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editor’s letter
1
Tests of a Company’s
Prowess
Reducing expenses without a loss of confidence among employees is one
of the greatest challenges a company can face. Having lived through a few
major cost reduction exercises myself, I know firsthand how difficult and
demoralizing they can be. But as Vinay Couto, Deniz Caglar, and John
Plansky show in their cover story, “Building Trust while Cutting Costs” (page
64), it is possible to downsize and streamline and simultaneously increase
the commitment and entrepreneurial spirit of your employees. It takes a very
high level of candor, engagement, and attention, but a company that can
pull it off becomes a much stronger competitor.
Companies are also tested when they try to close the gap between strategy
Illustration by Lars Leetaru
and execution: to link all day-to-day activities consistently to the purpose and
direction of the overall business. Every business leader is (or should be) preoccupied
with making this happen. “10 Principles of Strategy through Execution,” by Ivan
de Souza, Richard Kauffeld, and David van Oss, lists the precepts, gleaned from
their experience at PwC and its global consulting business Strategy&, for how to
editor’s letter
pass this test, time after time (page 82).

Proficiency with digital technology represents another surprisingly difficult
challenge. If you’re facing that test, you’ll be interested in the profile of Stanford
University’s preeminent “intelligence augmentation” pioneer Terry Winograd
(page 106). His influence is evident in the work of students such as Google
cofounder Larry Page and Linked-In cofounder Reid Hoffman. The subject of
our Thought Leader interview this issue, Bill Ruh, GE’s point person for digital
transformation, discusses how the application of technology is driving the rapid
evolution of the world’s industrial infrastructure (page 126).
2
The entire financial-services industry has been tested — along with the
world around it — by the global economic crisis of 2008 and its aftermath. In
“Banking’s Biggest Hurdle: Its Own Strategy,” you’ll see how the most resilient
banks had one thing in common: coherence (page 8). Other tests of company
prowess covered in this issue include Microsoft’s effort to cultivate relationships
with startups (page 15), the auto insurance industry’s forthcoming challenge
from autonomous vehicles (page 27), and the potential problem faced by every
corporate board director, as delineated by Tim Laseter: recognizing a CEO’s
tendency toward hubris (page 52). Contributing editor Sally Helgesen describes
how one organization is responding to a more personal type of test: the ability of
women leaving one career track, particularly the military, to move into another
(page 34).
You may be wondering if I think every aspect of business is a test of that
company’s ability. Not really. Most of what we do every day is just business
as usual. But when it comes to an issue like digital acumen, strategy through
execution, or — especially — building trust, the test isn’t just a problem to solve.
It’s an indicator of how far a company can go in meeting challenge after challenge.
Now you’ll have to pardon me. Having written this, I feel a strong desire to go for
a brisk walk, maybe take a short rest, and then jump back into the fray.
strategy + business issue 86
Art Kleiner
Editor-in-Chief
kleiner_art@
strategy-business.com
leading ideas 64
8 Banking’s Biggest Hurdle:
Its Own Strategy
Alan Gemes and Joerg Ruetschi
Why coherent institutions were the first
to rebound after the financial crisis.
15 Microsoft Starts Up
Shameen Prashantham and George S. Yip
The tech giant’s partnership model shows
how large companies can work with new
ventures to drive innovation.
21 The CEO as Activist

Jan Alexander
Duke professor Aaron Chatterji
believes business leaders have social 82
and political responsibilities they can’t
afford to neglect.
27 Who Will Insure Self-Driving

Cars?
Chris Martin, Aaron Schwartz,
and Haskell Garfinkel
The advent of autonomous vehicles
may send the auto insurance industry
over a cliff.
34 Changing Ladders at a High Rung

Sally Helgesen
An innovative program helps seasoned
women leaders — including former
military officers — plot career transitions.
40 s+b Trend Watch 34

Female Board Members on the Rise
essays
MARKETING, MEDIA & SALES
42 The Art of Customer Delight

Thomas A. Stewart and
Patricia O’Connell
The service sector needs to break away
from old manufacturing-oriented habits
and embrace the discipline of designing
great experiences.
STRATEGY & LEADERSHIP
52 The Line between

Confidence and Hubris
Tim Laseter
You can identify early signs of
failure or success from a prospective
CEO’s behavior.
features
STRATEGY & LEADERSHIP TECHNOLOGY
64 Building Trust 106 Siri, who is Terry Winograd?

while Cutting Costs Lawrence M. Fisher
Vinay Couto, Deniz Caglar, For 40 years, the Stanford professor has
and John Plansky steered the increasingly complex and
During a restructuring, rumors spread meaningful interactions between humans
and fear takes hold. You can reduce and computers.
the turmoil by finding ways to inform,
empower, and inspire employees.
82 10 Principles of Strategy
through Execution
Ivan de Souza, Richard Kauffeld,
and David van Oss
How to link where your company is
headed with what it does best.
THE THOUGHT LEADER INTERVIEW
126 Bill Ruh

Art Kleiner and John Sviokla
During the next few years,
says GE Digital’s leader, the Industrial
Internet will turn every company into a
digitally empowered enterprise.
BOOKS IN BRIEF
142 Women’s Work

Jill Priluck
146 Buying Our Time

Edward H. Baker
149 Cash Advances?

Mark Gimein
152 It Pays to Get to Know Your

Superconsumers
Catharine P. Taylor
END PAGE: RECENT RESEARCH
156 Return on Design

Matt Palmquist
Companies that receive awards for
product design see an immediate
uptick in stock price.
Cover illustration by Martín León Barreto
Issue 86, Spring 2017

www.strategy-business.com
strategy+business Published by PwC
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Jennifer Thai Bruce Feirstein Theodore Kinni Rob Norton Christopher A.H.
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optodesign.com Ann Graham Tim Laseter Matt Palmquist Chrisie Wendin
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8
leading ideas
Ideas
Leading
Illustration by Phil Hackett

leading ideas
Banking’s Biggest Hurdle:
Its Own Strategy
Why coherent institutions were the first to rebound
after the financial crisis.
by Alan Gemes and Joerg Ruetschi
he conventional wisdom within the banking industry about its troubles
T
9
since the recent global financial crisis goes something like this: Rightly or
wrongly, regulators imposed new rules that forced banks, particularly in
the U.S. and Europe, to adopt new, less risky (and less rewarding)
business strategies. The challenges of enforced constraint were exacerbated by
macroeconomic developments, lack of customer trust, new digital technologies,
and upstart financial technology–oriented competition — in other words, by
external factors the banks had little ability to influence.
But the most critical factor constraining banks after the financial crisis was not
external at all. It was the banks’ own strategy. When they took steps to become
coherent, they began to recover and thrive.
A study conducted by Strategy&, PwC’s strategy consulting group, analyzed
banking performance during and after the financial crisis. We found a strong
correlation between strategic coherence, performance, and recovery. (Coherence, in
this context, means the degree of
Among the 17 large banks that alignment among a company’s strategy,
we studied, the most coherent its capabilities, and the portfolio of
in 2007 were the most stable products and services it offers.) Among
performers throughout the the 17 large banks that we studied, all
seven years that followed. based in Europe or North America with
operations around the world, the most
coherent in 2007 were the most stable performers throughout the seven years that
followed. As for the rest, those that moved decisively after the crisis to become
more coherent saw the greatest performance improvement. Other banks — those
that took either tentative steps or none at all — took longer to recover.
leading ideas
In studies of coherence in business — such as Strategy That Works, by Paul

Leinwand and Cesare Mainardi (Harvard Business Review Press, 2016) — it’s
rare to hear financial-services companies mentioned. So we set out to explore
whether coherence could make a difference in banking. The answer appears to be
a resounding yes.
We knew that incoherence had been rampant in the sector during the years
leading up to the financial crisis. Many banks had moved aggressively into new
high-growth lines of business such as investment banking and the trading of comp-
lex financial products. Our hypothesis was that in some cases, firms pushed into
10
these growth areas too rapidly and indiscriminately. They got caught up in a classic
growth treadmill: chasing multiple market opportunities without the capabilities
needed to win. A few large banks had been more coherent than the rest. How strong
was the link between coherence and financial performance?
To answer that question, we looked at the 50 largest banks in the world as
measured by revenue, thus drawing from a group of comparable and relatively
influential companies. We narrowed the list to banks based in Europe and North
America, because they were more affected by the financial crisis than banks based in
Asia or Australia. Of the remaining 30 banks, we selected a sample of about half
— 17 banks in all, spread out geographically but otherwise chosen at random. We
scored them on performance using a publicly available metric: return on equity,
minus the cost of capital. Factoring in the cost of capital was important, as banks
with riskier business lines and expectations of higher returns (for example, global
markets with trading profits) consume more capital than conservative banks with
less volatile returns, such as private banking and wealth management businesses
with fee-based profits.
Coherence and Recovery

Once we had chosen the institutions to study, we were left with the challenge of
measuring coherence. No single metric can capture alignment among different
facets of an organization. We analyzed four attributes that shed light on each bank’s
strategy+business issue 86
level of coherence. (1) How well did its portfolio of businesses fit together and build
on the same capabilities? (2) How clearly was the identity of the bank expressed
through a single value proposition understood by its stakeholders? (3) How well-
leading ideas
suited was its geographic scope to its strategy — that is, did it expand only into
territories where it had a good chance of succeeding? (4) How successful was its
merger and acquisition activity in buying firms where it could either leverage its own
existing capabilities or sustainably apply the capabilities of the businesses it acquired?
Questions like these can be answered only by consensus judgment. Thus, we
assembled a panel of Strategy& and PwC industry experts and a collection of
investor presentations and analyst reports about each bank to augment the panel’s
knowledge. Following a rigorous set of evaluation criteria, we scored each of these
four factors on a scale of one to 25. We then calculated a coherence score for each
11
bank, based on the combined 100-point scale, for two periods: the years leading
up to the crisis and into the worst of it (2005–09) and the aftermath (2010–14).
We compared our coherence scores to the financial results for the same time
period (see exhibit).
It turned out that the banks in our sample had responded to the crisis in four
different ways, with significant performance implications. The four groups are
detailed here.
Exhibit: Strategic Coherence and Financial Performance

Each circle represents one of the 17 banks studied. The diameters represent their relative revenues
in 2014. The correlation between coherence and recovery (shown by the slanted regression line)
was evident in the period leading up to and during the crisis (left), and slightly stronger in the
subsequent five years, when returns for the industry declined overall.
20% Financial 2005–09 20% Financial 2010–14

performance performance
10% 10%
0% 0%
–10% –10%
–20% –20%
0 Strategic coherence score 100 0 Strategic coherence score 100
Source: Strategy& analysis

leading ideas
• Consistent and coherent. The banks in this group, six of the 17 we studied,
were coherent before the crisis and remained so. As our hypothesis had suggested,
they performed well, even at the height of the turbulence. Some tweaked their
strategy in reaction to the crisis, for example, by changing their funding sources.
But they didn’t have to change much, and they had the strongest overall financial
results. Indeed, many were stronger in 2014 than they had been in 2007. Some
took advantage of their competitors’ decline by acquiring businesses (at a
relatively low cost) that bolstered their own strategies. Today, these banks
continue to invest in distinctive capabilities — such as technologically
12
sophisticated back-office operations and online banking — that further
strengthen their position.
• Strategic change toward coherence. The four banks in this group did not
have a high level of coherence before the crisis. They had pursued lofty ambitions,
trying to build themselves into global powerhouses in some cases by expanding
into businesses where they had little expertise. They suffered accordingly in the
2007–09 period, incurring losses and, in some cases, accepting government
bailouts. But between 2009 and 2012 each of them radically restructured to
become more coherent, even when this meant significantly scaling back or exiting
geographies, major lines of business, or both. These decisive moves paid off. The
financial performance of each bank showed marked improvement within 18
months of making the shift.
• Incremental strategic change. The five banks in this group were also
relatively incoherent when the financial crisis started, and their financial
performance dropped dramatically. But they made only incremental changes to
their strategies, tinkering at the margins. They soon found themselves with lines
of business that underperformed. These banks gradually reshaped their strategies,
and their performance began to recover in 2015.
• Delayed strategic change. The final category contained just two banks.
When the crisis started, they did not exhibit much coherence. But they also
didn’t face a capital crunch and did not need government help to survive. This
apparently made them confident, and they stuck to their strategies for expansion.
After the crisis, their performance declined slowly but consistently until they
entered the ranks of the poorest performers. It’s noteworthy that since 2014 (the
leading ideas
last year of data we studied), both have taken on new leadership and are beginning
to implement a coherence-oriented strategy.
Moving Forward
Every bank we studied, in all four groups, had at least begun to recover from the
financial crisis by 2014. But recovery
A top priority for many was much easier for some banks than
banks now is rebuilding others. That finding has significant
customer trust, demonstrating implications for banks in today’s
13
a positive role as a facilitator rapidly changing marketplace.
of economic activity A top priority for many banks
and prosperity. now is regaining their relevance and
reputation by rebuilding customer
trust, demonstrating a positive role as a facilitator of economic activity and
prosperity. They have to demonstrate not just the will but the coherence needed
to deliver.
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leading ideas
To find the funds for investment in their new, more strategic priorities, for
example, banks may have to eliminate marginally profitable lines of business,
overhaul incentive plans, redesign processes to harness digital technology, and
rethink their outsourcing approaches. They will have to invest in new capabilities,
including digital and financial technology prowess. They also need to revitalize
their recruiting and retention practices. In the 2000s, much of the best talent
coming out of business schools went into investment banking. Now, the best
people go elsewhere, often to technology companies. Banks need to win those
employees back.
14
Most of all, each bank needs to develop a clear identity based not on what it
sells but on what it does best. This will take nuanced, deliberate thinking. For
example, many global banks are paring back investment banking activities and
focusing on wealth management. But being in wealth management won’t be
enough to guarantee success in such a crowded market.
Start by asking how your company can create the most value. Will yours be
the bank that innovates? That puts the customer first? That pursues the digitization
of banking, both at the customer interface and in your core processes? Or that
parlays capital into high-leverage investments? Then consider your ability to deliver.
Do you have the necessary capabilities? If you don’t have them now, are you
equipped to build or buy them? Do you have a blueprint for bringing them to life?
Are your stakeholders, internal and external, committed to working with you?
The strongest banks will shape the future of the industry. Instead of trading
their way to the top, they will attract customers by meeting their needs and interests.
That will take a level of coherence that the financial-services industry has not seen
for many years. Our study suggests that it is now beginning to reemerge. +
Reprint No. 17101
Alan Gemes Joerg Ruetschi Also contributing to the analysis

alan.gemes@pwc.com joerg.ruetschi@pwc.com underlying this article were
works on strategy and is a specialist in the strategic Vidhi Gupta and Alex Harriss,
transformation with boards and structural transformation both of PwC UK and active with
and senior executives of leading of banking and capital market Strategy&.
banks for Strategy&, PwC’s businesses for Strategy&. He
strategy consulting business. is a director with PwC UK,
He is a partner with PwC UK, based in London.
based in London.
leading ideas
Microsoft Starts Up
The tech giant’s partnership model shows how large companies
can work with new ventures to drive innovation.
by Shameen Prashantham and George S. Yip
t the Microsoft Accelerator in Beijing, engineers are developing new
A technologies that could transform industries as diverse as automobiles,

mobile telephony, and e-commerce. They are doing so under
Microsoft’s wing, housed within the company’s Asia-Pacific R&D
facility. But they aren’t limited to using Microsoft products: One of the more
striking features of the facility is the presence of Apple computers on the desks of
15
some of the roughly dozen startups working there. Microsoft is providing a

coworking space, technical and business mentoring, and connections to
prospective customers, partners, and collaborators, in hopes that if a startup’s
innovation comes to fruition, it will be a boon for both parties.
The Beijing Accelerator and others like it around the world represent the
culmination of a strategy that Microsoft has pursued for about a decade. During
this time, Microsoft has rolled out a
The asymmetry between series of ambitious partnerships with
large companies and startups, startups. The business case is clear:
in terms of power, structure, Engaging with startups enables a large
and decision-making corporation such as Microsoft to tap
speed, makes it difficult to into exciting innovations just getting
forge mutually beneficial off the ground. And startups know that
connections. working with a company such as
Microsoft will provide access to the
resources, legitimacy, and scope they need to catapult them into greater visibility
and help them obtain new business opportunities.
But in practice, this type of engagement is challenging to implement. The
asymmetry between large companies and startups, in terms of power, structure,
and decision-making speed, makes it difficult to forge mutually beneficial
connections and nurture them over time. Since 2006, we’ve conducted more
leading ideas
than 100 interviews with Microsoft managers, startup employees, observers from
other companies, and industry experts in diverse geographic settings, in order to
better understand how these partnerships have evolved. Across industries, as
more and more large companies look to these types of arrangements as a means
of gaining access to cutting-edge technologies, Microsoft’s experience can provide
valuable lessons.
The Path to Partnership

