.0. It requires openness
with data and collaboration, to an extent that
feels uncomfortable at many companies. The
requisite technological capabilities and human
skills are often in short supply. It involves new and unfamiliar ways of organizing production. And, perhaps
most daunting, it represents a leap of faith; investments
must be made today, while many of the products and
processes involved in the approach are still unknown.
Nonetheless, companies that hold back, waiting
to see how it all turns out before investing, will fall
behind. As World Economic Forum founder Klaus
Schwab put it in his recent book The Fourth Industrial
Revolution (World Economic Forum, 2016), Contrary

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actions, operations, and logistics seamlessly among


them, and collecting and analyzing data for use by all.
On an industrial platform of this sort, market
intelligence information, gathered from the machinery and the behavior of people in the system, moves
smoothly into product development and manufacturing. Equipment and software from multiple vendors are
connected, with the connections extending beyond the
companys own walls into the value chain to external
distributors and suppliers. The net effect is to bring customers closer to operations, analyzing their data to better forecast their needs, improve products, and develop
new offerings, often customized to individuals.
Smaller companies can also establish themselves
through the platform concept. Some solar panel manufacturers, for example, have built innovative revenue
models that are forerunners to Industry 4.0 models.
Instead of directly selling panels to their business customers, they sell the electric power those panels generate. The manufacturer installs the panels (financing the
hefty up-front costs), and maintains and upgrades them
at a compelling price. In exchange, the customer signs
a 20- or 30-year contract. The manufacturer assumes
that no matter what happens during the subsequent
decades, its analytic prowess incorporating weather,
financial, and operational data will enable it to adopt
changing technologies and deliver energy at low cost. It
will keep the panels clean, use sensors to detect equipment breakdowns (solar panels have few moving parts,
so breakdowns are relatively rare), and upgrade the panels when photovoltaic technologies improve.
Platforms are successful in the Internet 4.0 context because of a phenomenon known to economists as
lock-in. Once a customer commits itself to a technologically comprehensive platform especially one that
offers multiple services, with costs that keep diminishing and an expanding network of users it is increasingly difficult to switch. Every new customer expects to
be able to connect to its own network of businesses, so
new customers sign up as well. This network effect, as
its called, further reinforces lock-in.
For example, over the course of 20 or 30 years, a

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to the previous industrial revolutions, this one is evolving at an exponential rather than linear pace. It is not
only changing the what and the how of doing things,
but also who we are.
A small group of companies 71 of the respondents to our survey, representing only 4 percent of the
total have chosen to lead the way. These first movers say they have invested 6 percent or more of their
revenues since 2013 in Industry 4.0 efforts, and also
claim high levels of digitization and competitive advantage. They appear to be finding rapid payoffs in efficiency, cost savings, and opportunities for innovation;
more than half are among the group expecting to see
rapid business returns on their investments.
Some of the advantage enjoyed by first movers
has to do with the virtuous circle they kick off when
they move more quickly than competitors. If first movers can realize their expected cost savings and revenue
gains, they will generate more capital to reinvest in their
Industry 4.0 strategies, enabling them to improve their
operational performance and increase their lead over
competitors even further. As a result, the investment
required for laggards to catch up will grow. Advanced
implementation of Industry 4.0 may provide enough
competitive advantage that it will be seen by investors
as a qualifier for funding.
A still more compelling factor is the platforms that
first movers create. A platform is a nexus of exchange
and interoperable technology that allows a wide range
of vendors and customers to seamlessly interact. The
most successful first movers of the software and Internet
industries Amazon, Apple, eBay, Facebook, Google,
and Microsoft among them all cemented their position with powerful and distinctive platforms. Apple and
Google, for example, collect 30 percent of the revenue
for apps sold in their app stores.
First movers on Industry 4.0 will seek a similar advantage. GE and Siemens are already moving to solidify
their position as platform providers. Each has developed
a cloud-based system for connecting machines, devices,
and systems (such as enterprise resource planning systems) from a variety of companies facilitating trans-

4/14/16 5:17 PM

In Industry 4.0, whoever owns a


platform owns access to the customer,
and can place its own brand on the
aggregated work of other enterprises.

The Globalization Accelerator

s the fourth industrial revolution binds companies and countries ever more tightly together through worldwide supply chains and
sensor networks, it will increasingly promote
globalization. At the same time, it will link
closely to local companies. That helps explain why the
survey results differed considerably by region. Asian
companies, especially those based in Japan and China,
expected the greatest gains from the digitization of Industry 4.0, followed by companies in the Americas, and
then Europe and the Middle East. Japanese companies
are already the most advanced in this field, followed by
those based in the U.S. and then Europe. Companies
in all regions expect to catch up within five years (see
Exhibit 2).
As Industry 4.0 takes hold around the world,
emerging nations probably have the most to gain. They
can leverage digitization to gain efficiency in their hori-

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zontal integration, working with the global manufacturers to whom they supply all manner of raw materials, parts, and components. The more closely they align
with the platforms of Industry 4.0, the more potential
customers they will be able to reach.
This great integrating force is gaining strength at
a time of political fragmentation when many governments are considering making international trade
more difficult. It may indeed become harder to move
people and products across some national borders. But
Exhibit 2: Expectations for Industry 4.0, by Region
Respondents from three major regions were asked: What cumulative
benefits from digitization [in the context of an Industry 4.0related survey]
do you expect in the next five years? Asia-Pacific had the largest
percentage of companies with high expectations.
100%

Efficiency Gains
Lower Costs
Additional Revenue

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solar panel manufacturers platform will probably be


linked through Industry 4.0 relationships to a few other companies platforms. These in turn will influence
other choices that solar customers make. As these customers add interrelated technologies, they will likely
find their operations locked into that ecosystem
while competitors customers might be locked into a
different ecosystem. Ultimately, two or three platforms
will probably cover most of the sector, just as Apples
iOS and Googles Android currently divide the smartphone sector. In Industry 4.0, as in other technological
fields, whoever owns a platform owns access to the customer, and can place its own brand on the aggregated
work of many other enterprises.

93

80%

MODEST GAINS
Companies expecting
gains between
10% and 29%

60%

40%

20%

SUBSTANTIAL GAINS
Companies expecting
gains greater than
30%
Europe, Africa,
Middle East

Americas

Asia-Pacific

Source: Industry 4.0: Building the Digital Enterprise, PwC

4/14/16 5:17 PM

Your Companys Path

igital capabilities are vital to move forward


with Industry 4.0. Developing them takes
time and concentration; a step-by-step approach is important. But you must move with
alacrity, so you dont forfeit the first-mover
advantage to competitors. These six steps have been
critical for the successful companies weve seen.
1. Map out an Industry 4.0 strategy up front. Evaluate
your own digital maturity now, versus where you need
to be. Set clear targets for closing the gap. Prioritize the
measures that will bring the most value to your business and make sure these are aligned with your overall