Microsoft’s startup engagement journey has been a long one, marked by con-
16
siderable learning. Early on, the company developed expertise in partnering with
independent software vendors. But like most of its peers at the turn of the 21st
century, Microsoft did not have any systematic way to engage with startups. This
period also witnessed the emergence of the open source movement, which provide
software that users could freely alter and improve. A new reality had thus arrived:
The availability of free open source tools meant that software companies — including,
increasingly, smaller entrepreneurial firms — had an alternative to Microsoft
technologies. For a company that relied heavily on other companies building soft-
ware offerings on top of its platform technologies, this was no minor threat.
The second half of the 2000s featured a concerted response from Microsoft.
It became clear that merely tweaking existing partnership programs and extending
them to startups wouldn’t be sufficient. In 2008, the company launched an
initiative called BizSpark. The program offered free software tools for a period of
three years to startups that were less than five years old and that had less than
US$1 million in revenue.
Within a couple of years of its launch, thousands of startups around the
world had signed up for BizSpark. From Microsoft’s perspective, the rationale
was straightforward: Typically, for every license sold of the startup’s product, a
license of the underlying Microsoft technology would be sold as well. And by
working with startups, Microsoft could develop long-lasting relationships with
exciting new companies.
A spin-off initiative called BizSpark One, managed from Microsoft’s Silicon

Valley campus, was launched in 2009. It sought to identify the 100 most innovative
startups from among Microsoft’s thousands of BizSpark member startups. Each
leading ideas
member of this select group received yearlong support, such as strategy advice on
the venture’s business model; introductions to relevant technical teams within
Microsoft; and promotion through marketing channels, including, in several
cases, the creation of company mini-documentaries. All this support came from
a designated portfolio manager on Microsoft’s BizSpark One team.
By 2012, managers at Microsoft’s research facility in Israel had recognized
the potential for working much more closely with promising startups — and for
a shorter period of time — than the BizSpark One program allowed. The major
difference in the new accelerator model these managers wanted to develop was
17
that startups would be physically located in a Microsoft facility for the duration
of the partnership. This would allow for more face-to-face interaction than was
Illustration by QuickHoney
leading ideas
possible in the long-distance relationships of the BizSpark One program, saving

valuable time for both parties. Managers in Microsoft’s research unit in India
quickly warmed to the idea, and joined forces with their Israeli counterparts to
promote it to Microsoft’s U.S. headquarters.
Accelerators were launched in Tel Aviv, Bangalore, and Beijing. Each was
located in a strong Microsoft research facility, in a city with a vibrant or emergent
startup scene. (The Bangalore Accelerator has since outgrown its space and moved
into a separate building.) In 2013, after promising results from the original group,
accelerators were launched in Berlin, London, and Paris — three of the most
18
prominent startup hubs in Europe. The following year, Microsoft launched an
accelerator in Seattle, its own backyard. Each of these accelerators provides its
startups with four months of access to technological and business infrastructure,
mentoring, and network-building opportunities, culminating in a demo day
attended by Microsoft managers and partners, as well as external investors.
In parallel with its in-house programs, in May 2015 Microsoft launched
BizSpark Plus, which enables the company to work with more than 200 of the
world’s leading startup accelerators. Through this program, Microsoft provides
up to $120,000 of credits to use Azure (Microsoft’s cloud computing platform),
technical support, and guidance from technical evangelists to help growth-stage
startups bring their products to market.
Pushing Boundaries
To make its startup partnerships work, Microsoft employs a quality we find in the
most innovative companies: creative realism. That is, it goes beyond existing
norms in unconventional ways, but still
Microsoft employs a quality operates within reasonable constraints.
we find in the most innovative Microsoft sets explicit guidelines
companies: creative realism. and expectations for its startup partners,
but keeps things flexible by looking for
context-specific ways to add value. For example, the accelerators are technology-
agnostic. Startups are not obliged to build their offerings on Microsoft technology
(although they are certainly encouraged to do so through the offer of free software
and cloud services). Microsoft recognizes that not all startups are sold on its
leading ideas
platform technologies, and that the best startups are unlikely to be attracted to a
partner program that limits them to working on a particular platform. Microsoft
also takes no equity stake from startups in its accelerators.
Microsoft adapts its accelerator “curriculum” to local conditions. This is
critical when rolling out a partnership program globally: Companies need to
have some policies that apply across the board and others that recognize the
challenges and opportunities unique to each location. In China, for instance,
Microsoft works closely with national and local government officials, who are the
primary source of incentives and resources for entrepreneurship and innovation.
19
On a visit to the Bangalore Accelerator in February 2016, we learned that
Microsoft had begun sharing its expertise with a strategic partner. It helped the
India-based conglomerate Reliance Industries set up GenNext Hub, an accelerator
in Mumbai. It is “powered by Microsoft” but not directly run by it, an
acknowledgment of the resource intensity of operating an accelerator effectively
in emerging markets. Given the breadth of Reliance’s business interests, it is not
surprising that the technology-based startups in this accelerator represent a range
of sectors, including healthcare, finance, and retail. In May 2016, Microsoft
announced a similar arrangement in Shanghai — a new accelerator formed in
partnership with electronics company INESA and the local government.
Microsoft has looked for additional ways to embrace creative realism in its
partnership model. For example, the company seeks to make the most of its
global footprint by tapping into lessons learned from different groups. Managers
at the London Accelerator told us that they had recently met some of their
counterparts from Asia, whose accelerators had been in operation longer, and
had benefited from the exchange of ideas. And the company has recognized
that the startups that “graduate” may continue to benefit from its support. In
the Bangalore Accelerator, it created space that alumni could use on a first-
come-first-served basis.
An Innovation Ecosystem
The Microsoft Accelerator and BizSpark programs constitute the bulk of the
company’s startup engagement activity, which also includes M&A, app
development programs, and industry events. Microsoft also recently established
leading ideas
a new corporate venture group, Microsoft Ventures, which provides an additional

channel focused on making equity-based investments in startups, augmenting its
own product and technology efforts, harnessing emerging trends as early as
possible, and placing both strategic and financial bets with early-stage companies.
Success stories among Microsoft’s startup partners around the world suggest
that its efforts have paid off. In the U.S., StorSimple, a cloud storage company
that was named the 2011 BizSpark Partner of the Year, was acquired by Microsoft
in 2012. Testin, a Beijing-based startup
The next big idea may come that was one of the first graduates of
20
from your internal R&D, but the Beijing Accelerator, currently
it is just as likely to be found claims a valuation of more than $500
outside, developed by the million. A South African startup,
engineers and entrepreneurs WhereIsMyTransport, which has
spread among the world’s partnered closely with Microsoft since
innovation hot spots. its conceptualization, relocated in July
2015 to the U.K., where it has
established useful links with Microsoft’s British subsidiary. WhereIsMyTransport
now has access to a more sophisticated startup environment — one with a more
diverse set of potential partners and funding sources — as well as a stronger
regulatory system for intellectual property protection, all of which lead to greater
possibilities for it to launch into global markets.
As multinationals compete to build their own innovation ecosystems,
understanding how to engage effectively with startups becomes critical. The next
big idea may come from your internal R&D, but it is just as likely to be found
outside, developed by the talented engineers and entrepreneurs spread among the
world’s innovation hot spots. +
Reprint No. 17102
Shameen Prashantham George S. Yip

sprashantham@ceibs.edu g.yip@imperial.ac.uk
is an associate professor of is a professor of marketing and

international business and strategy at Imperial College
strategy at China Europe Business School in London.
International Business School
(CEIBS) in Shanghai.
leading ideas
The CEO as Activist
Duke professor Aaron Chatterji believes business
leaders have social and political responsibilities
they can’t afford to neglect.
by Jan Alexander
hen news breaks, people expect public figures to respond.
W
21
Company leaders are now often included in this category, as
social media connects them with their customers in unprecedented
ways. What’s a CEO to do? How much does a chief executive
risk by speaking up about social or political controversy — or is staying silent a
worse offense? These questions loom particularly large amid contentious elections
that involve many polarizing issues.
Aaron Chatterji, an associate professor at Duke University’s Fuqua School
of Business, believes business leaders should play a more meaningful role in public
policy and solving social problems than most do. Chatterji has been studying the
confluence of the private and public
sectors throughout his career, and
has had a foothold in both worlds
himself. Before earning a Ph.D. from
Photograph courtesy of Duke University Multimedia Group
the University of California at

Berkeley’s Haas School of Business
in 2006, he worked in banking as a
financial analyst. He later stepped
out of academia to serve as a senior
economist at the White House
Council of Economic Advisors from
2010 to 2011.
Chatterji spoke with strategy+
business about the role he thinks
Aaron Chatterji 21st-century business leaders should
leading ideas
take on the world stage, from designing corporate social responsibility (CSR)
programs with greater impact to sounding off on their personal convictions.
S+B: You’ve been critical of corporate social responsibility in your work. What
do you think business leaders should be doing to improve CSR?
CHATTERJI: Part of the way companies can deliver better impact is to stop
replicating one another’s efforts. Almost every business wants to have an education
program, an environmental program, and a community-giving program. In the
business world, we subscribe to the idea of specialization and comparative
22
advantage: You rely on Amazon instead of building your own delivery
infrastructure. It might be good to think about which companies are actually
running the most effective CSR programs and rally behind those.
There are various ways to collaborate. Companies can work across sectors, so
that they are not necessarily working with direct competitors. Or they could
connect and collaborate more on social impact programs through trade associations
that already coordinate among competitors to achieve common goals.
At the same time, corporations could work more with policymakers. One
thing company leaders might do is use their CSR division to incubate programs,
then get government organizations to take them to scale. Thinking of CSR
programs as a way to experiment and try new things can be a fruitful approach.
Businesses have a much wider range than does government to experiment.
S+B: Do you think tying CSR to a company’s core strategy — as Michael

Porter at Harvard Business School has long advocated — helps deliver a
stronger impact?
CHATTERJI: Yes, and I would advise corporate leaders to do less stuff better when
it comes to CSR. A great way to start is to think about what your organization’s
capabilities are. We know it’s hard to enter a new market and do new things that
aren’t part of your existing capabilities. We shouldn’t think it’s any different when
you’re dealing with social issues.
GE’s initiatives in clean energy provide a classic example. Another is UPS,

which has provided logistics support to deliver supplies in emergency areas, as it
did after the earthquake in Ecuador in April 2016. Those are the kinds of efforts
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leading ideas
that I think are potentially useful. I’d separate those from companies like Ben &
Jerry’s, Toms Shoes, or Patagonia, where the social mission is front and center for
the brand.
S+B: Your study with Harvard’s Michael Toffel of activist CEOs looked at
how a top executive visibly committed to a certain cause can affect a brand
that isn’t itself connected with a social mission. Were you surprised at
the findings?
CHATTERJI: We looked at the public stances that a number of top executives
24
have taken on controversial issues that are unrelated to the business, or at least
indirectly related, and our findings were counterintuitive. A generation ago, we
would have probably advised CEOs not to get involved in controversial political
issues [for risk of alienating or losing customers].
In our study, we found that CEOs can frame the discourse and have an
impact on public opinion, potentially to the same extent as prominent politicians.
[Apple CEO] Tim Cook did this when he spoke out very publicly against Indiana’s
Religious Freedom Restoration Act, which critics warned would allow
discrimination against same-sex couples. Moreover, our research suggests that
CEOs who communicate where they stand on a controversial issue can bring
more business to their company. With Apple, we noted an increase in consumer
intention to buy Apple products after Cook spoke out.
And in fact, many commentators point to the pressure from the business
community, including Cook, Salesforce.com CEO Marc Benioff, and Angie’s
List CEO Bill Oesterle, as a key driver behind the decision by then Indiana
governor Mike Pence and the state
“It can be risky not to speak legislature to revise the most contentious
out on a controversial issue, provisions of the act.
because silence can be seen Of course, there are also cases of
as a statement in itself.” activism backfiring. When Target
announced that transgender customers
could use the bathroom of their choice in its stores, more than a million people
signed an online petition calling for a boycott, though there were also supporters.
Last summer I wrote about CEOs, such as Cook, Drew Houston of Dropbox,
leading ideas
and Mark Zuckerberg of Facebook, who used social media to send out statements
expressing solidarity with those protesting the police shootings of young African-
American men in Louisiana and Minnesota, and experienced some backlash and
calls for boycotts. But we are also seeing that in the age of social media, the
notion of speaking out on a controversial issue is perceived as engaging an
audience. It can be risky not to speak out, because silence on an issue can be seen
as a statement in itself.
S+B: What do you think has caused this shift in the perception of CEOs’ political
25
and social activism? Might it have to do with the more personalized approach
that we have to consumer products today?
CHATTERJI: It might play into the trend toward making brands more personal,
to have brands that are your friends. We’re looking at that sort of microtargeting.
Another thing we’re finding is brands using social statements to influence
the way they’re perceived — to show that they want to be branded as activists in
shaping public opinion. Take Honey Maid Graham Crackers, a Mondele−z
product. Honey Maid has been airing commercials like “Neighbors,” which
shows two neighbors, one of whom is Muslim, learning to accept each other, and
“Mis Hijos,” about a father adjusting to his son having a same-sex partner.
S+B: You’ve also talked about the case for business leaders taking on more
official responsibilities in society, rather than just making ad hoc decisions to
associate with certain social issues.
CHATTERJI: We’re going through some permanent changes in the way the
economy works, and businesses could take the lead in addressing some of the
consequences. We look to business for job creation. Yet I’ve found that although
entrepreneurs create value, technology entrepreneurs don’t usually need to hire a
lot of people. Online travel sites destroyed travel agent jobs. Netflix disrupted
Blockbuster, which employed 60,000 people at its peak in 2004, and most of
those jobs were lost by the time Blockbuster folded 10 years later. Education and
retraining for people who lose jobs due to technological disruption should be a
high priority and something the business world approaches more thoughtfully.
Could there be ways that business leaders might help with government
leading ideas
retraining programs? They might, for example, provide more insight into how to
make the folks in some of these programs as qualified as possible for jobs that are
actually out there. Right now there seems to be a large disconnect between the
success of our retraining programs and the fact that businesses still have trouble
finding qualified people to hire.
S+B: If you’re a CEO, what’s in it for your company if you get more involved with
the public sphere?
CHATTERJI: If I think about the CEOs I admire, it’s those who understand
26
their companies’ role in a larger value chain. The value chain includes suppliers,
buyers, and all the regular stakeholders that would be named in an MBA
classroom, but the company is also embedded in society. The most thoughtful
CEOs are thinking about the products they introduce and the impact they have
on society and human health, and how to work with other businesses and
governments to do a better job accounting for some of the negative sides of
their products.
Whether a top executive steps out on controversial issues seems to me like
a very personal choice. But I do think the ideal CEO is someone who is aware
of where his or her company fits in the value chain, how it relates to society, the
impact that the company could have, and the externalities it creates. +
Reprint No. 17103
Jan Alexander
alexander_jan@
is senior editor of
strategy+business.
: Meet the next generation of business thought leaders