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strategy. Gain commitment to this approach from the


full range of top company leadership, and make sure
that commitment is evident to people throughout the
enterprise, who will base their decisions on what they
believe their leaders want and expect.
2. Start with pilot projects. Use them to establish
proof of concept and demonstrate business value. Not
every project will succeed, but they will all help you
learn the approach that works for your company. With
early successes, you can also gain buy-in from the organization, and secure funding for a larger rollout. For
the early pilots, define a relatively narrow initial scope,
but incorporate the end-to-end concept of Industry 4.0
from materials to the customer delivery (and services
after the sale). Design pragmatically to compensate for
standards or infrastructure that doesnt yet exist. Collaborate with digital leaders outside your companys
boundaries; work with startups, universities, or industry organizations to accelerate your digital innovation.
3. Define the capabilities you need. Building on the
lessons learned in your pilots, map out in detail the
capabilities you need to achieve your goals, and develop
a blueprint for building (or acquiring) those capabilities. Include technological enablers, such as an agile and
highly functional IT infrastructure with well-designed
user interfaces, that can propel your business processes
forward. Also include strategies for recruiting and developing the right employees and attracting the right companies to work with. Your success with Industry 4.0 will
depend on the skills and knowledge you can deploy.
4. Become a virtuoso in data analytics. Success with
Industry 4.0 depends on your prowess in unlocking
data possibilities, and using analytics in creative and
effective ways. Establish cross-functional analytics ca-

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Industry 4.0 could overcome those barriers by enabling


companies to transfer just their intellectual property,
including their software, while letting each nation
maintain its own manufacturing networks. Future
advances in 3D printing, for example, will enable virtually any company to set up shop anywhere, and to
fabricate components, spare parts, and (potentially) industrial equipment without having to ship the finished
pieces. Operations will become more global and more
local at the same time.
Unresolved issues abound. For example, will governments change their customs activities and tax structures to account for a world in which physical goods of
all kinds rapidly decrease in value compared with the
intangibles intellectual capital and ongoing support,
for example that distinguish them? Will a digital
fabrication plant be considered a full-scale manufacturing location? Will this type of manufacturing create jobs? Or supplant them with technology? As the
intellectual property value of software and services increases, will new cybersecurity challenges arise? Or will
cradle-to-grave tracking of products make it easier to
enforce global rules about IP theft, and to trace violations? The centuries-long process of globalization has
always presented new challenges and new risks; now, as
we stand on the brink of an entirely new technological
way of life, the challenges and risks may come in unfamiliar new forms.

4/14/16 5:17 PM

Dont buy the hype. Buy the reality.


Industry 4.0 will be a huge boon
to companies that fully understand
what it means for them.

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that you can profit from being part of platforms that


you dont fully control. The greatest breakthroughs in
performance occur when you actively understand consumer behavior and can orchestrate a distinctive role for
your company within a complex ecosystem of partners,
suppliers, and customers.
Finally, dont buy the hype. Buy the reality. Industry 4.0 will be a huge boon to companies that fully understand what it means for them. Change of this nature
will transcend your companys boundaries and probably the national boundaries of the countries where you
do business. +
Reprint No. 16213

Resources
Frank Burkitt, A Strategists Guide to the Internet of Things, s+b,
Nov. 10, 2014: The three types of companies described here
enablers, engagers, and enhancers are all active in an Industry
4.0 ecosystem.

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pabilities, tied closely to the strategic priorities of the


whole enterprise, drawing on in-house staff and outsourced expertise. Develop ways of combining data
from different parts of the business for example,
your quality, logistics, and engineering functions
(which may have had separate and incompatible monitoring systems before this) and apply these methods
to as many domains as possible, particularly those that
differentiate your company or attract customers. Learn
to get value out of data through intelligent systems design, using real-time analytics to tailor products to customers and continually improve your processes. Think
big, but start small, with proof of concept projects.
5. Transform into a digital enterprise. Capturing the
full potential of Industry 4.0 will probably entail major
changes to your companys practices and the attitudes
underlying them. Set the tone from the top, with clear
leadership, commitment, and vision from the C-suite
and financial stakeholders. Foster a digital culture: All
your employees will need to think and act like technologically adept natives, willing to experiment, learn new
ways of operating, and adapt everyday processes accordingly. Remember that change doesnt stop once youve
implemented Industry 4.0. Your company will need to
reinvent its capabilities continually, at faster rates than
in the past, to stay ahead of the game.
6. Adopt an ecosystem perspective. Develop complete product and services solutions for your customers. Use partnerships or align with platforms if you
cannot develop a comprehensive offering on your own.
You may find it difficult to share knowledge with other
companies, and you may prefer acquisition to collaboration. But look for ways to bridge your own companys
boundaries perhaps with technical standards so

95

Chris Curran, Tom Puthiyamadam, and Chrisie Wendin, Raising Your


Digital IQ, s+b, Feb. 15, 2015: This global survey of business leaders
shows how the smartest companies develop and wield their technology
strategy a prerequisite for success in Industry 4.0.
Reinhard Geissbauer, Jesper Veds, and Stefan Schraum, Industry 4.0:
Building the Digital Enterprise, PwC Global Industry 4.0 Survey, 2016,
pwc.com/industry4.0: In-depth report on the survey of more than 2,000
industrial business leaders from which this article was developed.
Tom Igoe and Catarina Mota, A Strategists Guide to Digital Fabrication, s+b, Aug. 23, 2011: 3D printing can do to manufacturing what the
Internet has done to information-based products and services.
Helmuth Ludwig and Eric Spiegel, Americas Real Manufacturing Advantage, s+b, Jan. 20, 2014: Top Siemens executives describe the factors
(such as energy cost and speed-to-market) that will make any country, not
just the U.S., ripe for Industry 4.0.
More thought leadership on this topic:
strategy-business.com/operations_and_manufacturing

4/14/16 5:17 PM

THOUGHT LEADER

The Thought Leader Interview:


Joseph Kaeser
The CEO of Siemens describes how an industrial powerhouse
founded in the 19th century is using software, sensors, and savvy to
build a digital manufacturer that can thrive in the 21st century.

thought leader
96

ery few companies have survived as many technological


and industrial revolutions
as Siemens AG. Founded in Berlin
in 1847, Siemens has seen and
prospered through the advent of
steam, trains, electricity, the internal
combustion engine, steam turbines,
the jet engine, wind power, the personal computer, wireless communications, the Internet, and, now, big
data. While other companies managed through these consecutive
industrial and information revolutions, Siemens has helped lead them.

sb83_096-103_TL_JosephKaeser-fin.indd 96

With fiscal 2015 revenues of 75.6


billion (US$82 billion) and 348,000
employees, it is one of the worlds
largest industrial enterprises.
Today, Siemens is organized
into 10 divisions, most of which
offer highly complicated products.
The divisions address markets such
as wind power and renewables,
power generation, energy management, building technologies, mobility, process industries and drives,
and healthcare. The sun never sets
on this far-flung empire, which
stretches from a steel factory in

Cilegon, Indonesia, to a software development center in Bangalore, India; from an ultrasound equipment
manufacturing facility in Plymouth
Meeting, Penn., to a wind turbine
plant in Cuxhaven, Germany.
Every business talks about becoming more digital. Buzzwords
like 3D printing, the Internet of
Things, mass customization, and big
data are bruited at conferences and
populate the fundraising decks of
startups. But these concepts and
the broader notion of digitizing
manufacturing have a particular
meaning for Siemens. It is in the
midst of its own digital transformation. The company is putting lots of
time, effort, and talent into marrying information technology to the
process by which it designs, builds,
and delivers its highly sophisticated
products. The companys own manufacturing is already largely conducted in fully digital factories.
Steering Siemens through the
next industrial revolution is the mission of Joseph Kaeser, who joined
the company in 1980 and rose
through the ranks of the semiconductor divisions and then into central management as chief financial
officer. In August 2013, he was
named president and CEO.