at strategy-business.com/youngprofs.
leading ideas
Who Will Insure Self-Driving Cars?
The advent of autonomous vehicles may send the auto
insurance industry over a cliff.
by Chris Martin, Aaron Schwartz, and Haskell Garfinkel
f you are an executive of an auto insurance company, pay attention — you
I may not have a business in 20 years. You can blame the fundamental shifts
in auto safety and data mining that connected car and autonomous vehicle
technologies will bring. Robot drivers will outnumber humans behind the
wheel. The remaining human drivers will be safer, thanks to collision-preventing
sensors and analytics on board. Insurance claims will be rare, losses will be
27
reduced, premiums will decline, and insurance companies will probably lose
control of the data that makes their pricing models possible. Car owners might
no longer purchase insurance directly. Instead, automakers would bundle
insurance into each new car purchase, much as they do satellite radio and roadside
service contracts today.
These types of structural business model changes don’t happen often,
especially in a regulated sector like auto insurance. And although the shift isn’t
imminent, it is practically inevitable. Already, driverless cars have moved from
low-speed and test environments to limited use on public roads and highways.
Safety and production issues need to be addressed before widespread adoption
can occur, but the auto industry and the businesses that support it are pushing
hard for change.
Global auto insurance is a US$700 billion market that represents 42 percent
of global aggregate property and casualty insurance, according to Swiss Re. It is
an extremely competitive market today, and it will be still more competitive by
2030. Research conducted by our DeNovo strategy consulting platform suggests
that auto insurance companies will find themselves squeezed out of conventional
auto insurance altogether. They would then have to find new sources of revenue:
expanding into non-automotive fields such as commercial liability and cyber-
security coverage or, perhaps, partnering with car manufacturers and ride-
sharing services.
leading ideas
If you’re in this sector, you may feel that you have a long time to prepare.
Data from the Insurance Institute for Highway Safety suggests that mass-market
(95 percent) adoption of vehicle safety features takes approximately 30 years.
Such features are typically introduced in luxury vehicles and then, as costs fall,
expand across the entire fleet. But insurers do not usually wait for full adoption
before adjusting rates. Front airbags, for example, were introduced in 1984, have
been mandatory on all new U.S. passenger vehicles since 1998, and only in 2016
were they installed in 95 percent of the national fleet. Yet auto insurance premium
reductions of 25 to 40 percent for cars with airbags were phased in long ago. The
28
addition of airbags now saves roughly 2,500 lives per year in the U.S., according
to the National Highway Traffic Safety Administration (NHTSA), and this has
directly influenced actuarial assumptions.
The overall safety improvements ushered in by self-driving technology will
similarly affect insurance risk models before fully autonomous vehicles reach the
mainstream. Safety is expected to improve rapidly. The first accident initiated by
a Google autonomous car occurred after 1.45 million vehicle miles traveled
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leading ideas
(VMT), which is approximately 0.7 accidents per million VMT. This is

significantly lower than the current U.S. average of about 2.0 accidents per
million VMT. Given that human error is responsible for more than 90 percent
of all accidents in the U.S., insurers will be pressured to shave premiums.
How rapidly will autonomous vehicles advance? Much depends on
regulation. Current regulations are friendlier to autonomous vehicles than one
might expect, given how many technical challenges are still to be solved. For
example, the recently announced U.S. driverless vehicle policy does not contain
specific regulations but rather guidance for safety measures and for how these
30
vehicles can conform to local and federal traffic rules. The intention of this
policy’s flexibility is to avoid the lengthy process usually associated with
developing standards for new auto technologies. The fact that autonomous
vehicles may bring transportation to millions of disabled Americans also may
spur regulatory approval. Further, regulators are aware that in the small number
of incidents involving autonomous vehicles to date, human error was to blame
most of the time.
Another major factor in the development of self-driving vehicles is price.
According to a 2014 IHS Markit report, the incremental cost to the consumer of
autonomous driving technology will be $7,000 to $10,000 per vehicle in 2025.
This suggests that autonomous
With all the research and vehicles could command a luxury
development under way, we premium for the foreseeable future.
expect the first autonomous But mainstream manufacturers
vehicle insurance policies to are working steadily toward incor-
be written by 2019. porating this technology into mass-
market autos. General Motors (GM)
may prove to be the front-runner; it began testing its autonomous Chevy Bolt
in August 2016. Ford has stated its intention to deliver fully autonomous
vehicles in high volume by 2021. Toyota has invested $1 billion in a new
research institute to develop a self-driving concept car. Projected to appear in
2020, it will assist drivers rather than replacing them. With all the research and
development activity under way, we expect the first autonomous vehicle
insurance policies to be written by 2019.
leading ideas
Reinventing Auto Insurance
If even a small number of autonomous vehicles replace those driven by humans,
the revenue from insurance premiums will decline, and the sector’s business
models will lose ground. Auto insurers could face structural changes in their
underwriting and risk modeling, as
The greatest risk for insurers well as revisions to the underlying
is losing control over the data components of policies.
— statistics on speed, weather The greatest risk for insurers is
conditions, brake pressure, losing control over the data on which
31
and driver distractions — they they depend to price risk effectively.
depend on to price risk. Data including statistics on speed,
distance between vehicles, response to
weather conditions, brake pressure, and driver distractions will be gathered by
software embedded in the car that is proprietary to the manufacturer. Automakers
will aggregate that data from a vast fleet of connected vehicles. They will thus be
in a better position than insurers to understand and price risk. This shift creates
the potential for a battle over data ownership.
Will automakers sell cars and insurance as a package deal? It’s possible. They
have developed new revenue streams before. For example, the General Motors
Acceptance Corporation, now known as Ally Financial, was founded in 1919 to
give GM’s dealers access to financing.
To expand into insurance, vehicle manufacturers would need to obtain
necessary state licenses by acquiring insurance companies or seeking these licenses
themselves. Some autonomous vehicle manufacturers are showing signs of interest
in this path. For instance, Tesla has introduced InsureMyTesla, a service in Hong
Kong and Australia that works with AXA General Insurance and QBE Insurance,
respectively, to offer insurance policies tailored to its customers. Tesla will not
conduct the underwriting or retain the risk, but the automaker will learn the
claims and customer service aspects of the insurance process.
Meanwhile, the growing prevalence of software controls will change the
dynamics of auto repair after crashes. Insurers will need to rethink how they
value the replacement costs for damaged vehicles. Software has high development
costs, but low-to-negligible costs for distribution (for example, through software
leading ideas
updates). This gives manufacturers an inherent advantage in valuing the

replacement cost, and a more compelling rationale to enter the insurance market,
because low replacement and distribution costs increase the likelihood that
bundling insurance will be profitable.
The Insurers’ Response

The many unknowns will affect the way the insurance business evolves. For
example, autonomous technology is already ahead of consumer acceptance. Many
people are not yet mentally prepared to embrace these cars in every aspect of
32
everyday life: for example, as a way for young children to travel unaccompanied by
an adult. Further, the practice of evaluating autonomous vehicle safety is still in its
infancy. Even if statistics demonstrate that autonomous driving is safe, it is not clear
how the industry or regulators will assign fault in the collisions that do occur.
Consider, for example, the widely reported May 2016 fatality in which a
self-driven Tesla car hit a truck that was making a left turn. There was a human
driver in the car, who apparently had put the car in autopilot mode. The NHTSA
announced in January that it would require no recall. It did not attribute the
accident to defects in the car, but it implied that future autonomous vehicles
might be limited to roadways designed for them. The decision could have broad
implications for how autonomous vehicles are insured and how insurers design
personal auto policies. New policies may explicitly exclude certain autonomous
driving activities and may require an additional rider or add-on provision.
Typical personal auto policies do not specify which features the insured
chooses to purchase or use while driving. In the future, insurers will not necessarily
be aware of the various autonomous driving features on individual vehicle models
or how they can be activated. Thus, either policies will need to evolve to match
broad groups of features or there will need to be an unprecedented degree of fine-
grained cooperation between insurers and manufacturers.
Autonomous vehicles’ reliance on software may open the way for multitiered
insurance products. For example, insurers could offer a hybrid product
combining commercial liability with specific cybersecurity protection and

personal auto insurance.
Cyber risk is a real concern for autonomous vehicles, and will need to be
leading ideas
priced into insurance policies. In 2015, Chrysler voluntarily recalled 1.4 million
vehicles because of a software flaw that could allow the vehicles to be remotely
accessed. In September 2016, Tesla updated its software in response to a breach
that permitted remote access to and control of functions, including turn signals
and the braking system.
U.S. government security and safety agencies have sounded the alarm, too.
The FBI, the Department of Transportation, and the NHTSA issued a joint
public service announcement in March 2016 warning that driverless vehicles are
increasingly at risk for unauthorized remote access intended to obtain driver data
33
or manipulate vehicle functionality.
Nonetheless, the die is cast in favor of autonomous vehicle technology.
Production of 12.4 million connected cars is forecast in 2016, and annual growth
of 49 percent is expected through 2020, according to the Gartner Group. The
business models of both automakers and insurance companies, therefore, will
need to adjust, and adjust quickly.
For insurers, the winners will be those that move early to respond to the
drop in revenues from traditional auto premiums and that identify new
opportunities (such as coverage of cybersecurity in cars) where risk is not yet well
understood and where new forms of insurance will be in demand. +
Reprint No. 17104
Chris Martin Haskell Garfinkel

christopher.martin@pwc.com haskell.garfinkel@pwc.com
is the insurance industry specialist is the co-leader of PwC’s fintech
for DeNovo, a next-generation practice and a founder of DeNovo.
strategy consulting platform He is a partner with PwC US.
focused on fintech innovation.
DeNovo is published by PwC
Aaron Schwartz under Strategy&, the strategy
aaron.m.schwartz@pwc.com consulting business at PwC.
is the head of research for For more information, see
DeNovo. He is a director with strategyand.pwc.com/denovo.
PwC US.
leading ideas
Changing Ladders at a High Rung

An innovative program helps seasoned women leaders —
including former military officers — plot career transitions.
by Sally Helgesen
34
Illustration by Irene Rinaldi

leading ideas
f you’re a CIA officer contemplating a new career, how do you go about
I assessing and describing your skills to a potential employer? Keep in mind

that you are prohibited from talking about what you do, what you have
learned, and who you know. Indeed, anonymity is built into the job. In the
agency’s headquarters in Langley, Va., employees’ offices are marked only by a
simple number, not by name or title.
This was one of many unusual problems facing a group of around 20 senior
women seeking to make a career transition who gathered in an elegant Manhattan
apartment for a weekend retreat early last fall. There was the recently retired CIA
35
agent. Plus seven generals, colonels, and lieutenant colonels from various U.S.
service branches — women who had run complex logistical operations, overseen
multibillion-dollar budgets, and deployed to danger zones around the world.
And there were 13 women from the private sector who had held high positions
in finance, media, consulting, technology, and law.
All had just retired or were preparing to do so. And because they were eager
to put their lifetime of well-honed skills to work in a new career, they had come
together for a program called Mission: Getting to Next (MGTN). Although all
the attendees were on a quest for self-reinvention, the women from the armed
services faced challenges that went to core questions of identity and contribution.
Who were they when they were no longer General X? How might they operate
in a fluid world that lacks the clear structures the military (or an intelligence
agency) provides? And how were they supposed to engage in open back-and-
forth discussion when their many decades of training emphasized keeping
personal views to themselves, following orders, and minimizing risk?
Brigadier General Marianne Watson knew firsthand what the women
gathered were facing. Having retired in her early 50s from her position as director
of manpower and personnel for the Army and Air National Guard, in which she
set policy for 450,000 officers and enlisted soldiers, she had struggled to imagine
what might come next. Her husband’s death seven months before retirement
added to her feeling of being at sea. “I didn’t see a path forward and I had no idea
of what kind of opportunities were out there or what I could do,” she says. “And
I had no network of support that could help me because there are so very few
women at my level in the military.”
leading ideas
Yes, the military offers some training in tactical skills to retiring officers —
resume writing classes, even advice on dressing for success. But the reflective
work of self-examination and connection required greater depth. “Having the
opportunity to sit with women who were at my level from the private sector as
well as different branches of the service gave me an understanding of all the
possibilities out there, beyond just defense-related industries,” says Watson, who
was looking for something completely different. After considering starting a
hydroponic farm and using the resources provided by the program to research it,
she concluded that her situation required a less dramatic transition. So she went
36
to work as director of outreach for Center for America, a nonprofit that educates
small businesses about military hires. She also joined MGTN as co-CEO.
Watson noted that participating in the program helped her see “that it was
OK to be confused and vulnerable when I was in the process of trying to figure
things out.” A lieutenant colonel at the fall gathering echoed her observation:
“It was unprecedented for me to have the chance to dig deep and know I wasn’t
alone.” She noted that it gave her a rare opportunity to connect with women
from the other service branches.
Reinvention retreats have become popular as more people pursue spiral
careers — careers that unfold in stages throughout the course of one’s life rather
than proceeding predictably along a straight line that ends abruptly at retirement.
Spirals have been reshaping how people approach work and career since the
mid-1980s, when technological innovation began to upend the lifetime
employment expectations of the
Because they live longer and postwar era.
tend to have less financial Women have often led the trend.
security than men, women are After all, they are more likely to have
particularly likely to pursue entered the workplace relatively late,
second careers. and to have taken periods of time away
from full-time work when their
children are young. Because they also live longer and tend to have less financial
security than men, women are particularly likely to pursue second or third
careers upon reaching what used to be considered retirement age.
Carole Hyatt, a pioneering and hyperconnected New Yorker whose career
leading ideas
as an executive and entrepreneur began in the early 1960s, started the program
that became MGTN in the mid-1980s. She wanted to help women who had
had successful careers, but had no wish to retire, think through the next twist
in their spiral. Having begun her career at CBS, founded and sold the market
research firm Hyatt Esserman, and then founded the Leadership Forum, a
networking organization that connects women all over the world, Hyatt knew
the challenges of continual self- reinvention that an ever-evolving path requires.
And as the author of the pioneering bestseller The Woman’s Selling Game
(Warner, 1979) as well as the groundbreaking When Smart People Fail (Penguin,
37
1987), she was skilled at sharing what she had learned in a way that inspired
and encouraged others.
So when Hyatt began noticing successful women from their late 40s
through their 60s contemplating second (or third, or fourth, or fifth) acts, she
saw a business opportunity. She began offering workshops designed to help
women identify what they wanted to do next — and build both the plan and
the network required to act on their goals. She called the program Getting to
Next and delivered workshops multiple times a year in her Manhattan apartment
or her home in Stockbridge, Mass. Getting to Next drew participants mostly
from the United States, but also from around the world. Prime ministers, senior
academics, and high government officials as well as women from the private
sector flocked to the program for nearly 30 years, increasing the power and
scope of the shared network.
Then, at a professional lunch in 2012, Hyatt sat next to a woman in her
early 50s who mentioned she was looking for a new job. Hyatt asked what the
woman had been doing and the woman responded simply, “I was a general.” “A
general of what?” “In the U.S. Army.” Hyatt was astonished. “I barely knew there
were women generals, and I’d certainly never met one — I’d been completely
disconnected from the military throughout my career. So I was intrigued and
asked a lot of questions. It turned out this woman had headed up a huge team,
had numerous degrees, and had worked all over the world.”
Hyatt assumed employers must be beating a path to the general’s door, but
that was not at all the case. The general had virtually no network outside the
military and little idea of how her skills might be applied in a different setting.
leading ideas
Her interviews had led nowhere, though several companies had invited her to
speak at their conferences, without offering payment. Having left behind the
solid identity and firm sense of purpose and belonging that the military provided,
she wasn’t sure where she fit in.
Hyatt couldn’t forget this general. She was disturbed that a woman with her
skills and experience could be struggling to find work. She was distressed that
decades of service to the country could be so undervalued. And she was intrigued
by the new and wholly overlooked market niche the general represented. Why
shouldn’t senior military women have access to her program?
38
She began cold-calling military bases around the country, trying to learn the
names of female officers. Hyatt made little progress until she attended a conference
sponsored by Women in Defense in Washington, D.C. “A speaker there
mentioned she was about to retire, so I ran up afterward to give her my card and
invite her to my next program free of charge,” she recalls. “She knew other senior
women in the service, so we were able to build the program based on that.”
The experience of having a military officer present was so powerful that
Hyatt reinvented her entire program. Committing to the goal of having nearly
equal representation of military and civilian women at every event, she renamed
it Mission: Getting to Next and redesigned the workshop so that soon-to-be
veterans and civilian senior women could make maximum use of one another’s
skills, insights, and especially networks.
Hyatt reconfigured her business as a nonprofit so sponsors could be enlisted
for support and so they could network for recruitment. She made it more robust
by adding mentors and a coach from One to One Women Coaching Women, as
well as a three-month mentoring program for all participants. Military participants
have access to a mentor from the private sector for a year.
Hyatt’s own story exemplifies the power and inspiration of spiral careers. At
the age of 82, she speaks continually of her program’s expansion, flies around the
world to scout prospects in locations as remote as Kazakhstan, and continues to
ask the question that has always guided her: So, what can I do next?
MGTN is now expanding to serve more midlevel women looking to make

a transition. “There is an outflux of military women retiring and we need to be
able to help them, and even expand our program to serve military spouses,” says
leading ideas
Joan Firestone, MGTN’s executive director. “Creating military/civilian networks
is so beneficial. Military women have been isolated, and now they can share a
commonality of experience. And civilians get exposure to the military in a way I
don’t see elsewhere.” +
Reprint No. 17105
Sally Helgesen
sally@sallyhelgesen.com
is an author, speaker, and
leadership development
39
consultant, whose most recent
book is The Female Vision:
Women’s Real Power at Work
(with Julie Johnson; Berrett-
Koehler, 2010).
leading ideas
s+b Trend Watch

Female Board Members on the Rise
Women continue to gain ground in the boardroom, which
may be good news for diversity. A recent study found that
far more female directors place a high value on diversity
than do their male colleagues.
Women are holding more board seats... ...and value diversity more than men do
40
60%
Percentage of board members who
Women as a % of
strongly agree with the statement
U.S. population
50% 92%
89%
40%
Percentage of
S&P 500
30% board seats held
by women 38%
24%
20%
10% Women Men Women Men

“Diversity leads “Diversity leads
to enhanced to enhanced
0% company board
2009 2010 2011 2012 2013 2014 2015 performance” effectiveness”
Source: Heidrick & Struggles, 2016 PwC Annual Corporate Directors Survey
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essay marketing, media & sales
MARKETING, MEDIA & SALES
42
The Art of Customer

Delight
The service sector needs to break away from
old manufacturing-oriented habits and embrace
the discipline of designing great experiences.
by Thomas A. Stewart and Patricia O’Connell

irlines routinely rank near the bottom of customer satisfaction
A surveys. But we would wager that most customers, like us, find that
the time on the plane — the “sit back, relax, and enjoy the flight”
part — is the least awful piece of their experience. The nightmare
is everything else: prices that change from minute to minute and bear no
perceivable relationship to actual cost or value, fees for checking bags and just
about any amenity, and frequent delays caused by weather or “the late arrival of
the incoming aircraft.” Airports themselves have their own set of annoyances:
check-in kiosks that are out of order or can’t read your credit card, the queues
43
and indignities of security, inadequate staffing, seemingly random gate-change
announcements, and the scrum at the gate.
Welcome to Surf Air, which sells flights by subscription. For a monthly
fee (currently US$1,950, plus a one-time membership charge of $1,000),
subscribers can take an unlimited number of flights anywhere in Surf Air’s 12-
city system in California and Nevada. That is a bargain for many customers:
an L.A. lawyer who needs to be in Sacramento several times a month, a tech
mogul who weekends in Lake Tahoe, consultants with clients scattered around
California, or a restaurateur with properties in different cities. On a full-service
carrier, a last-minute round-trip between San Francisco and Los Angeles can
cost $450. However, the real value of Surf Air is not the price of a flight, but the
experience of the carrier’s ingenious service design.
Service Design Is a Bridge

Service design is a strategic discipline that originated in Europe and is spreading
rapidly worldwide. At its core lies the belief that services can and should be
designed with as much care as products, so your customers get the experience
you want them to have every time.
At its heart, service design is the bridge between strategy and customer experience.
It is grounded in your company’s identity, capabilities, and chosen competitive path.
It is activated when you rethink, reimagine, and recreate every stage and aspect
of interaction between customers and your company, regardless of what is being
sold and whether a transaction actually occurs. It succeeds when you delight the
customers you have chosen to serve and advance your strategic goals at the same time.
Three key ideas are embedded in the service design philosophy:

• Service design starts with what you, the seller, want; it is about delivering
on your promise to customers in accordance with your strategy, not acceding to
everything a customer asks.
• Service design is proactive, not reactive; it involves choices, actions, and
consequences.
• Service design creates consistency, and consistency is no accident.
Consider how Surf Air designs its service. Each step is meant to reduce hassle,
avoid pain points, and please customers. Because its customers are members,
44
there is no payment to process, so booking a flight takes just a few minutes. The
company flies only Pilatus PC-12 NG aircraft — a nine-passenger plane that has
the feel of a private jet. The choice of these planes eliminates security screening,
because the U.S. Transportation Security Administration (TSA) exempts aircraft
carrying fewer than 10 passengers. The airline works out of underutilized regional
airports to eliminate the crowds and chaos of big airports like LAX and SFO.
Surf Air operates up to 90 scheduled flights a day. Passengers need to show
up only 15 minutes before flight time. Free snacks and beverages await them in
the preflight area. There are no boarding passes, because passengers’ names are
on a list, and no boarding groups, because there are only nine seats. Luggage
is picked up plane-side and delivered as passengers walk off — sometimes by
the pilot or copilot, sometimes by the minimal ground staff Surf Air has at its
airports. “When our members first come in, they are very confused,” says CEO
Jeff Potter. “They’re used to loudspeakers and bright lights and being corralled.”
The radically simplified customer journey eliminates backstage labor, too.
Surf Air needs no baggage-handling system and employs no flight attendants. Its
IT system is much simpler, too — it requires no algorithms to set fares, has no
tickets to process, and connects to no travel agents. The resulting economics are
so attractive that Surf Air can make a profit on a flight that is just 60 percent full.
That compares to an estimated 75 percent average for big network carriers. Surf
Air can — and will — fly scheduled flights with just one passenger.
But it’s not the luxury, the convenience, or even the relative economy of Surf
Air that members like most. “People constantly point out that flying commercially
between L.A. and San Francisco, a 90-minute flight, actually takes 3 to 4 hours,”
says Potter. “Our surveys show the number one thing people value is time. We
like to think we’re not saving them time — we’re giving it back to them.” Indeed,
Surf Air fliers frequently comment on what a gift those few hours are, allowing
them to coach their children’s teams, to be more involved in the life and care of
an elderly family member in another city, giving them peace of mind about a
project that needs a little more oversight than is the norm.
Nothing about Surf Air’s extraordinary experience depends on its employees
being superior human beings. Like the people with whom you have interacted at
check-in counters, TSA lines, and gates, they are good people and try their best.
45
But ordinary airline and airport employees are unable to deliver great customer
experiences because their services are part of a patchwork of many different pieces
and processes rather than a coherently designed system.
Great service is not a consequence of good intentions, attentive management,
or a supportive culture. Service needs to be laid into the company’s keel, the
way performance is built into a BMW or intuitiveness is designed into an iPad.
If service isn’t built in, no amount of goodwill can deliver it reliably, and no
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effort can compensate for the lack of it. In fact, cause and effect are reversed:
A company designed for service will naturally display the behaviors — the
intention, attention, and culture —
A company designed for good customer experience requires.
service will naturally
Design a Journey
display the behaviors —
Experiences matter. Experiences are
the intention, attention, journeys. Journeys are designed. These
and culture — good statements are fundamental to
46
service requires. understanding service design and its
delivery. Experiences happen over time
and, often, over space. They are journeys, whether physical (like a flight from Dallas
to Detroit) or temporal (like a 10-year relationship with an insurance company)
or intellectual (like a consulting engagement). For customers, journeys involve
need, planning, anticipation, embarkation, the event itself, disembarkation,
and memory. Companies must analyze and design every stage of that journey,
especially every customer touch point, because each is an opportunity to engage
— or alienate — a customer.
Most companies are not designed to think this way. Service-industry
operating models — their org charts, processes, incentives — were adapted from
manufacturing, where metrics are based on the quantity and quality of finished
goods rather than the value of interactions with customers. These models are
designed from production out, not from customer back. This is especially
disconcerting when we consider that the service industry is responsible for more
than three-quarters of U.S. private-sector gross domestic product (GDP) and
about 68 percent of GDP worldwide.
The industrial legacy is ill suited for services in large part because the
customer is an active participant in most service transactions, as Frances Frei and
Anne Morriss point out in their book Uncommon Service: How to Win by Putting
Customers at the Core of Your Business (Harvard Business Review Press, 2012). An
automobile assembly plant is a massive and intricate place, but the customer is far
from the factory floor. In a hospital, during a professional-services engagement,
or in a restaurant, by contrast, the customer is right there, letting you know what
he or she expects. Consequently, practices and lessons from product design and
manufacturing cannot simply be portaged over to service enterprises.
The ThedaCare hospital system in Wisconsin runs primary-care clinics that
handle about 450,000 patient visits each year. Many of those patients need a
blood test or other lab work. ThedaCare redesigned the patient’s journey step
by step so that blood is drawn as soon as the patient gets to an exam room and
before the doctor arrives, with the aim of returning results before the end of the
visit. Doctor and patient can discuss the tests immediately.
The result: A better-informed and more complete doctor–patient visit; an
47
increased likelihood that a patient will follow instructions; and less time wasted
in missed phone calls to discuss test results after the appointment. Because
ThedaCare owns its labs, it was able to make these service-design choices without
increasing patients’ wait times. According to ThedaCare, the net effect of the
redesign has been to shorten the duration of a visit.
It is difficult to think of a transaction between a buyer and a seller that
cannot be made more valuable to both parties by improving its design — both
within and outside the service sector. Service design can be vital to manufacturers,
government agencies, and others whose business is not in services per se. Toyota,
for example, developed an entirely new dealer network for its premium Lexus
marque, precisely because it wanted to design and deliver a level of service that
complemented the promise of the brand.
Well-designed service succeeds on two dimensions simultaneously: technical
excellence and customer experience. In this disciplined focus on essentials, great
service design resembles great industrial design, which seeks excellence and
efficiency in the same way. Service design sees customer satisfaction and cost
management as complementary, not contradictory. When you, as a seller, do not
have a good design, you are more likely to base decisions on cost rather than value,
because it is harder to tell the difference between spending and investing money.
Five Principles of Service Design