Photograph by Matthew Septimus

BY DANIEL GROSS

4/14/16 4:23 PM

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broader implications of the ongoing


technology revolution.
S+B: I understand you spent several
years in Silicon Valley.
KAESER: More than five years, from

1994 through 1999. I came over as


CFO of what was then Siemens
Components, which was the semiconductor, passive devices, and electrical components business. Then I
ended up becoming the CEO, and I
left in 1999, just about at the height
of the bubble. I always remember
those were tough times.
S+B: Wasnt there a boom going on?
KAESER: Well, in 199495, it was

still kind of a depressed environment in the Valley. House prices


were still down. There were a few
companies talking about Internet
applications and voice over IP. And
then the telecommunication networks began to bloom. Lucent was
still around and telecom was very
cool, and companies like Cisco and
Bay Networks were thriving. You
know, when Candlestick Park [the
San Francisco Giants baseball stadium] was renamed 3Com Park in
1995, that was interesting to me. I
had never thought about companies
like 3Com or Cisco before. We actu-

ally were a supplier to Cisco and


telecoms and datacoms, and the
DRAM [dynamic random-access
memory] business was still really
strong with the pull from companies
like Micron. But when I introduced
myself as the big shot from Siemens,
people said, Oh, is that the mattress
factory? I responded that it was
kind of close, because whenever you
buy products from us, you can sleep
well! But this was also a time when
Apple was at five bucks a share. I
was working in Cupertino, and the
Apple complex was just across I-280.
And people were joking about Microsoft buying Apple for the price of
a Snapple.
Siemens Past and Future
S+B: So you saw the beginnings of
one bubble in Silicon Valley. And
today were sitting in San Francisco,
which many people regard as the
epicenter of an even bigger techinfused bubble.
KAESER: Well, no one can predict

the future. My take would be yes, we


are in the middle, if not close to the
peak, of another massive bubble.
But then again, the ones who survive will change the world. And
thats the fascinating thing.

thought leader

Kaeser may not have the mien


of a millennial technology executive.
He doesnt wear hoodies, and his
hair is combed carefully in a silver
coif. But he is something of a digital
native, having spent time in Silicon
Valley in the 1990s. (At the time,
Kaeser confesses, the locals often
confused Siemens with Simmons
Bedding Company.) Today, Siemens
employs more than 17,500 software
engineers. Although much of the
conversation about technology revolves around apps and websites,
Siemens is providing examples of
how IT and data can add a massive
amount of leverage in advanced
manufacturing.
In conversation, Kaeser is energetic and informal one favorite
word of praise is cool with a wideranging, pragmatic perspective on
the issues affecting his company and
his industry. Over a one-course meal
(fish and white wine) at a hotel in
San Francisco in November 2015, he
sketched out his favored path to relevance for a 170-year-old advanced
manufacturing conglomerate in the
early 21st century. He described how
Siemenss approach to manufacturing brings coherence to a diverse
portfolio, and helps drive its culture,
and he aired his opinion on the

97

4/14/16 4:23 PM

Daniel Gross
gross_daniel@
strategy-business.com
is executive editor
of strategy+business.

thought leader
98

managing today. The information


comes faster and is more accessible
than ever before. Theres a lot of
data, and the challenge is how to
prioritize information. As a company leader or as any manager,
any person you need to prioritize
your tasks. It has become harder to
set the priorities correctly because
theres so much information. You
need to go after that information
and understand whats first and second and third [in importance].
The second aspect to managing: How do you manage your company using the data you collect?
Theres a technocratic approach in
which you look at the numbers. But
by the time you get the numbers, its
too late already because the numbers
only reflect what happened in the
past. At the end, managing a company is still very analog, because hu-

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man beings are analog, and the way


you manage your company is you
deal with human beings from the
top all the way to the bottom. That
value chain of human resources
needs to be intact.
S+B: So its not just about the
numbers?
KAESER: [At Siemens] we know our

numbers, usually daily, in terms of


bookings and revenues. We have
built a real-time system and we

because by the time you see the


numbers, its too late.
S+B: What is the Siemens approach
to the use of information technology
in advanced manufacturing?
KAESER: Its a very powerful ap-

proach because we are industry leaders. We have a division called digital


factory, where we merge the real
world, which is hardware, with the
virtual world, which is simulation
software. We have all the elements of

We have a division called digital


factory, where we merge the
real world with the virtual world.
know our cash flow. But in a business like ours, which has cycles from
two to seven years, its much more
important to understand the markets. How do we recognize early indicators of a changing world? That
object you see is that going to be
there tomorrow? If its there tomorrow, is it going to be different?
Whats your competitive environment? How do the customers of
your customers change? Thats the
type of stuff you need to understand

manufacturing automation in that


division. We have hardware such as
control systems and CPUs. Then,
around that hardware, we have socalled PLM [product life-cycle management] software, which allows us
to simulate production and robotics
flows ahead of time. So today, we
build manufacturing automation
lines and design processes before a
manufacturing plant has been built.
Merging the real world with the
virtual world allows us to create

strategy+business issue 83

S+B: Youre the CEO of a massive,


diversified global company. With
the digitization of information, you
can have information and insight
into all your different operations on
one screen. How does that affect the
way you work and manage? Do you
have a dashboard of indicators on
all the time? Are you texting 500
different people?
KAESER: There are two aspects to

4/14/16 4:23 PM

what we call a digital twin. We copy


a real-time manufacturing process
into the virtual world to optimize
engineering, processing quality, uptime, and load time and then we
copy it back into the real world of
manufacturing. Thats pretty cool. I
believe we are the only company in
the world that can do it. And when
we simulate processes in manufacturing and in engineering, in R&D,
we can go from destructive to nondestructive testing. Together with

data we get from hardware. The importance of hardware is what people


often underestimate when they talk
about the Internet of Things. Have
you ever thought about where data
comes from?
S+B: It comes from the customers,
doesnt it?
KAESER: People say they are getting

the data from their customers. But


when I ask who and what is providing the data, they respond, Its the

There are thousands of sensors


in [a high-performance turbine],
and every sensor has a story to tell.
Every moment, it delivers data.
Boeing, we simulate the whole development and engineering process
for new airplanes. And then, we [do
simulations that test] whether the
airplane can fly or not.

S+B: Siemens employs a huge


number of software engineers.
What are they doing?
KAESER: We have more than 17,500

software engineers in our company,


more than many software companies in the world. And those people
develop software inside the products, which is called embedded software, as well as build applications
and data analytics tools that use the

sb83_096-103_TL_JosephKaeser-fin.indd 99

S+B: What does it mean to have


every product you make incorporate
sensors and be connected in the
cloud? Is this your new approach to
manufacturing for every one of your
diverse businesses?
KAESER: Thats exactly what it is.

Weve got energy generation. Weve


got energy management. Weve got
automation for manufacturing, and
products for industries like oil and
gas, food and beverage, mining, all
that good stuff. And there are vertical software applications for certain
industries. Those applications are all
based on hardware that provides
data through sensors. We look at
that data, analyze it, and then make
applications out of it. Think about
turbines for a utility. We help the
utility company analyze how much
service its power plants need based
on fuel consumption, the utilization
rates, and the maintenance data.
S+B: Is this a vertically integrated
process in the sense that youre
manufacturing the machines that
produce the data, youre collecting
and analyzing the data, and then
youre writing software? And are you
also making the sensors?
KAESER: We manufacture products

that generate power, that automate


manufacturing processes, that scan
people (like CT and MRI machines),

thought leader

Advancing Data Analytics

machines and stuff. Exactly! Its the


installed base of machines. If you
look at a high-performance energy
turbine, like a gas turbine, our flagship, the 8000H, its a 600-megawatt machine a really cool machine! There are thousands of sensors
in that machine, and every sensor
has a story to tell. Every moment,
that sensor delivers data to software,
which stores it in the cloud.
Theres a two-step process: collecting data and making use of it.
Once I have data, how do I make
meaningful analytics out of it so my
customer has an advantage? My customer would pay me for information
that makes life easier, better, less
costly, or more valuable. And thats

what many people dont understand


when they talk about the Internet of
Things or open platforms. Ive got
data, but why would someone pay
me for that data?

99

4/14/16 4:23 PM

S+B: How does this approach


change your relationship with your
customers and the value proposition
Siemens offers?
KAESER: It changes the relationship

thought leader
100

massively because data analytics


gives a company a lot of information
[it can use] to optimize and shorten
the value chain. The value chain
consists of the supplier of your supplier, your supplier, your company,
your customer, and the customer of
your customer. The information you
get from data can shorten that value
chain. You can make products faster, more cost-efficiently, more flexibly. You can produce in lot sizes of
one. You can cut out different links
of the value chain. And the links
that get cut out provide the least

sb83_096-103_TL_JosephKaeser-fin.indd 100

value in the value chain. And thats


what you need to understand.
Where am I in the value chain?
How can I remain a strong link by
providing more value than anyone
else in there? Youd better know
what you can do with your data and
cut someone else out rather than get

KAESER: If you look at a company


culture and what it takes to stay
alive for the next generation or two,
or maybe even longer, you need to
look at the purpose of the company.
Why is it that Im going to get up in
the morning and go to work at that
company? Why do I believe it is

Production is being changed.


In the last five years, we have
increased productivity eightfold.
cut out yourself. The issue isnt just
that your suppliers might try to cut
you out. Your customers might try to
cut you out because they say, Ive
got the data, so why do I need you?
Thats the paradigm shift. The
telecom space is a good example.
Now why would you pay a lot of
money for making a phone call if
youve got Skype?
The Industrie 4.0 Difference
S+B: It seems like this approach
would require a substantial shift in
the culture as well as how you
train people and present yourself
to customers.

worth going the extra mile and giving my extra five cents? The way
weve been defining the purpose at
Siemens is that we are a business to
society enterprise.
We created that term business to society because we have
B2C (business to consumer) and
B2B (business to business) offerings.
But we are a business that contributes to societys development in the
world, through becoming carbon
neutral by 2025 (were the biggest
company in the world that has committed to doing that); or saving lives;
or providing people with reliable,
safe power; or giving people a more
livable life in cities. Our employees

strategy+business issue 83

and that move people and goods


from place A to place B. Thats a lot
of products, and all those products
have sensors. But we dont manufacture sensors. However, once we get
the data, we have the data analytics
platform and the cloud. For example, we have a proprietary cloud system for on-site data. Our customers
care about manufacturing and engineering data and intellectual property rights because [this type of data]
is the holy grail of innovation.

4/14/16 4:31 PM

think thats pretty great. Thats how


we start changing the culture.
Next, everyone in this company, from the receptionists all the
way up to the CEO, needs to have
an understanding of what we call
our ownership culture. I say to them,
Whatever you do, whoever you are,
wherever you work in the Siemens
world, just act as if this were your
own company. That approach is
how we do business and how we
manage our business.
S+B: Thats mostly inward-facing.
What about external-facing efforts?
KAESER: You need to change the

S+B: What is Industrie 4.0, and what


role is Siemens playing in that?
KAESER: Industrie 4.0 is the Ger-

man version of the first generation of


manufacturing automation (see A

sb83_096-103_TL_JosephKaeser-fin.indd 101

S+B: If I were to show up there,


would I notice a difference between
it and any other factory?
KAESER: Oh, yeah. You will see

a highly automated manufacturing


flow, like what the automotive industry uses. But what you see is:
Sometimes the flow is like this [he
moves one hand off to the side].
Sometimes the flow is like this [he
shifts it again], and all of a sudden,
the flow is like this [he moves both
hands]. And you say, What the hell
is going on here? Well, what happens is that theres a customer request such as, I want this product
in that size, in that lot size, with that
blue color, with that dot on the bottom. So the software steers the
manufacturing process into lots as
small as one item. And then sometimes all of a sudden, you see that
certain products are being sorted out

into a queue, because the plant received information about a quality


defect in that product. So the simulation fixes the defect and gets approval from quality management to
put the fix into the production process. And then off we go.
The production process is being
changed. Its machines talking to
machines in a self-optimizing manufacturing and engineering process.
Using this approach, we have attained a production quality rate of
99.9988%. That is getting pretty
close to Six Sigma. In the last five
years, we have increased productivity eightfold. Its really something.
S+B: When you go back to the
origins of the assembly line in the
U.S., Henry Ford said it could work
only if you had a standardized
product. For 100 years, customization has been the enemy of manufacturing efficiency. But youre
saying this approach resolves that
contradiction?
KAESER: Exactly. Industrie 4.0 ba-

sically takes the cost of scale close to


zero. No matter what lot size you
need, the unit cost is about the same.
At some point, what will happen
is this: You are a consumer and
you want to buy a car. You go to the

thought leader

way you go to market. The world is


all about competencies. Never let the
hardware guys sell software, never,
ever! Just dont even let them get
close to it. Our perspective is that
we now sell solutions, applications,
and comprehensive systems as opposed to just selling the product.
We sell value instead of selling functionality. Its a complicated go-tomarket method.

Strategists Guide to Industry 4.0,


by Reinhard Geissbauer, Jesper Veds, and Stefan Schrauf, page 86). It
basically combines engineering and
manufacturing. We call it a digital
twin. Weve built Industrie 4.0type
manufacturing plants in Germany.
And the first one outside Germany
is in Chengdu, China. Thousands of
people are visiting this plant.

101

4/14/16 4:23 PM

gaps in efficiency. Once weve done


the simulation, we print the blade.
3D printing is also a huge help in
bridging the gap between scale and
scope. Scale used to mean that if you

By making the cars cheaper,


you have maybe another 200 million
people who can afford a car.
factory will build it to order. Four
weeks from now, you will have a
car. No more waiting six months,
or compromising at the dealership,
where they have 50 cars but not the
one you want.
S+B: Theres been a lot of talk
about the ability to do mass customization through technologies such as
3D printing. But so far it seems like
more of a hobbyists endeavor.
KAESER: No, no, no! We use a lot of

thought leader
102

3D printing already. We print smallvolume prototypes, and thats a very


important method of speeding up
innovation. In the old days, it took
ages to design a high-efficiency,
high-temperature blade. Today, we
simulate it, thanks to our digital factory PLM simulation system. We
simulate the airflow, the cooling system, and the coating, which is important because the temperature at
the edges of that turbine blade goes
up 1,600 degrees Celsius when its in
use, so weve got to really understand what the cooling system is all
about and how we minimize the

sb83_096-103_TL_JosephKaeser-fin.indd 102

did 5,000 blades, it was cheap, and if


you did only five blades, it was very
expensive. Today, it doesnt matter
because those five blades can be produced by 3D printing. If you take
the scalability out of the equation,
you can expand your scope and
have a lot size of one. Thats the approach. Its interesting. This is real,
and its not a bad thing to have.
Labor and Society
S+B: Theres a lot of concern about
the impact of technology on jobs and
employment. If manufacturing
becomes substantially more
automated, what effect will that
have on employment throughout the
supply chain?
KAESER: If you shorten the value

chain by cutting out links, as we discussed earlier, it results in lower cost,


and that means fewer resources are
being used. Fewer material resources
will be needed, and fewer human
resources will be needed. This is just
the way it works. Furthermore, the
remaining human resources will