Every company’s strategy is unique, or should be, so its service design should be
one-of-a-kind, too. For example, Starbucks, whose value proposition is to emulate
a European café — a place to sit, sip, and stay — should not copy Dunkin’
Donuts, which wants to get you on your way because, after all, “America runs on
Dunkin’.” Yet all good service design should follow five basic principles, which
will help you shape service-design initiatives, evaluate proposals and programs,
and, above all, bring coherence to your service strategy.
1. The customer is always right — provided the customer is right for you. You
have to decide which customers you want, and which you don’t. A customer who
demands a level of service, a type of product, or a price that you aren’t willing to
deliver is the wrong customer for you. Deciding which customers you are willing
to engage with and what you are willing to do for them is a powerful exercise in
48
defining your brand.
2. Don’t surprise and delight customers — just delight them. You delight
your customers by meeting their needs within the expectations they have for
whatever you are offering, whether those expectations are high or low. A well-
designed service is predictably excellent. If customers don’t know what to expect
from you, why will they seek you out? If their expectations aren’t met, why will
they stay or return?
3. Great service should not require heroic efforts by you — or the customer.
Service design and delivery should be efficient, effective, scalable, and, if not
error-proof, error-resistant. Employees should not need to be superheroes, bend
the rules, or take shortcuts to give customers the experience you promise. Saving
the customer time and money is just as important as saving yourself money.
It is easy for a customer to interact with and do business with a well-designed
company at every stage.
4. Service design and delivery must be coherent across all platforms.
Wherever you choose to play, you have to play well. If you provide a fabulous
customer experience in the store but your website frustrates customers, you
will likely lose them. The task of managing services has become immeasurably
harder as Web and mobile devices have multiplied the number of channels, touch
points, and opportunities for interaction between companies and customers. This
means more complexity, less control, more ways to make errors, and increased
competition. It also means more ways for customers to find you and opportunities
to woo, wow, and win them.
One corollary is that partners that provide complementary services are as
much a part of the service value chain as your own touch points, platforms, and
channels. Overcoming or compensating for flaws in your partners’ service design
can be your single biggest challenge.
5. You’re never done: Anticipate, create, innovate, iterate — and repeat.
Many services companies have no formal innovation process, and the methods,
structures, and protocols for product innovation often fail in services. But because
the life cycle of a service needs to be managed as carefully as the life cycle of a
product, companies must work to instill and support an innovative culture. Be
aware that services innovation can happen anywhere in the value chain — co-
49
creation and innovation with actual customers in the wild are just as valuable as
research in the lab, or more so.
Winning Customers’ Minds

Ryanair, the Dublin-based budget airline that recently transformed itself with
service design, has taken these principles to heart. Previously, even in an industry
famous for being deaf to customer needs, Ryanair stood out. In 2007, the Economist
described the airline as “a byword for appalling customer service,” citing its “jeering
rudeness towards anyone or anything that gets in its way.” CEO Michael O’Leary
even mused publicly about charging passengers for using lavatories.
The carrier’s Hobbesian strategy of operating flights that were not only
cheap, but “nasty, brutish, and short” worked — until it didn’t. Ryanair issued a
profit warning in September 2013; it then saw its net income for fiscal year 2014
fall to ¤522.8 million (about $585 million), from ¤569.3 million in fiscal 2013,
while other low-cost competitors were thriving. Seeing the writing in the sky, in
late 2013 O’Leary decided that the company had to “stop unnecessarily pissing
people off.”
The person charged with that task is Kenny Jacobs, who joined the company
as CMO in January 2014 after 13 years in food retailing. Jacobs thought, “It is
either going to be the worst or the best job that I’ve ever had in the customer
marketing space,” he told us in an interview.
Ryanair had to stay true to its rock-bottom-price value proposition while
improving customer experience. The airline focused on three key aspects of the
journey: the digital experience, with a more user-friendly, intuitive website; the
airport experience, with more streamlined, efficient operations; and the in-flight
experience, by allowing people to bring on luggage and offering assigned seats (for
a fee). Each addressed a major pain point in one of the three principal phases of a
trip by air; none was untrue to the airline’s low-price promise; and the cost to the
airline was minimal. Indeed, each element can save the company effort and money.
By the end of fiscal 2015, Ryanair was carrying 19 more passengers per
flight than it had two years earlier. The initiative has more than paid for itself.
The airline is chasing not customers’ hearts, but their minds. “We don’t want
customers to say, ‘We love Ryanair,’” says Jacobs. “We want people to say, ‘This
50
is a commoditized, functional experience getting from Dublin to London, from
London to Madrid.’”
That is the very opposite of Surf Air’s promise, which is a private-jet
experience at a relatively reasonable price. We have bookended these two stories
with a purpose — to demonstrate that service design is an instrument of strategy,
a way to connect the boardroom to the day-to-day experiences of customers. The
identity you seek to project is, indeed, the face your customers see.
The mind-set and principles of service design are a critical way to improve
how services are managed. The result of their industrial legacy is that services,
the biggest employer and creator of wealth, are too much managed by guess and
by gosh. Company after company is underwhelming its customers and leaving
money on the table. It’s time to stop that and take action. +
Reprint No. 17106
Thomas A. Stewart Patricia O’Connell Adapted from Woo, Wow, and Win:
stewart.1490@osu.edu patriciamaoconnell@gmail.com Service Design, Strategy, and the
is the executive director of the is president of Aerten Consulting, New Art of Customer Delight, by
National Center for the Middle a New York City–based firm Thomas A. Stewart and Patricia
Market at Ohio State University. that works with companies to O’Connell (HarperBusiness, 2016).
Formerly the chief marketing devise content strategies and
and knowledge officer of Booz & develop thought leadership for
Company (now Strategy&) and top management. She is the
editor-in-chief of Harvard Business coauthor, with Neil Smith, of How

Review, he is a contributing editor Excellent Companies Avoid Dumb
of strategy+business. Things (Palgrave, 2012), and the
former management editor of
BloombergBusinessweek.com.
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States.
© 2017 PwC. PwC refers to the PwC network and/or one or more of its member
firms, each of which is a separate legal entity. See www.pwc.com/structure.
essay strategy & leadership
52
The Line between

Confidence and Hubris
You can identify early signs of failure or success
from a prospective CEO’s behavior.
by Tim Laseter
t is rare for a week to pass without a newspaper or magazine offering a tale of
I the mistaken path of a fallen business executive, quoting critics who explain
the errors that led to the failure. However, investors and boards of directors
responsible for selecting a CEO don’t have the luxury of hindsight. They
should, ideally, identify any shortcomings in their prospective CEO before
there is trouble, not after the fact. This is no easy task. Is there some predictable
fatal flaw that distinguishes responsible risk taking from something reckless or
even sinister?
One field of academic research suggests an answer: executive hubris. Hubris,
53
defined as excessive self-confidence or pride, leads CEOs to make overly risky
bets or to ignore relevant warning signs and fail to invoke contingency plans. The
problem, of course, is that the difference between justifiable and excessive self-
confidence generally becomes evident
only after the damage is done. The difference between
Most incoming CEOs have justifiable and excessive
pride and self-confidence well above
self-confidence generally
normal levels, and with good reason.
A typical CEO has an elite education
becomes evident only
and a decades-long track record of after the damage is done.
superior performance. More important,
regardless of tenure or education, a CEO generally earns that title by gaining the
trust of the experienced leaders and savvy investors on the company’s board. The
challenge for an investor, a board of directors, or an advisor to executives is to
recognize when the CEO (and perhaps the whole management team) is about
to cross a line — from making bold strategic bets with warranted assuredness, to
risking the enterprise through reckless and dysfunctional overconfidence.
Four early signals can help in navigating these muddy waters. The first
two, narcissism and dismissiveness, are warning signs of hubris. The other two,
humility and inquisitiveness, are promising signs of justifiable confidence.
The Narcissism Warning Sign

Signs of narcissism offer the most critical indicator of hubris. In the classic Greek
myth, Narcissus perished after becoming captivated by his own image reflected
in water. Psychologists characterize a narcissist as someone with a grandiose view

of his or her own talents and a craving for admiration. Narcissists exhibit these
qualities to the point where they lose perspective and begin to make unreasonable,
destructive decisions.
A narcissistic CEO becomes focused on his or her ego rather than the
company’s stakeholders. This trait is all too prevalent among executive leaders, as
Arijit Chatterjee and Donald C. Hambrick of Penn State University showed in
a wonderfully titled 2007 paper, “It’s All about Me: Narcissistic Chief Executive
Officers and Their Effects on Company Strategy and Performance.” Their study
54
of 111 CEOs in the computer industry found that those who demonstrated
narcissistic traits tended to make more and larger acquisitions, which led to
“extreme and fluctuating organizational performance.”
A prime case study of the destructive impact of a narcissistic CEO features
Joseph Nacchio, former CEO of Qwest Communications. Nacchio launched
his business career in the telecommunications industry through serendipity: At
a career fair, he mistakenly ended up in an interview room for AT&T instead of
Procter & Gamble. Starting as a young engineer in 1969, he advanced through
the business ranks while also extending his education credentials by earning a
master’s degree in business from NYU and a Sloan Fellowship from MIT. In
1993 he became the youngest executive leading a major AT&T business unit:
the struggling consumer long-distance business. While the unit continued to
struggle, Nacchio’s intelligent but highly competitive manner made him stand
out. He gained the respect of colleagues, but he could also instill fear. In a 2005
Denver Post article, “A Look at Joe Nacchio,” former fellow AT&T executive
Dick Martin would later recall, “He can be very cutting in a meeting where he’s
in charge. He doesn’t suffer fools easily.”
Indeed, one of the earliest signs of narcissism that Nacchio displayed was
a tendency to build himself up at the expense of his colleagues, going beyond
the competitiveness one might expect from someone who was openly angling
for the chief executive role. As a 2000 Forbes profile put it, he was known for
having “sniped at [AT&T’s] top executives, impugned their intelligence and
even questioned their psychological stability.” The same article quoted Nacchio
asserting that he could have been “a powerful asset” to them as CEO.
But when it became clear in the mid-1990s that Nacchio wouldn’t be chosen
as CEO, he began looking elsewhere. He landed the chief executive position at
Qwest in 1997, on the strength of a plan to turn this relatively small, Denver-
based telecom company (US$697 million in 1997 revenues, compared with
AT&T’s $53 billion) into an industry leader. Launched just a decade earlier, in
1988, Qwest had originally been an offshoot of the Southern Pacific railroad line,
installing fiber-optic cable for companies such as MCI along its rights of way.
Qwest had grown by laying its own cables alongside those of its customers. Now,
in the early years of the Internet, Nacchio proposed that Qwest could step out in
55
front on the basis of its technological prowess.
Upon accepting the CEO offer, Nacchio quickly developed a business plan
— purportedly on the back of an envelope — for an IPO later that year. He
was no longer held in check by a staid culture, as he had been at AT&T, and he
articulated increasingly grandiose views when talking to journalists. In a 1998
Wired magazine article, “Building the Future-Proof Telco,” he commented, “I
feel like an emerging oil baron.” A Fortune article published the same year, “Wild,
Wild Qwest — The Gunslinger in Telecom,” described Nacchio as a “modern-
day Wyatt Earp” building a new form of telecommunications company. “People
ask if we’re telecom guys or Silicon Valley guys,” Nacchio said in the opening
paragraph. “I like to say we are a Silicon Valley company on the other side of
the Rockies.”
In 2000, Nacchio made a seemingly prescient and bold strategic bet —
one that gained kudos at the time, but also indicated that his narcissism was
growing. After rumors suggested that larger telephone companies were ready to
acquire Qwest, he turned the tables by initiating a hostile takeover of US West.
This $45.2 billion acquisition sent Qwest’s stock reeling, but Nacchio remained
confident. He could, after all, claim that his acquisitions had tripled Qwest’s
annual revenue, to $3.9 billion.
Yet by 2001 the company’s growth had slowed and it had lost several major
government contracts. Nacchio was facing criticism related to his compensation,
which, according to the New York Times, included a $1.2 million base salary and
an estimated $86 million in bonuses and stock options. In the May shareholder
meeting, he was unrepentant, reportedly stating, “I know they are big numbers,
but I’m neither apologizing for it nor am I embarrassed for it.” When questions
of accounting irregularities arose, he conceded nothing. “You all think we cheat
and lie and steal, obviously,” he told investors at a Goldman Sachs conference in
October 2001. “Therefore, you trade us at a discount to what a normal company
with great revenue and great growth should be traded. And I’m not going to
convince you on that. We’ll just let the numbers speak for themselves.”
Despite his braggadocio, Nacchio had initiated a flurry of personal stock
sales totaling more than $100 million from January through May 2001, when the
stock hovered near $40 per share. When Nacchio resigned under board pressure
56
in June 2002, the stock price had dropped to around $4 per share. In 2007,
Nacchio was convicted on 19 of 42 counts of insider trading and sentenced to
prison. The conviction also cost him more than $60 million in forfeited trading
profits and fines. Furthermore, the company ended up paying $250 million in
fines to the SEC to address the charge that it had booked billions in false revenues
over several years.
Released from prison in 2013, Nacchio remains unrepentant and wealthy
(prosecutors valued his net worth at $500 million at the time of his trial). He
claims that the National Security Agency engineered his SEC conviction because
Qwest wouldn’t cooperate with the agency’s surveillance programs. Even if his
claim is correct, there is no question that his narcissism, and the way he expressed
it, made it much more difficult for
A second sign among him, and his company, to navigate
potential chief executives successfully through the turbulence
that he in part created.
— dismissiveness —
represents a subtler Dangers of Dismissiveness
but equally important A second sign among potential
indicator of trouble. chief executives — dismissiveness
— represents a subtler but equally
important indicator of trouble. A dismissive executive is one who takes on