need different skills than blue-collar


workers used to have. Workers need
to deal with machines that are
quicker to understand what needs
to be done than the workers themselves are. Their experience is
dwarfed by the computers experience, because the computer stores
all the knowledge and calibrates all
the data. People will still be in the
factory, but they will be doing different work than they used to.
Reskilling workers is a lot of hassle.
Thats not great news, right?
S+B: Certainly not for labor. How do
we get around this?
KAESER: Making up the difference

is possible only through growth. If


you can massively lower the costs of
a product, people who were unable
to afford that product will become
able to afford it. We have 7 billion
people on this planet. Of those,
maybe 4 billion would be able to
drive. But only 2 billion can afford
a car. By making the cars cheaper,
you have maybe another 200 million who can afford a car. By tearing
down the cost barrier, you enable
more people to afford it and thus
you secure growth.
S+B: Do you see barriers to the
rollout of ever more efficient
manufacturing technology?
KAESER: We were just having quite

a debate and discussion with Andy


McAfee [coauthor of The Second
Machine Age, which argues that revolutions in technology will sharply
reduce the need for labor]. And I

strategy+business issue 83

Internet, put your specs together,


and send that order to BMW. Someone will check your credit history
and your funds. Then, your car will
go straight to production and the

4/14/16 4:23 PM

Reprint No. 16214

thought leader

S+B: This would seem to require


a different type of leadership
from technology and industrial
companies.
KAESER: Think about the whole

have to stop the coal-fired power


plants and youre going to have to
stop the pollution of your cities.
And they say, You know, you [in
the West] screwed the whole world.
You are developed now. You are rich.
Youve got a lot of money and you
are driving nice cars and you are telling us now we cannot do that
because you have already produced
all the allowable CO2 emissions?
Thats not going to work. So, [if
youre a business in the West,] youd
better make sure that your emissions
go down.
If you dont bridge the societal
divide, youre going to go nowhere
with Industrie 4.0 or the Internet
of Things or anything else a lot of
techies and companies are talking
about. Thats something that leaders
of companies had better think
about. They need to ask themselves,
How do I deal with the digital divide, the societal divide? How do I
make sure that I bring people along
and make a meaningful contribution to society? +

Enjoy a free management history e-book when you


sign up for Ideas That Work, our email newsletter.
strategy-business.com/newsletters

said, There is one thing we really


never had a look at. Will the majority of the society be willing and able
to deal with the fact that the few
smartest, the few brainiest, are going
to conquer the world?
He said: Why not? I responded that democracies [are run] by the
majority vote and not so much by
who is the smartest, the fastest, and
the brightest.
And the reality is that we dont
know the outcome [of these technological advances]. There is going to
be a regulatory catalyst. And there is
going to be a societal catalyst. The
unions, the churches, those social
types of nonprofit organizations say
to businesses, You think youre
pretty cool. Youre going to cut out
all the middlemen, but youre also
going to cut out social justice, so you
just go to hell. We dont want to deal
with you.
That societal impact has always
been a massive topic that we, I think,
also are trying to understand. How
can you as a business contribute to
society? Because if you dont provide
a value to society, society will just
not accept you.

matter of air pollution. We said,


weve got to get the CO2 emissions
down. Of course we need to. Then,
we talk to China and to India and to
Indonesia and say, You are going to

sb83_096-103_TL_JosephKaeser-fin.indd 103

4/14/16 4:23 PM

Boardroom Brawlers
by Jill Priluck
Dear Chairman: Boardroom
Battles and the Rise of Shareholder Activism, by Jeff Gramm,
HarperCollins, 2016

M
books in brief
104

any analysts and reporters perceive shareholder


activism as a trend that
emerged in the last three decades.
And its true that a market beset
by short-termism, large
pools of capital and
cheap debt, and fickle
investors who punish
stocks when companies post a bad quarter
has created conditions
ripe for shareholder
activism. But takeover
investors have been
around as long as the
market.
Indeed, as Jeff Gramm shows in
his lively, well-researched book Dear
Chairman, investors have been clawing their way onto company boards
and into the decision-making process for nearly a century. From Benjamin Grahams 192628 fight with
the Northern Pipeline Company to
Bill Ackmans failed 2013 attempt to

sb83_104-111_BIB_fin.indd 104

take over J.C. Penney, Gramm, a


professor of investing at Columbia
Business School who also runs a
hedge fund, documents a host of
proxy battles, board position struggles, minority shareholder ascents,
and hedge fund raids of the modern
corporate era.
Gramm describes how the dynamics of the market for control of
public companies has evolved over
the decades. During the stock market booms of the 1890s and 1920s,
shareholders focused
on horizontal and vertical grabs for power in
the form of mergers
and stock market manipulations. In the
1950s and 1960s, it
was common to see
companies engage in
serial acquisitions to
build conglomerates.
The 1980s saw an
abundance of what become known
as greenmailing a phenomenon
in which activist investors would
amass a stake, threaten a takeover,
and then sell their shares back to
the company at a higher price. In addition to Graham and Ackman,
Gramms cast of characters includes
Warren Buffett, H. Ross Perot, Carl

Icahn, and Daniel Loeb. Theres an


entire chapter devoted to Karla
Scherers efforts to wrest control of
her familys company away from exhusband Peter Fink in a proxy fight
that resulted in Shearson Lehman
Huttons purchase of R.P. Scherer
for US$480 million in 1989. Famous 1980s-era raiders Michael
Milken, Ron Perelman, and Nelson
Peltz get mentions, as does lawyer
Joe Flom.
The history of modern activism
really got under way in the 1920s.
Graham was one of the first investors to employ activism as part of his
investing strategy. And he came to
the forefront by challenging an overcapitalized company to return cash
to shareholders after using an analysis of the companys fundamentals.
In 1926, Graham, a securities investor, noticed a discrepancy in Northern Pipelines balance sheet. While
the stock languished at $65 per
share, the railroad actually generated more than $6 per share in annual
earnings and owned investment securities worth $90 per share. Senior
management members and representation from the Standard Oil system dominated the board, which
benefited from an uninterested
shareholder base. I had treasure in

Illustration by Noma Bar

Books in Brief

4/14/16 4:44 PM

sb83_104-111_BIB_fin.indd 105

was Phillips Petroleums poison pill


that angered passive shareholders
and led Icahn to victory in his battle
with the company in 1985. Icahns
influence on the public company
wasnt high-minded. If you really
analyzed it, people like me are out to
win, and winning is money, he told
New Yorker writer Ken Auletta.
Gramm also offers a peek into
how the press influences activist efforts. Reporters have long adored
several swashbuckling Texans who
took on the corporate establishment.

presss stock plummeted, Buffett


bought an enormous position in the
company and steered its future.
As Gramm explains, Grahams
influence on activist investors has
waxed and waned. Buffett ultimately moved away from Grahams
quantitative style of investment into
a simpler approach that still stands
out amid the sea of hedge fund
offensives that dominate the shareholder activism landscape today. As
Buffett told the New York Times
Magazine in 1990, I became very

Many corporate management


teams owned little stock, and so
had little interest in selling to
maximize value for shareholders.
The Saturday Evening Post called
Young, who waged a proxy fight for
C&O Railway in the 1940s, The
Daring Young Man of Wall Street.
Young had publicly released a series
of vicious letters to Guaranty Trust,
the trustee of $80 million in debt
secured by Youngs C&O stock.
Perot was a darling of the media
when he took on General Motors
Roger Smith in the 1980s.
Buffett was one of many raiders
who used the press to his advantage.
Gramm describes how in 1963 the
man now known primarily for running Berkshire Hathaway moved in
on American Express after he read a
Wall Street Journal article in the
wake of the so-called salad oil scandal: A tank at the Allied Crude Vegetable Oil Refining Corporation,
one of the largest customers of
American Expresss field warehousing subsidiary, was filled with water
instead of oil. When American Ex-

interested in buying a wonderful


business at a moderate price.
Buffett may have long since left
the shareholder activism game. But
as Gramm shows in this engaging
book, many of the value-seeking
disciples Oracle of Omaha continue
to wage public battles against corporate management. +
Jill Priluck
jpriluck@gmail.com
is a journalist who lives in New York City.
Her reporting and analysis has appeared
in the New Yorker, Slate, and Reuters,
among other publications.

books in brief

my hands, said the hedge fund


pioneer. Graham in 1926 founded
the first partnership that shorted
securities and collected performance-based fees. After failing to
convince management to pay out
shareholders with a dividend, he ran
a proxy fight for two seats on the
board and eventually garnered the
votes that led management to distribute cash to shareholders.
Benjamin Graham is omnipresent throughout a narrative that explores how the meaning of the public company has shifted over the last
century. The purpose of a public
company is to benefit its shareholders. This means management and
the board of directors must harness
the companys assets to maximize
investor returns, writes Gramm.
But in the early 20th century, the
market for corporate bonds and preferred stocks dwarfed the market for
common stocks. In the 1950s, the
proxyteers, the original raiders,
targeted public companies as part of
a counterrevolution to the inevitable excesses of the managerial revolution, as one told Time in 1955.
Proxyteers such as Robert Young
bought large interests in public companies from holders who were liquidating their stakes and then attacked management.
As Gramm demonstrates, the
second wave of raiders in the 1980s
woke up passive shareholders. Many
corporate management teams owned
little stock, and so had little interest
in selling to maximize value for
shareholders. Icahn and his contemporaries set out to influence board
behavior, despite the 1982 arrival of
the poison pill a legal device that
let companies flood the market with
new stock once hostile investors
amassed significant stakes. Icahn
called it legal trickery. Ironically, it

105

4/14/16 4:44 PM

by Nancy A. Nichols
The Confidence Game: Why We
Fall for ItEvery Time, by Maria
Konnikova, Viking, 2016

y father was a used-car


salesman. And it was
my experience of watching him work that led me to be fascinated with all kinds of business practices some legitimate, and some
that probably crossed the line.
Perhaps thats why I find Maria
Konnikovas book The Confidence
Game so compelling. Konnikova,
a contributing writer at the New
Yorker, has written a book that is so

books in brief
106

The author cites a study of 1,000


marketers, which found that
10 percent scored at the top of
the range for narcissism.
detailed about the art and history
of the confidence man that it could
almost serve as a textbook for aspiring criminals.
Writing in a clear and straightforward manner, Konnikova details
both lesser-known frauds (a Canadian doctor who falsified his credentials and went on to operate successfully on 19 sailors) and infamous
cases like that of Bernard Madoff.

sb83_104-111_BIB_fin.indd 106

to reach vulnerable targets. Online


scams made up 40 percent of all
consumer fraud in 2011, up from 20
percent in 2007, according to statistics Konnikova cites from the FTC
and AARP. Technology, warns
Konnikova, is ushering in a new
golden age of grift.
But although the means may be
constantly changing, the human impulses that motivate con men and

women havent changed much.


Whether they operate online or in
person, con artists share a dark
triad, as Konnikova calls it, of traits:
psychopathy, narcissism, and Machiavellianism. They
prey on the unrealized
dreams of their targets,
selling them the future
they desire and secretly
believe they deserve.
Konnikova makes
it clear that although
we can dismiss con
artists as outliers who
operate beyond the
norms of society, the
formula used by con artists bears
some similarity to the one that
drives much of automotive, beauty,
and financial advertising. Take, for
example, the recent interest among
many companies in the power of
story-telling to tap into the belief
systems and values of their customers. Marketers construct elaborate
psychological profiles to understand
the unmet needs of their customers,
and then craft narratives to influence their behavior.
To be sure, most companies are
not full of psychopaths. But many
companies employ their share
of narcissists and Machiavellian
princes. The author cites a study of
1,000 marketers, in which 10 percent scored at the top of the range
for narcissism far above the average in the general population. As
such, they were masters of manipulation and deception.
If confidence men operate out-

strategy+business issue 83

The Race Goes


to the Grift

Among her many tales is the alarming story of a physics professor in his
60s who became so convinced of a
young bikini models love for him
that he was tricked into smuggling
drugs for her.
The unfortunate
and super-smart physics professor was suffering after a recent divorce. He went online
seeking romance but
instead found himself
involved in a drugtrafficking operation.
Konnikova makes it
clear that technological changes, such as the kind of online dating sites where the professor
connected with the model, are opening up new avenues for scam artists

4/14/16 4:44 PM

side the law, says linguist David W.


Maurer, author of The Big Con
(1940), it must be remembered that
they are not much further outside
than many of our pillars of society

are all vulnerable to fraud, and that,


in some ways, we are all susceptible
to using unsavory business tactics
ourselves. Each of us lies, on average, three times during a normal

The slope from a legitimate


business practice to a con can be
a slippery one. Many a corporate
fraud begins with minor tweaks.

sb83_104-111_BIB_fin.indd 107

conversation with an acquaintance,


according to psychologist Robert S.
Feldman. And, according to one
study the author cites, almost onequarter of adults believe it is OK to
falsely increase their insurance claim
to make up for the deductible.
Facts like these and others in
Konnikovas intriguing book will
make you sweat. Youll end up wondering what your colleague in the
next cubicle is up to, and whether
there is truly a legitimate institution
behind that website where you just
logged your credit card number.
Still, by reading Konnikovas
book carefully, you can reverse engineer a few pieces of worthy advice.
Dont get too caught up in your

Nancy A. Nichols
nancy@greatideasstudio.com
is a former senior editor of the Harvard
Business Review and founder of the
Great Ideas Studio.

books in brief

who go under names less sinister.


Indeed, the appeals of con men
hinge on some of the very same
concepts behind legitimate sales
pitches: fear of scarcity, appeals to
legitimacy, promises of future
wealth or idealized love interests,
and social consensus.
The slope from a legitimate
business practice to a con can be a
fast and slippery one. Many a corporate fraud begins with minor tweaks
to the books a few invoices that
can be recognized as revenue now
and, hopefully, be made up for later
only to have things spin out of
control as the market tanks or a recession hits.
Konnikova reminds us that we

emotions; instead, try to make sure


you are observing and listening objectively as much as if not more than
simply feeling. Doing so could help
keep you from getting swept up in
the prospect of outsized and everincreasing returns or, say, from
falling for the unlikely affection of a
bikini model.
Also, check with others and
then actually listen to them. One
colleague of the physics professor,
for example, told him blatantly that
he was about to be scammed and
dragged to prison for transporting
drugs. Did he listen? No.
Finally, stand up at the front of
your company and make it crystal
clear: We dont cheat, lie, or steal
here. Repeat this performance at the
family dinner table. Then stick to it.
And remember the old adage:
If it seems too good to be true, it
probably is. +

107

4/14/16 4:44 PM

by Mark Stahlman
Throwing Rocks at the Google
Bus: How Growth Became the
Enemy of Prosperity, by Douglas
Rushkoff, Portfolio, 2016

books in brief
108

he publisher of Douglas
Rushkoffs excellent new
book, Throwing Rocks at
the Google Bus, compares the author
to Thomas Piketty and Erik Brynjolfsson both of whom are noted
economists. But Rushkoff, a media
analyst who has become known for
his insights on technology, is no
economist. Whats more, he explicitly rejects both of these thinkers.
He dismisses Pikettys preferred solution to inequality, redistribution.
And Rushkoff is equally sure that
there will not be a second machine
age, as Brynjolfsson projects.
The reason for his disagreement
is expressed in the books subtitle,
How Growth Became the Enemy of
Prosperity. Its a theme that builds on
Rushkoffs earlier work, including
Life Inc. (Random House, 2009)
and Program or Be Programmed (OR
Books, 2010). Rather than focusing
on the economic and technological
factors driving the future of humanity, however, Rushkoff turns the lens
around in Throwing Rocks at the
Google Bus. The title, of course, is
a reference to recent incidents in
which some San Franciscans have
demonstrated their anger at Googles
private transportation system, which

sb83_104-111_BIB_fin.indd 108

pose but not bigger or smaller.