unwarranted risk by ignoring input from others.
In-group bias, a concept credited to psychologist William Sumner, is often
the root cause of dismissiveness. Although Sumner did not emphasize business,
his assertion, made more than a century ago, sounds eerily descriptive of some
corporate cultures: “Each group nourishes its own pride and vanity, boasts itself
superior, exists in its own divinities, and looks with contempt on outsiders.”
Pride and confidence, when exhibited either in a group or in an individual, are
not inherently problematic. But those attitudes can be destructive when they
lead business executives to ignore competitive threats or conflicting opinions.
A dismissive attitude suggests overconfidence and potentially an aversion to
healthy debate.
The bankruptcy of the Schwinn bicycle company under the leadership of
57
the fourth-generation CEO, Edward R. Schwinn Jr., offers a cautionary tale.
Founded in 1895 by his great-grandfather, a German-born bicycle innovator, the
Schwinn company became the dominant U.S. bicycle maker by the middle of the
20th century. One in every four bicycles sold in the United States was a Schwinn.
Schwinn’s original success came through process and product innovation.
Though there were hundreds of bicycle makers when the company patriarch,
Ignaz Schwinn, teamed with Adolph Arnold, a fellow German immigrant and
wealthy meat packer, the company wisely invested in mass production and
nationwide distribution while competitors continued to distribute locally and
build bicycles by hand. After a few decades in business, Schwinn stood as the
preeminent brand for low-cost, functional transportation for children and
adults alike.
But at its peak, Schwinn began to coast. It lost its focus on innovation and
willingness to invest in manufacturing. For example, in the 1970s, innovators
on the West Coast modified Schwinn cruisers with gearing from European-
designed bikes to create a whole new category, the “mountain bike” (which they
initially called a “klunker”). According to the book No Hands: The Rise and Fall
of the Schwinn Bicycle Company, an American Institution, by Judith Crown and
Glenn Coleman (Henry Holt, 1996), Ed Schwinn Jr.’s dismissiveness of three
new ideas — automated factories, dirt bikes, and mountain bikes — prevented
the company from meeting the challenges posed by its new competitors.
Some of those competitors actually came to Schwinn seeking alliances, and
were swiftly rejected. Gary Fisher, cofounder of the Mountain Bikes company
(now part of Trek) and one of the leading entrepreneurs of the new category, had
built his original models as adaptations of Schwinn bicycles. But he told the No
Hands authors that when he approached the Schwinn company, its executives
belittled him as an “amateur” and asserted that “We know bikes.… We know
better than anybody.”
The air of superiority and dismissiveness had been inculcated by the
increasingly weak leaders drawn from the Schwinn family. The book describes
how Ed Schwinn Jr. actively suppressed debate during a meeting where a few
senior executives pressed for change in the company after it had been tossed from
its perch atop the domestic industry by a series of missteps. Schwinn interrupted
58
the debate by saying, “Guys, this is not going in the direction that I wanted it to.”
He then ended the meeting. Within a week, the executive who had been most
assertive in pushing for change had been asked to resign.
Schwinn’s unwillingness to invest in manufacturing led the company to
outsource to a modest Taiwanese supplier, Giant, founded in 1972. Over the
next decade, Schwinn taught Giant how to make high-quality bikes. Giant then
began producing bikes for some of Schwinn’s competitors, including Trek,
Colnago, and Scott. When Schwinn abandoned Giant for lower-cost Chinese
suppliers in 1987, the now massive supplier began building its own brand.
Today Giant makes more bicycles than any other producer in the world; it even
sponsors one of the top Tour de France teams. Schwinn, on the other hand, filed
for bankruptcy in 1992.
Executives are not expected to have a crystal ball, and it is fair to be skeptical
of a new trend that could turn out to be a passing fad. But that skepticism should
be considered reasonable only after CEOs have given unfamiliar information a
fair hearing. The assertion that something or someone is unworthy of serious
consideration, the very definition of dismissiveness, suggests a risk of hubris.
Building a culture of superiority that dismisses contrarian opinions leaves a
company ill-prepared to manage the inevitable dynamics of a global economy.
Humility as a Predictor
On the opposite end of the spectrum, positive signals in prospective CEOs can
offer investors and board members great comfort. For example, visible signs of
personal humility suggest that an executive will not fall victim to hubris.
Humility may seem rare among successful people and companies, but it is
more prevalent among veteran executives than you might think. They know that
it can offer a powerful counterpoint to narcissism and dismissiveness. Indeed, it
takes great self-confidence to not use power and influence to force compliance,
and to humbly expose one’s opinions to open debate. Humble executives focus
on the larger vision and a broad set of
stakeholders rather than their own ego. Humble executives
They listen to others, consider multiple focus on a broad set of
points of view, and do not assume their
stakeholders rather than 59
own opinions are infallible. To be sure,
nurturing humility requires patience. their own ego.
It often takes time for a CEO to reflect
on a decision rather than leaping to the expedient solutions and self-serving
explanations so common in narcissistic or dismissive cultures. Here we can look
to Honda for an example.
Soichiro Honda’s first successful business, Tokai Seiki, supplied piston rings
to Toyota prior to World War II and was acquired by the carmaker in 1945. Over
the ensuing years he established the Honda Motor Company, which morphed
from a moped maker to a motorcycle manufacturer to a car company.
Soichiro Honda’s implementation of an informal, unstructured management
style established a culture that embodied his personal belief that success is 99
percent failure. This in itself exemplified humility. The lean manufacturing
culture, so natural in Japanese companies, helped Honda establish a consensus-
oriented culture that promoted greater humility.
Some might argue that this approach can lead to in-group bias. But as an
observer and practitioner of the total quality and just-in-time revolution of the
1980s, I have seen firsthand how the humility embedded in lean management
practices can systematically lead people to question and test their biases. Honda
has practiced lean principles for decades and continues to follow the principles
articulated by its founder: Proceed always with ambition and youthfulness; respect
sound theory, develop fresh ideas, and make the most effective use of them; enjoy
your work and always brighten your working atmosphere; strive constantly for a
harmonious flow of work; be ever mindful of the value of research and endeavor.
My visit to Honda’s Marysville, Ohio, operations in the 1990s drove this

home for me in a compelling way. Unlike other automotive companies I had
visited over the years, Honda personified humility by disregarding hierarchy
and pedigree. Although I had read about the egalitarian precepts of the Japanese
“Theory Z” management style, I was mesmerized when I stepped into the Honda
America headquarters. The building was made up of large spaces full of desks
staffed with hundreds of white-collar workers wearing the same style of jumpsuits
as the factory workers in the attached building. They symbolically identified
themselves as one with the rest of the staff, decades before companies began
60
moving to open-space architecture.
My interactions with senior managers reinforced the humble image: Rather
than hard-charging MBAs or Ivy League graduates, headquarters was staffed
by smart, down-to-earth managers with an industrious, Midwestern work ethic.
Probed about the company’s phenomenal success, they pointed to Honda’s
philosophy sangen shugi, loosely translated as “going to the spot.” Soichiro Honda
operationalized the concept in the U.S. through adherence to the “three realities”
— actual place, actual part, and actual situation — as the foundation of problem
solving. Honda managers would not sit behind a desk and bark out orders.
Instead they went to the spot, be it their own manufacturing floor or that of their
suppliers, to observe and collect hard data to find the root cause of a problem.
Successful executives rise through the ranks by understanding strategic
challenges that are not evident to the average employee, but their lofty position
also isolates them from critical frontline challenges. Humble executives listen to
the front line and integrate that insight into strategy rather than pulling rank and
assuming they know better than everyone else.
The Power of Inquisitiveness

A culture of inquisitiveness is even more powerful than humility in reducing
hubris. Inquisitiveness provides the greatest defense against risky business bets.
The best chief executives lead with high confidence this way. They combine
intellectual curiosity with a passionate pursuit of facts. They don’t accept assertions
but instead challenge their people to support recommendations with rigorous
evidence. An inquisitive executive typically has a great gut instinct and strategic
mind-set and treats all assumptions — including his or her own — as hypotheses
to be tested rather than bold, strategic visions to be imposed. Inquisitive leaders
can be inventive and they will make big bets, but only when they have built the
organizational confidence that the opportunity is worth the risk.
In Silicon Valley, the “lean startup” movement has established inquisitiveness
as a day-to-day practice, through a focus on releasing products rapidly, observing
real-world customer response to them, and changing direction as needed. Eric
Reis, who coined the term lean startup, found inspiration in a variety of places.
One source was the work of Steve Blank, a venture investor, entrepreneur,
61
and academic, who invested in a startup founded by Reis called IMVU.
Reis integrated Blank’s customer development methodology, which is based
on in-depth inquiry, with his own experience of agile software development
and appreciation of world-class
The best chief executives manufacturers such as Honda and
combine intellectual Toyota. The lean startup movement
curiosity with a passionate frames failure as a positive output
of experimentation and encourages
pursuit of facts. They don’t “pivoting” to a better path when a
accept assertions. trial fails. Proponents do not apply a
classic “batting average” mind-set, but
instead measure progress by continually asking “what have we learned?” The
aspiration to fail fast makes it hard to be narcissistic or dismissive, because there
is always a great deal of evidence from real-world launches and trials, which
makes it easier to temper your biases.
Although now well beyond the startup phase, Amazon also continues to
display this inquisitive mindset. In 1996, Jeff Bezos established the vision for
Amazon to be the world’s most customer-centric company, and to manage for the
long term. Bezos reprints his original shareholder letter articulating that vision
in every Amazon annual report. His 2016 letter offered a perspective on how to
avoid hubris: “I believe we are the best place in the world to fail (we have plenty
of practice!), and failure and invention are inseparable.… We all know that if you
swing for the fences, you’re going to strike out a lot, but you’re also going to hit
some home runs.”
Bezos has surrounded himself with highly motivated, competitive individuals

with justified self-confidence. Simultaneously, though, he created an organization
relatively immune to hubris. His inquisitive nature translates to a desire to learn
from others.
This was exhibited in a widely celebrated way with Amazon’s acquisition
of Zappos. Many analysts, myself included, assumed that Bezos bought the
online shoe retailer with a plan to apply Amazon’s unmatched expertise and
scale in fulfillment operations to convert a marginally profitable business into a
winner. Instead, Bezos publicly explained that the Zappos acquisition offered a
62
learning opportunity because it shared the same customer obsession — but had
a fundamentally different focus. Amazon sought to serve customers by offering
the lowest possible prices whereas Zappos, under CEO Tony Hsieh, articulated
a customer service passion for “delivering happiness.” Now Amazon could learn
from this.
An inquisitive nature leads to ongoing learning and offers the best defense to
hubris. Inquisitive people and companies broadly and explicitly look for solutions
to the problems no one has solved. They do not accept the status quo, nor do they
waste time trying to convince others that they have all the answers.
Avoiding the Hubris Trap

Eliminating corporate hubris ultimately demands a culture that keeps confidence
in check. Company leaders must not believe they are infallible, particularly when
making “bet the farm” decisions. Truly innovative leaders don’t assume they
know how to handle every situation better than anyone else. Instead, they seek to
learn by making small bets and constantly adjusting in response to the findings.
If you are a chief executive yourself (or an aspiring one), it may take some
discipline to avoid the hubris trap. Don’t spend your time reading articles
praising your business acumen. Instead, study the reports of the short sellers who
question your business strategy. As a member of a board of directors, hire outside
consultants (or even academics) and charge them with the task of identifying the
weaknesses in your business strategy. Find a way to challenge your assumptions.
Another preventive measure is to build diversity in your teams. Management
teams with common backgrounds and perspectives can yield efficient decision
making. But quick decisions made by groups with too much uniformity can
filter out data that does not fit their theories and overlook alternatives worthy
of consideration. Constrained by inherent and often hidden biases, they may
simply lack the ability to think broadly
Too many CEOs fall prey about alternatives.
Finally, avoid fueling dreams tied
to a hubris built on short-
purely to financial success rather than a
term financial metrics. fulfilling mission. Does the long-term
plan emphasize goals such as achieving
63
the top market capitalization in the industry rather than articulating the strategic
rationale, such as taking the industry in a new direction? Too many CEOs and
their boards fall prey to a hubris built on short-term financial metrics, ignoring
the reality that stock market success often proves fleeting. Instead of following
their example, you can build an organization that instills pride and enables you
to execute your strategy with the right amount of confidence. +
Reprint No. 17107
Tim Laseter This article draws upon

timothy.laseter@pwc.com unpublished research by a team
is an advisor to executives of faculty at UVA’s Darden School,
for Strategy&, PwC’s strategy including Yiorgos Allayannis, Sam
consulting business. He is Bodily, Ken Eades, Greg Fairchild,
a managing director with Luanne Lynch, Dan Murphy, Frank
PwC US, based in Arlington, Warnock, and Tim Laseter.
Va.; a contributing editor of
strategy+business; and a The details about Joseph Nacchio
professor of practice at the come from the Denver Post (Dec.
University of Virginia’s Darden 23, 2005), the New York Times
School. He is the author or (June 17, 2002), CNN Money (June
coauthor of four books, 17, 2002), Reuters (May 12, 2011),
including The Portable MBA the Washington Post (Sept. 30,
(Wiley, 2010). 2013), and NPR’s Marketwatch
(Apr. 3, 2014).
64
feature strategy & leadership
BuildingTrust

whileCuttingCosts
During a restructuring, rumors spread and fear
takes hold. You can reduce the turmoil by finding
ways to inform, empower, and inspire employees.
BY VINAY COUTO, DENIZ CAGLAR, AND JOHN PLANSKY
65
“EVERYTHING WENT QUIET.”

That’s how one manager described the workplace immediately after
his company announced a large-scale restructuring — and it’s an
all-too-familiar story to employees whose companies have engaged
in a cost reduction initiative. Decisions are being made at the
highest level of management, but little is known outside that inner
Illustration by Selçuk Demirel
circle. Employees still need to do their jobs: serving their external

and internal clients, meeting deadlines, and moving existing
projects and plans forward. But that’s easier said than done in the
face of uncertainty. Worse still, no one can be sure that a slash-
and-burn cost-cutting exercise will accomplish its intended result.
Often, these efforts weaken a company instead of positioning it to
grow effectively.
Vinay Couto Deniz Caglar John Plansky Copyright © 2017 by
vinay.couto@pwc.com deniz.caglar@pwc.com is a former principal PricewaterhouseCoopers
is a leading practitioner is a leading practitioner with PwC US. He has Advisory Services LLC.
in strategic cost trans- in strategic cost trans- advised executives in All rights reserved.
formation for Strategy&, formation for Strategy&. the financial-services
PwC’s strategy con- Based in Chicago, he industry for Strategy&. Fit for Growth is a
sulting group. Based is a principal with PwC registered service mark
in Chicago, he is a US. He specializes in Adapted with permission of PwC Strategy& LLC in
principal with PwC US. organization and cost of the publisher, Wiley, the United States.
He specializes in global transformations in from Fit for Growth: A
operating model trans- retail, consumer Guide to Strategic Cost
formations in consumer packaged goods, and Cutting, Restructuring,
packaged goods, financial services. and Renewal, by Vinay
industrial products, and Couto, John Plansky,
financial services. and Deniz Caglar.
Restructuring initiatives can have a debilitating effect on the hearts and

minds of employees, affecting those who stay as well as those who are let go.
In our work with dozens of organizations implementing sweeping cost-cutting

programs, we have observed firsthand the turmoil that employees experience —
and how frequently their needs are forgotten during the crucial work of planning
for the transformation.
But what if the restructuring were more than a slash and burn? What if
it appealed to hope instead of fear? What if it not only promised, but actually
delivered, a stronger company and a better place to work? Cost management is
effective only when it leads to a less sclerotic, more aspirational enterprise —
one without suffocating bureaucracy or micromanagement, in which initiative
66 and entrepreneurship are encouraged and rewarded, internal processes serve
the customers and employees instead of “the process” itself, and the company
outperforms the competition consistently. If the restructuring doesn’t help the
company get stronger — if it doesn’t lead to a better way of working for everyone
in it — then it probably wasn’t worth conducting the exercise in the first place,
because the effects won’t last.
Company leaders embarking on a cost management effort therefore face two
challenges. First, they have to make the right sort of promise to employees: that
cost reductions will be not only fair, but also productive. This transformation is
not intended simply to permit the company to survive a few more years — it is
intended to set the company on a path to greater prosperity and thus better jobs
for those who remain.
Managers can help their people
realize that the company, and most
employees, will ultimately be better
off as a result.
Second, leaders have to deliver. They can’t just embark on a project out of
desperation. They have to have a credible way to move the company forward,

and to make cuts that will serve that goal. The only way to accomplish this is to
start with strategy — to have a clear idea of which activities are truly critical to
the company’s success, and which are distractions or merely nice to have — and
to follow through by cutting costs to grow stronger.
To be sure, many in your company — not just employees, but some senior
executives as well — will remain skeptical throughout the early stages of the
process. They know that cost cutting means layoffs, and that these are devastating
to both individuals and teams. You can’t convince them in advance that you will
handle the process differently this time than your company has handled it in the
past, and few companies have a good track record in this domain. 67
The feelings stirred up by an announcement of a cost-cutting action are
powerful, and to help people see beyond them, you’ll need to enlist the help of
your middle and frontline managers. It’s easy to overlook the important role these
individuals play as the restructuring unfolds. It falls to them to communicate
the rationale for the restructuring, to keep morale as high as possible during
the transition, and eventually to lead their part of the organization to working
in a different way. They need your support. Empower them to communicate
and lead, not to just passively watch their departments be trimmed without a
rationale. They can help their people understand the reasons for the particular
choices that were made, and realize that the company, and by extension most
employees, will ultimately be better off as a result. In so doing, these managers
can earn their people’s trust by helping them see that becoming more efficient
and effective is both a path for survival and a better way to operate.
Yes, it will be hard. Yes, some people will move on. But the overarching
message is a positive one, intertwined with the company’s strategic identity.
What’s more, the decisions made will have a lasting impact: This won’t be the
kind of restructuring that has to be endured every few years. If you genuinely
come out of the exercise with a company that is more competitive and more
agile than it was before, then you have a great incentive to offer the employees
who remain: a chance to participate in a growing, vibrant enterprise.
Investment, Not Expenses