This approach is fully committed to
private property and sees a strong
role for governments in intervening
to block entities from becoming
too big to fail.
By tapping into
what may be the only
major alternative to
the endlessly rotating
capitalism-or-socialism hamster cage that
has dominated the past
century of political
economic
punditry,
Rushkoff cuts to the
radical core of the issues involved. He argues that we
should promote prosperity over
growth, thus forcing a fundamental
reexamination of what has been hidden from our view. No Luddite,
Rushkoff calls on us to take advantage of what digital technology gives
us: an opportunity to restore human
balance to a society that is now racing toward a future in which machines dominate.
Because Rushkoff isnt an economist, he cant be expected to produce a detailed description of a
new economic system. But he does
provide a wealth of examples of entities that are managing to promote
prosperity amid growth. He focuses
on well-known topics such as benefit corporations, employee-owned
businesses, and cooperatives, all
of which endeavor to spread wealth
more equitably. These well-intentioned efforts, however, are just
scratching the surface. And in the

strategy+business issue 83

Rocking the Bus

ferries well-paid workers from gentrifying neighborhoods to the companys suburban campus. In the
book, Rushkoff unabashedly promotes human values, which, he
steadfastly claims, are
the same as digital values. As he puts it, The
word digital itself refers to digits the 10
fingers we humans use
to build, to count, and
to program computers
in the first place. In
this important and
useful polemic, Rushkoff puts forth a bold
thesis: We need to understand that
digital technology allows us to install a new social operating system
to replace the old industrial one that
tried to eliminate the incalculable
messiness of human life. Its about
time someone said this and made
the argument stick.
Rushkoff starts with the premise that the pure economic analysis
promulgated by the digerati has
failed to help us understand how the
future is unfolding. Rather than
wholeheartedly embracing the market logic of unfettered technology,
or calling for a regime of regulation
that will halt technological progress,
he advocates a third way: digital
distributism. Distributism is an approach to economics based on the
principle of subsidiarity, which
simply means that every entity,
whether corporation or government
agency, should be as big or small as it
needs to be to accomplish its pur-

4/14/16 4:44 PM

majority of countries most notably in China approaching economic development without a recognition of the vital importance of
growth is a nonstarter. As Rushkoff
puts it, we seriously need a new operating system.
We need it, he argues, because
for the first time, automation is fundamentally reshaping our economic
prospects. As economist Lawrence

the early 2000s, pointing to a persistent slowdown in consumption


growth. Rushkoff also believes that
technologies change us. Sociologists
may disparage that argument as
technological determinism, but
their protests cant stop us from being shaped by the tools we use.
The previous version of distributism, from which Rushkoff
draws some schematic guidance,

Rushkoff unabashedly
promotes human values, which,
he steadfastly claims, are the
same as digital values.

sb83_104-111_BIB_fin.indd 109

was an early-20th-century product


of what is often called Catholic social teaching. This is the approach
launched by Pope Leo XIII in his
1891 encyclical Rerum Novarum,
which in English has the subtitle
Rights and Duties of Capital and
Labor. It has taken many forms, including that of Dorothy Day and
her Catholic Worker movement,
which Pope Francis specifically
praised on his 2015 trip to the U.S.
In his recent encyclical, Pope
Francis noted that we are now living
in a technocratic paradigm a
cultural matrix in which technology
rules humanity. Pope Francis has
been accused of being a socialist (or
worse) for his criticism of the market as an inhuman machine. Rushkoff, for his part, is not Catholic.

Mark Stahlman
mark@tmtstrategies.com
is president of the Center for the Study
of Digital Life.

books in brief

Summers recently noted in a conference presentation, in the 1960s the


Nobel Prizewinning economist
Robert Solow could dismiss the effects of automation on employment
and industrial structure. Summers,
then an impressionable graduate
student, believed him. But Summers
says he now believes that automation is not fundamentally transformational after all.
Furthermore, general attitudes
about growth may have changed.
More and more people realize that
expecting nonstop consumptiondriven growth makes little sense
going forward. Indeed, those who
most carefully monitor consumer
behaviors have noticed lasting
changes in attitudes that began to
show up in developed countries in

But he is a radical thinker who has


tried to understand what techno
logy might accomplish when and if
humans actually reclaim control of
their own lives.
Many economists have proposed rewriting the rules or have offered schemes for saving capitalism. Rushkoff brings a completely
different set of observations and insights to this vital and expanding
conversation. Because he isnt constrained by models and isnt limited
by an education that blocks consideration of technological changes,
Rushkoff is free to consider how
human prosperity can displace a
mechanistic growth drive. At the
same time, he belongs in the category of techno-realists who squarely
avoid both the utopian and dystopian outlooks.
Rushkoff is throwing rocks at
more than the Google buses. He has
been a hands-on participant as well
as an astute observer during the past
20 years as the Internet has taken
over our lives. He deserves to be read
carefully, and his voice is likely to be
an important one as we craft our
new human paradigm. +

109

4/14/16 4:44 PM

by Zachary Karabell
The Only Game in Town: Central
Banks, Instability, and Avoiding
the Next Collapse, by Mohamed
A. El-Erian, Random House, 2016

books in brief
110

ne of the more peculiar


features of the past decade has been the transformation of a formerly quiet, behind-the-scenes cohort of central
bankers into the most visible and
consequential players in shaping the
arc of the global economy.
Central banks star turn has
sparked considerable controversy in
many parts of the world. But as
Mohamed A. El-Erian demonstrates
in his deeply informed new book,
The Only Game in Town, it is a role
that cannot long be sustained and is
likely coming to an end. To El-Erians credit, and to the frustration of
those looking for simple answers,
the author lays out a future path
that is neither clear nor certain. We
are headed, says El-Erian, to a turning point a T-junction. Some
countries will find a glide path toward greater self-sustaining prosperity free of aggressive central bank
intervention; others will find themselves more deeply mired in sclerosis
and crisis.
El-Erian repeatedly emphasizes
that the time has come for governments to recognize that they can no
longer rely on central banks to do

sb83_104-111_BIB_fin.indd 110

(that T-junction) and suggests policy


prescriptions for central banks and
governments going forward.
El-Erian is surely right that for a
set of institutions that have shaped
the cost of capital for companies,
the price of mortgages for consumers, and the supply of money for
countries, central banks remain ill
understood. In part that is because
of their own legacy of what former
Federal Reserve chairman Alan
Greenspan called purposeful obfuscation, that tendency of central
bankers to stay out of the spotlight
and when placed in it to do their
best to just mumble incoherently.
The rolling economic and financial crises of the past decade
have thrust bankers to the forefront
of global economic policymaking.
Faced with governments that have
been unable or unwilling to do the