In our book, Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring, and
Renewal (Wiley, 2017), we start with the premise that all spending is investment;
every cost is a choice. The secret to unlocking growth through cost reduction in
a Fit for Growth transformation is to make more deliberate choices about where
to invest, focusing on what to keep rather than what to cut.
As a company leader, your ability to make these choices wisely depends on
68 accepting a strategic reality: Some expenses are better than others. Companies
thrive when they focus their investments on a few differentiating capabilities —
the combinations of processes, tools, knowledge, skills, and organization that
consistently deliver value for them and that set their company apart from others —
and reduce expenses everywhere else. The capabilities at the heart of a company’s
strategy are complicated and expensive enough to require most of the time, money,
and attention from top management. They also require the commitment, skill,
and expertise of a host of other people, at every level of the hierarchy.
Fit for Growth transformations entail changes to a company’s cost structure,

its organization, and the way the company is run. Many of the moves you might
make are familiar: reorganizing business units or functions, slimming down
reporting relationships, expanding spans of control, centralizing or decentralizing
work, digitizing processes, outsourcing or offshoring, and relocating workforces.
Almost certainly, there will be head-count reductions. But this time, you have
a clear and communicable rationale for every change. You are refocusing the
company around the things it does best, and redirecting spending to the areas
that lay the groundwork for sustainable, long-term growth.
Restructurings of this sort require meticulous planning and execution to
achieve their objectives. They may take a year or two to complete, led during
that period by a transformation team explicitly focused on translating the

strategy into decisions about capability building, cost, and the organization,
and communicating these decisions across the enterprise. This level of detail
might sound like it would create an unnecessarily traumatic experience; many
companies prefer a “stealth” approach in which they ask departments to quietly
cut costs across the board, assuming that will be easier for people to accept.
But the opposite is true. By giving the effort the serious play that it deserves,
you and your company’s top management demonstrate that you have a credible
view of how to succeed, that you are fully committed to that view, and that you
recognize the barriers and blocks that have led to decline in the past. Now you
are putting your money where your strategy is. 69
The transformation proceeds over three distinct stages, each presenting a
different challenge in communicating with the workforce. In the first phase, you
set the direction for the restructuring, prioritize the opportunities you want to
pursue, create the case for change, and express your intent that “this time will
be different.” In the second, you translate your strategic direction into a detailed
design for the future processes, organization, and systems, and develop a plan
for moving from the current to the future state. In the third phase, you enlist
the organization in executing the plan; the detailed design of the transformation
becomes the new normal for the enterprise (see exhibit, next page).
Each phase presents critically important opportunities for managers on the
front lines to help their teams understand the issues at hand, and to make the
Exhibit: The Three Phases of Transformation
At each stage of the restructuring, the company takes critical steps
toward building a stronger organization.
PHASE 1: The Case for Change | 2–3 months
• Identify differentiating capabilities

• Analyze cost and capability competitiveness across the value chain
• Develop a vision of the future state and operating model
• Size and prioritize opportunities
Complex or cross-
functional opportunities
PHASE 2: Design and Dialogue | 3–6 months
• Develop blueprint for new capabilities, organizational

structure, business processes, and systems
Simple • Select locations, outsource partners, and technology
initiatives platforms
• Develop detailed implementation plans

• Launch pilots
70
PHASE 3: The New Normal | 6–18 months
• Execute action plans

• Monitor progress and make adjustments
• Evaluate further opportunities for cost reduction
Source: Adapted from Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring,
and Renewal
turmoil more productive. Many companies that have followed the Fit for Growth
approach have restructured without wreckage, enlisting their employees in the cost

transformation process. They have even come out the other side with employees
appreciating the company in a way they didn’t before. When designed and managed
in this way, large-scale restructuring is a constructive exercise; it can make your
company more competitive, more profitable, and better prepared to grow.
Phase 1: The Case for Change

“I was very worried about what was going to happen to me and whether I was going
to have a job. No one was giving me any reassurance. And no one could.”
For people on the receiving end, cost management exercises can feel like
a roller-coaster ride out of control. People naturally think first of their own job 71
security and the protection of their domain. Phase 1 is a time of uncertainty
for everyone outside the executive team. Questions surround the vaguely
described “project.” There may be an announcement that a major analysis of the
organization and costs is under way, but the specifics are not voiced. The idea
that the company is cutting costs to grow stronger is not clear; if the company
has cut haphazardly or in an across-the-board fashion in the past, it’s hard to
imagine that anything different will happen this time. Nobody voices the idea
that this effort could fix broken processes, eliminate bureaucracy, or raise the
profile of the most successful parts of the business.
Only a few employees know with absolute certainty that they are
indispensable. Most feel vulnerable about their own future. Top management
As a company leader, you have to give
managers the support and tools they need
to be truthful, transparent, and
reasonably optimistic.
may assume that the highest-ranked performers or those handling seemingly

critical activities will see their own positions as secure. But they rarely do. Rumors
run rampant. Some employees hope that the effort will just peter out a quarter
of the way through, which might have happened in the past. Others assume that
massive layoffs will cripple the company and that those remaining will end up
doing three times as much work as before.
As speculation becomes the dominant topic of discussion in the office,
middle and frontline managers bear the brunt of responsibility for answering
employees’ questions and maintaining morale. But because they aren’t involved
in designing the transformation, they have little idea of what is going to
happen. In fact, they may be unsure about their own jobs. This puts them in
72 an awkward position. They have to support their people and keep operations
going. They want to address the rumors. But they don’t know what to say, or
even what to think.
Your goal as a company leader in this phase is to avoid all that. You have to
give managers the support and tools they need to be truthful, transparent, and
reasonably optimistic. They need to be able to reinforce the case for change as
communicated by the CEO in everyday language that will resonate with their
team. In addition, they need to find a way to keep their team focused on day-to-
day business.
At the start of the initiative, there should be a company-wide announcement
making the case for change. Don’t focus yet on cost reduction per se, but on
reorientation around your strategy. In a Fit for Growth transformation, you are
doubling down on the things that have made the company successful in the
past and building them out for greater success in the future. You may want to
articulate the core value proposition, which might never have been expressed in
concise form in the past, and to signal that it is based on what your company
does best.
You can also, at this point, single out a few critical factors that are already in
the company’s culture that you hope to reinforce. The idea here is not to provide
a definitive statement, since there is still much to define about the specific actions

you will take. But you are showing everyone in the enterprise that you are ready
for them to think more strategically, and laying the groundwork for the phases
that follow.
Next, provide some in-depth guidance for managers on communicating
with staff, especially in light of your company’s existing culture and values.
Explicitly encourage them to promote on-the-job behaviors that reinforce people’s
pride in what they do. In an operation focused on customer service, for example,
a manager might launch a customer satisfaction survey and share results with
employees. Give managers ways to increase autonomy and on-the-job satisfaction
by allowing employees more latitude in delivering customer service or improving 73
shop-floor operations.
Some managers will be doing this kind of thing anyway, and you want to
give them reason to believe their engagement will be rewarded. “I encouraged
people to control what they could control, to try to stay positive, and to focus
on their key objectives,” said an IT director at a company that went through
a transformation in 2015. “My feeling was we could all take one of two roads.
We could either sulk, not do the work, or not act in the right way — in which
case we would be making the decision to let us all go much easier and our fears
would become a self-fulfilling prophecy. Or we could continue to work on what
we were supposed to work on, try to help the company, hope for the best, and go
from there.”
Phase 2: Design and Dialogue
“There would be days when everybody was in tears, and nothing had even been
announced yet.”
Phase 2 of the restructuring typically kicks off with the public articulation
of a savings target. This is often quite aggressive; it could be 20 percent of
operating expenses, or even more. With the target identified, shared with outside
stakeholders, and broken down by function and business unit (at least internally),
the initiative moves into a more intense period.
The employees who hoped in Phase 1 that things would just blow over
now see that’s not the case. A few more people get pulled out of their day-to-
day jobs to help design the detailed cost reduction plans. Some early savings
initiatives, such as hiring freezes and travel restrictions, are implemented. But
they’re inadequate for reaching the targets, and there are no details on how the
company plans to achieve the rest of the cuts.
At this point, people start to act on their anxieties. In some cases, good
people — exactly the people companies want to keep — become frustrated
with the uncertainty about their future, seek opportunities elsewhere, and leave.
Among those who stay, anger and resentment mount.
Managers are concerned on many levels during this phase. They wonder
if they and their long-term colleagues, some of whom are personal friends, will
survive the restructuring. They are concerned about the fate of their executive
74 sponsors and others who have mentored them; about what it will take to grow
and advance in the restructured organization, should they be fortunate enough
to be offered a position in it; and about whether the new company will be a good
place to build a career. They get no help from the executive and transformation
teams, who are occupied with the overall cost management priorities.
“There was no talking point we were given that made any real sense; there
was only a talking point to the business piece,” said one manager we interviewed.
“And most employees couldn’t care less about the business piece when something
like this is going on. ‘Talk to me as a human, as part of your family.’ That’s what
people wanted.”
But this time, as you did in Phase 1, you are going to do things differently.
You must give managers the support they need to address people’s concerns,
Managers need to let executives know
what’s happening in the trenches,
to help remind them to address the
communication vacuum.
including their own. The Fit for Growth approach doesn’t mean playing down
the impact, but it does mean painting a clearer picture of the organization you
feature strategy & l eadership

are creating — a can-do culture in which people spend more time doing things
for customers and less time managing one another.
Much of each individual manager’s success during this phase comes
down to people skills: the quality of relationships the manager has, and his
or her ability to convey empathy and communicate a realistic optimism. This
is the time for dialogue, for open, deeply felt conversations about choices and
the ways they should be executed. There should always be an aspirational
element to these conversations, with managers asking senior leaders,
“Why did we have to undertake this restructuring? What are we trying to
accomplish? How will it feel to work here when we are done?” As managers 75
start to understand the strategic rationale supporting the transformation,
they can better explain to their employees how the decisions being made
align with the company’s strengths and priorities (which they ideally already
discussed with employees in Phase 1), and how they will position the
company well for success in the future.
Explicitly give middle managers the support and encouragement they need
to communicate up the hierarchy — even when sharing difficult messages —
without fear of negative consequences. Executives are often so consumed with
shaping the future that they lose track of the feelings within the organization at
large. Managers need to let them know what’s happening in the trenches, to help
remind them to address the communication vacuum.
Phase 3: The New Normal
“Can we really pull this off? Can we work this way in the future?”
The conventional approach at the third stage of a restructuring is familiar:

Cuts take place without a clear strategic rationale, people make do with the
resources they have but without changing what work they perform or how, and
the company continues to decline.
In a Fit for Growth exercise, however, you’ve already laid the groundwork
for the company to revive. Nonetheless, this phase is very difficult. The challenge
facing you is to get through the transition and pave the way for the “new
normal,” the better system you hope to create.
The transformation is now in high gear. Employees are told how
76 reporting lines and organizations will change. They may learn of plans to
consolidate functions across business lines or geographies, to implement new
processes or IT systems, to outsource work, to move some work to a new
city, or to shut down entire offices. In some instances, early retirement and
enhanced severance programs are announced, giving employees even more to
think about.
Even in the best circumstances, not everybody likes what they hear.
As in previous phases, there will be a lot of bias in how employees interpret
information. Some employees think the changes take the company down the
wrong path. Others are more concerned about their own department than
about the business as a whole. A few are disappointed that the changes don’t go
far enough. To ease these concerns, you should continue to hold conversations
about the strategic direction of the company, but now offer more detail about
the capabilities you have and those you expect to develop.
The question that looms largest for every employee still has not definitively
been answered for many: “Do I have a job?” As this phase begins, those decisions
have not yet been finalized; indeed, you’ll be calling on your midlevel managers
to help make them. Legal and human resources constraints prevent names from
being released until the selection is complete and the official communications
and severance packages are ready. Employees know the moment is coming, but
little else.
“You get the pressures of people calling you who are your friends, saying,
‘Come on now, what’s going on? You’ve got to tell me something. Am I safe?’”
recalled a manager of the period when he was huddled in meetings related to

employee selection. “To have to turn them down [not be able to answer them]
is a tough thing.”
Everything connected with staff reductions — the selection of the
people who will end up without jobs, the communication of the unwanted
news to those people, and the process of “managing them out” — is difficult.
Establishing a fair, consistent, and relatively transparent process is critical.
With any luck, your company has taken a rigorous approach to performance
reviews before the transformation, and the existing information can be used
to select who is let go. If not, you may need to deploy a special assessment to
objectively evaluate employees, using it to separate strong, average, and poor 77
performers. However it is accomplished, the selection process as layoffs begin
must be as objective as possible, and you must avoid any hint of favoritism or
bias. The human resources and legal departments will help line managers get
through this tricky time.
It’s impossible to completely avoid pain during head-count reductions, but
there are ways to minimize the stress. Voluntary severance or early retirement
programs might be undertaken. For those let go, outplacement services can
likewise be useful, both in lifting morale and in encouraging cooperation.
On the flip side, managers should expect that some of their high
performers will leave in Phase 3, generally for jobs at other companies. Some
employees will put out feelers that turn into offers, and others, especially
middle and senior managers, will be approached by recruiters. Unwanted
attrition is part of the fallout of a transformation. Despite the risk of losing
their top performers, managers have to resist the temptation to make promises
to employees about their jobs during a restructuring. They should instead
continue to discuss the benefits of the transformation to the company and to
the staff as a whole.
Managers also face the emotional fallout experienced by the retained team
once their friends and colleagues have been let go. For those who stay on staff,
the relief of knowing they have a job is often quickly followed by survivor’s
guilt. “I felt like I had been hit by a truck when [my closest colleague and peer]
told me that his role had been eliminated and that there were no additional roles
available for qualified talent like himself in the company going forward,” said a
regional vice president of a retail bank. People decisions will be scrutinized, and
conspiracy theories about favoritism may arise. This dampens team morale and
adds to the concerns over what the new expectations will mean for the remaining
employees, how they can perform the work with a smaller staff, and whether
those new expectations are realistic.
Despite the tense, difficult atmosphere of this phase, there is also an
opportunity to set up the company and its employees for success. The uncertainty
that has pervaded the organization now starts to recede. Decisions about new
operating models and the required head-count changes have been finalized and
78 announced. Implementation teams are formed to act on the decisions that have
been made. Employees at every level see what the new organization will look like
and how individual roles will change. Communication that was once minimal
moves into overdrive, in the form of memos, town hall meetings, staff meetings,
training, and team-building sessions, all helping to keep employees informed
and engaged.
Thus, for all the turmoil, the beginning of Phase 3 represents a time of
relief and renewed optimism. The stage has been set for a recovery of morale,
and people can see the stronger company begin to emerge.