Central banks have reached the


borders of what they can do with the
tools of policy at their disposal.
commentator and analyst. He tackles complex issues with a sharp focus, and provides not just an overview of how central banks worldwide
have navigated the past decade, but
also a road map of the current challenges and better processes for moving forward. While eschewing the
temptation to provide a simple prediction for what lies ahead, he explains what he sees as most likely

hard spadework of structural reform, central banks gained, as the


title suggests, a virtual monopoly on
economic decision making. And although they may have done their
job admirably, they have, he concludes, reached the borders of what
they can do with the still limited
tools of monetary and regulatory
policy that are at their disposal.
El-Erian is a perfect Virgil for

strategy+business issue 83

Twilight of the
Central Bankers

the heavy policy lifting. After all,


central banks did their job heroically and prevented the 200809 global crisis from transmogrifying into a
global meltdown. They have spent
the past seven years taking extraordinary and unconventional measures such as quantitative easing and
negative interest rates, all in an attempt to bolster the worlds financial
system and spur economic activity.
The record charted by El-Erian has
been mixed, largely because elected
officials and governments in most
countries have remained passive,
fragmented, or misguided.
It would be hard to find a better
guide to this perplexing landscape
than El-Erian, an Oxford Ph.D.
who has run some of the most prominent institutional investing organizations in the world (those of Harvard and PIMCO) and is a frequent

4/14/16 4:44 PM

sb83_104-111_BIB_fin.indd 111

The outlook for government


action is decidedly mixed. Although
governments such as Chinas can
change gears and attempt to address
structural issues of slower growth
and rising wages, even
their skills are being
tested and perhaps
found wanting. Few
of the democratic governments in Europe,
North America, and
Latin America seem
capable of enacting the
type of long-term reforms that the moment
demands. The U.S. remains in many ways paralyzed by
gridlock. And the European Union
has never fully embraced a unitary
fiscal and economic policy.
While temperamentally optimistic, El-Erian soberly notes that
there is no easy path out of the low
growth, high unemployment, and
rising inequality that besets much
of the world. The populist stirrings
throughout the world, as reflected
in the candidacies of Donald Trump
and Bernie Sanders in the U.S. and
as felt through a familiar list of protests in societies worldwide, have yet
to grow into governance.
As he focuses on the limitations

of central banks, El-Erian omits a


key point. While inequality has
been rising along with growth stagnation, the costs of living have been
plunging everywhere, including the
costs of food, energy, and other everyday needs and desires. Surely that
has bolstered living standards far beyond our ability to easily measure.
Those changes, which can be ascribed in greater part to technology
than to the actions of central banks,
are reshaping our economic realities
more rapidly than we can analyze or
understand. Central banks may be
the only game in the town of global
economic policy. But they are just
one factor in the immensely complicated lattice of forces that are reshaping the world as we know it. +
Zachary Karabell
zkarabell@rivertwice.com
is the head of global strategy at Envestnet
and the author, most recently, of The
Leading Indicators: A Short History of the
Numbers That Rule Our World (Simon &
Schuster, 2014).

books in brief

our collective Dante as he leads us


through a tour of the purgatory of
the global economy; however, he can
wander off into too many tangents.
These tangents are in themselves illuminating, but they
dissipate the force of
the book. The latter
sections on diversity
and the need for both
gender and intellectual
diversity are compelling, yet they feel as
though they belong to
a different work.
Nonetheless, its
hard to quibble with
the authors central thesis. Yes, between negative interest rates in Japan and parts of Europe and continued bond buying and easing by a
European Central Bank deeply concerned about deflation, we are not at
the end of central bank interventions. As El-Erian hammers home,
however, governments need to take
up the baton of structural reform.
Companies must also begin to take
more risks with their massive cash
reserves, and financial system participants should take fewer risks.
Here, too, less action on the part of
central banks could be a spur to
both those needed changes.

111

4/14/16 4:44 PM

Whos the Boss?


When companies are run by co-CEOs, sharing power equally
doesnt necessarily translate into better results.
BY MATT PALMQUIST

end page
112

sb83_112_Endpage_fin.indd 112

traded U.S. firms that were helmed


by co-CEOs for a sustained period
during a recent 10-year stretch. They
controlled for several factors that
could affect performance, including
long-term debt, number of employees, and acquisition activity, as well
as the degree of board members independence. At the co-CEO tier,
they controlled for the length of time
the two executives served alongside
each other and the age difference
between them.
After combining several databases, the authors generated a measurement of each co-CEOs power based
on the individuals salary, tenure at
the firm, and level of stock ownership, and whether he or she also
occupied the board chair position.
The authors found that when the
CEOs shared influence evenly, firms
experienced slightly negative ROE
over the subsequent period. That suggests companies that divide power equitably may become bogged down in
power struggles between leaders with
equal sway over strategic decisions.
But as the gap in influence between co-CEOs widened, estimated
ROE peaked at about 243 percent
over the 10-year period. The finding
strongly supports a twin-leadership

model wherein one top executive


holds most of the clout. However,
firms ROE fell sharply, to 209
percent, as the power schism expanded further, and plummeted as
the power differential between coCEOs grew.
There are plenty of reasons to
employ co-CEOs. Sometimes two
merged firms want to keep both
CEOs at the helm. On other occasions, siblings jointly assume control
of the family business. In these scenarios, boards must carefully consider
how they dole out power and responsibility to their respective CEOs in a
two-party system, the authors advise.
Boards of directors should be
aware that the co-CEO leadership
structure, absent clear differences in
power between the co-CEOs, could
indeed turn a firm into a two-headed
monster, the authors write. +
Source: Whos in Charge Here? Co-

CEOs, Power Gaps, and Firm Performance, by Ryan Krause, Richard


Priem, and Leonard Love, Strategic
Management Journal, Dec. 2015, vol.
36, no. 13
More Recent Research at:
strategy-business.com/recent_research

Illustration by Elwood Smith

raditionally, firms, much


like countries, have operated
with one chief executive officer. But in recent years, an increasing number of high-profile companies including Bed Bath &
Beyond, Imax, and Whole Foods
have at times implemented a coCEO structure.
When the authors of a new
study weighed the impact of a coCEO system on a firms return on
equity (ROE), they found a complex
relationship between the co-CEO
structure and a firms bottom line. It
turns out that things go better when
there is a first among equals. CoCEO arrangements appear to benefit
the company most when a significant power gap exists between the
two leaders when more influence
over strategic decisions is placed in
the hands of one of the two CEOs.
But success depends on getting
the balance right. If the power gap
grows too wide, firm performance
begins to slump. That suggests that a
dramatic difference in the clout afforded to the two CEOs eventually
results in considerable distrust, and
communication breakdowns hamper
the firms performance.
The authors analyzed 71 publicly

4/14/16 4:57 PM

You will be hard-pressed to find a


better guide to the essential building
block of the organization of the future.
BusinessWeek

Since its first publication in 1993,


The Wisdom of Teams by Douglas
Smith and Jon Katzenbach has
sold nearly half a million copies
and has been translated into
more than fifteen languages.
This comprehensive classic,
authored by the founder of PwC
Strategy&s Katzenbach Center,
is the definitive work on how to
create high-performance teams.

AVAILABLE IN HARDCOVER AND E-BOOK FORMAT WHEREVER BOOKS ARE SOLD

HBR.org/books

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