Now managers can begin the more intrinsically rewarding task of managing
and motivating the remaining organization. People need to know that their
former colleagues were treated with dignity and respect, but more important
— now that the focus is turning to the future — they need to understand their
role in making the new organization a success. This is a big turning point in the
transformation, both practically and emotionally.
The forward-looking communication that is necessary once a transformation
has reached this stage is not something that can be accomplished in one or two
executive-run town hall meetings, important as those are. There also need to be
targeted team discussions led by the immediate managers whom the employees
trust most. These conversations are already taking place informally, through the
rumor mill. Every department is starting to hear about new systems or processes
they will be implementing. There is talk about changes in the metrics that
employees will be held to, and about the new measures that will be used to judge
their job performance.

This is the time to more explicitly communicate details that have been
discussed only vaguely before; to start implementing the new organizational
structure; and to codify the decision-making process as well as how information
will be shared and how incentives and motivators will be used to influence
behavior. In other words, this is when everybody starts to execute the changes
that were being talked about and worked on a few months earlier behind
closed doors.
The manager is now a field leader who will take his or her employees from
the old to the new, helping them learn new processes and systems, adapt to a
new organization structure and hierarchy, and change behaviors to move to a 79
new way of working. Most if not all managers will face some challenges with
their teams; some employees will need help and coaching to learn the new ways,
others will miss the old and resent having to learn the new.
Give managers the support and coaching they need to demonstrate
leadership to the team — helping them internalize the “why” and the “what”
of the transformation and accept that they will be part of the future. Employees
will know immediately if the manager is not 100 percent committed, and will
use it as an excuse (perhaps subconsciously) not to make the transition. The
manager’s role, then, is to show the employees, in words and actions, that he or
she understands the changes, is convinced that they make sense, and will adapt
as quickly as possible. The manager must be immersed in all of the organization,
Ultimately, the company’s fortunes
rise and fall on the decisions that
individual employees make every day.
process, and systems changes in order to explain them to the team without
hesitating or wavering.
And while managers are patiently supporting the willing, they must also
identify the unwilling. Despite managers’ best attempts, a few employees may
not be able to break with the past. The manager must spot these naysayers early
and help bring them along. Tactics could range from extended conversations
explaining the changes to blunt warnings about the need to cooperate. And if
the behavior does not change, these “derailers” may need to be let go so they
don’t poison the well.
With most transformations, the changes that begin at this point, with new
processes, new ways of doing business, and often a refined strategy, need to be
80 jump-started in order to take hold. Corporate culture is an essential tool in making
the changes of a transformation stick; such mechanisms as peer interactions and
informal leaders should reinforce the most important new behaviors.
Sustaining the Path

No organization can operate indefinitely in transformation mode. Thus, in most
traditional restructuring initiatives, the positive impact is short-lived as individuals
revert to past behaviors and spending habits. As normalcy returns, and so do
costs and head count. The program management office is disbanded; the “best
and brightest” who staffed the various work streams return to their normal duties
— and the urgency and strict oversight that characterized the company at the
height of the transformation naturally subside. It can become a vicious circle.
To combat these tendencies, company leaders will need to design and
implement the requisite systems and processes to manage change and adjust
performance accordingly. In a Fit for Growth transformation, they can do so
through several approaches. Some are strategic and involve tying the planning
and budgeting process more closely to your strategy so that resources are re-
allocated to your differentiating capabilities. Others are operational levers that
you can apply to align your cost structure to your strategy on a continual
basis. There are also organizational levers that you can pull to motivate and
empower employees to act in the company’s best financial interest. Last,
you can reinforce a culture and value system that encourages cost-conscious
behaviors over the long haul.
Ultimately, the company’s fortunes rise and fall on the decisions and trade-

offs that individual employees — the managers on the front lines and the
people they lead — make every day. Will those decisions benefit the firm as
a whole or maximize the self-interest of the person making them? The three
phases of change can be managed in such a way that people understand the
strategic rationale for the decisions handed down, even when they are tough, and
clearly understand their role in shaping the new organization. They can forge
ahead, confident that choices were made to enable sustained success. When trust
prevails, so does the company’s future. +
Reprint No. 17108
81
Resources
Deniz Caglar, Vinay Couto, and Gary L. Neilson, “Be Your Own Activist Investor,” s+b, Oct. 19, 2015: With these 10 principles for rethinking cost
management, you can maximize value and avoid threats from Wall Street.
Deniz Caglar, Marco Kesteloo, and Art Kleiner, “How Ikea Reassembled Its Growth Strategy,” s+b, May 7, 2012: During the Great Recession, this
iconic Swedish furniture company developed a new way to expand — cutting costs while increasing customer loyalty.
Deniz Caglar, Jaya Pandrangi, and John Plansky, “Is Your Company Fit for Growth?” s+b, May 29, 2012: An introduction to the fundamentals of the
Fit for Growth strategy.
Paul Leinwand and Cesare Mainardi, with Art Kleiner, Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap
(Harvard Business Review Press, 2016): The most farsighted enterprises have mastered five unconventional practices for building and using
distinctive capabilities.
More thought leadership on this topic: strategy-business.com/strategy_and_leadership
82
10
PRINCIPLES

OF STRATEGY
THROUGH
EXECUTION
How to link where your company is headed
83
with what it does best.
by Ivan de Souza, Richard Kauffeld, and David van Oss
“WE ARE ALL IN THE GUTTER,” wrote Oscar Wilde, “but some
Illustration by Andrew Bannecker
of us are looking at the stars.” That is the nature of strategy

through execution. You operate deep in the weeds, managing
countless day-to-day tasks and transactions. At the same time,
you keep a steady gaze on your company’s long-term goals —
and on ways you can stand out from your competitors.
Ivan de Souza Richard Kauffeld David van Oss Steve Treppo, Hans van
ivan.de.souza@pwc.com richard.kauffeld@pwc.com david.van.oss@pwc.com Delden, Christopher
oversees global thought is an advisor to is a partner with PwC UK Vollmer, Anil Khurana,
leadership for Strategy&, executives in the in London, specializing in and Mark Strom, along
PwC’s strategy consumer products innovation strategy. with Strategy& head of
consulting business. industry for Strategy&. marketing Ilona Steffen
Based in São Paulo, He is a principal with Several Strategy& and Strategy That Works
he is a partner with PwC US, based in thought leaders con- campaign director Nadia
PwC Brazil. New York. tributed to this article. Kubis. Also contributing
They include PwC were PwC UK partner
US principals Paul Craig Kerr and PwC US
Leinwand, Patricia Riedl, editor Julia Heskel.
Having a close link between strategy and execution is critically important.

Your strategy is your promise to deliver value: the things you do for customers,
now and in the future, that no other company can do as well. Your execution
occurs in the thousands of decisions made each day by people at every level of
your company.
Quality, innovation, profitability, and growth all depend on having strategy
and execution fit together seamlessly. If they don’t fit — if you can’t deliberately
align them in a coherent way — you risk operating at cross-purposes and losing
your focus. This problem is all too common. In a recent Strategy& global survey,
700 business executives were asked to rate their company’s top leaders in terms
of their skill at strategy creation and at execution. Only 8 percent were credited
84 as being very effective at both.
Strategy&, the strategy consulting business of PwC, has been studying the
relationship between strategy and execution for years. We have found that the
most iconic enterprises — companies such as Apple, Amazon, Danaher, IKEA,
Starbucks, and the Chinese appliance manufacturer Haier, all of which compete
successfully time after time — are exceptionally coherent. They put forth a clear
winning value proposition, backed up by distinctive capabilities, and apply this
mix of strategy and execution to everything they do.
Any company can follow the same path as these successful firms, and an
increasing number of companies are doing just that. If you join them, you will
need to cultivate the ability to translate the strategic into the everyday. This means
linking strategy and execution closely together by creating distinctive, complex
Fit for Growth is a
registered service mark
of PwC Strategy& LLC in
the United States.
capabilities that set your company apart, and applying them to every product
and service in your portfolio. These capabilities combine all the elements of

execution — technology, human skills, processes, and organizational structures
— to deliver your company’s chosen value proposition.
How do you accomplish this on a day-to-day basis? How do you get the
strategists and implementers in your company to work together effectively?
These 10 principles, derived from our experience at Strategy&, can help you
avoid common pitfalls and accelerate your progress. For companies that truly
embrace strategy through execution, principles like these become a way of life.
85
1
Aim High
Don’t compromise your strategy or your execution. Set a lofty ambition for
Icon illustrations by Alan Kikuchi
your strategy: not just financial success but sustained value creation, making a
better world through your products, services, and presence. Apple’s early goal
of making “a computer for the rest of us,” which effectively shaped the personal
computer industry, is a classic example.
Next, aim just as high on the execution side, with a dedication to excellence
that seems almost obsessive to outsiders. Apple, for instance, has long been
INFOGRAPHIC
A Guide to Strategy
through Execution
How to get the strategists and
implementers in your company
to work together effectively.
known for its intensive interest in every aspect of product design and marketing,
iterating endlessly until its notoriously demanding leaders are satisfied. The
company’s leaders do not consider execution beneath them; it is part of what

makes Apple special.
Together, a strong long-term strategy and a fierce commitment to excellent
execution can transform not only a company, but a regional economy. After
the 1992 Olympics in Barcelona, a group of local political and business leaders
realized, with some disappointment, that the event hadn’t triggered the economic
growth they had expected. So they resolved to change the region’s economy in
other ways. Led by the mayor, the group created a common base of technologies
and practices and set up training programs for local enterprises. By 2014, after
86 two decades of persistent effort, the city had become a hub for research and
technology companies. One legacy of the Olympics is a group of about 600
sports-related companies with a collective annual revenue of US$3 billion and
20,000 employees.
In carrying out this first principle, the top executives of your company must
lead the way. They must learn to set lofty goals, establish a clear message about
why those goals are relevant, and stick to them without compromise. This may
take a while, because lofty goals require patience. You need to persevere without
lowering your standards, and the confidence to believe you can reach the goals
soon enough. Leaders must demonstrate that courage and commitment, or no
one else will. At the same time, don’t be surprised if the rewards start to appear
sooner than you expect — both financial rewards and the intrinsic pleasure of
working with highly capable people on relevant projects. With high aspirations
(for example, IKEA’s goal of “creating a better everyday life for the many people”

or Amazon’s self-proclaimed role as the “everything store”), you recruit talented
people who are deeply committed to being there. That’s one way you’ll know
that you’re aiming high enough: The whole organization will start to feel like a
better place to work.
2
87
Build on Your Strengths
Your company has capabilities that set it apart, things you do better than anyone
else. You can use them as a starting point to create greater success. Yet more
likely than not, your strongest capabilities have been obscured over the years. If,
like most companies, you pursue opportunities that crop up without thinking
much about whether you have the prowess needed to capture them, you can
gradually lose sight of what you do best, or why customers respond to it.
Take an inventory of your most distinctive capabilities. Look for
examples where you have excelled as a company, achieving greatly desired
outcomes without heroic efforts. Articulate all the different things that had
to happen to make these capabilities work, and figure out what it will take
YOU SHOULD ALWAYS BE ANALYZING
WHAT YOU DO BEST, GATHERING
DATA ABOUT YOUR PRACTICES, AND
CONDUCTING POSTMORTEMS.
to build on your strengths, so that you can succeed the same way more
consistently in the future.
Sometimes a particular episode will bring to light new ways of building

on your strengths. That’s what happened at Bombardier Transportation, a
division of a Canadian firm and one of the world’s largest manufacturers of
railroad equipment. To win a highly competitive bid for supplying 66 passenger
train cars to a British rail operator, Bombardier shifted its manufacturing and
commercial models to a platform-based approach, which allowed it to use and
reuse the same designs for several different types of railway cars. “Platforming,”
which was a new operational strategy for the industry, required adjustments to
Bombardier’s supplier relationships and product engineering practices. But the
88 benefits were immediate: lower costs, less technology risk, faster time-to-market,
and better reliability.
Bombardier won the bid — and, more importantly, learned from the
experience, making the episode a model for other bids and contracts. When
some Bombardier engineers complained about the platform approach on the
grounds that it curtailed their creativity, the leadership had an immediate
answer: The platform demonstrated capabilities that competitors couldn’t
match and the company’s creativity could be focused on innovation. Additional
contracts soon followed.

The more knowledge you have about your own capabilities, the more
opportunities you’ll have to build on your strengths. So you should always be
analyzing what you do best, gathering data about your practices, and conducting
postmortems. In every case, there is something to learn — about your operations,
and also about the choices you make and the value you’re able to deliver.

3
Be Ambidextrous
In the physical world, ambidexterity is the ability to use both hands with equal
skill and versatility. In business, it’s the ability to manage strategy and execution
with equal competence. In some companies, this is known as being “bilingual”: 89
able to speak the language of the boardroom and the shop floor or software center
with equal facility. Ambidextrous managers can think about the technical and
operational details of a project in depth and then, without missing a beat, can
consider its broader ramifications for the industry. If strategy through execution
is to become a reality, people across the enterprise need to master ambidexterity.
Lack of ambidexterity can be a key factor in chronic problems. For instance,
if IT professionals focus only on execution when they manage ERP upgrades or
the adoption of new applications, they may be drawn to vendors for their low
rates or expertise on specific platforms instead of their ability to design solutions
that support the company’s business strategy. When the installation fails to deliver
the capabilities that the company needs, there will be an unplanned revision; the
costs will balloon accordingly, and the purchase won’t fulfill its promise.
We recognize, of course, that not everyone needs to be equally conversant
in the company’s strategy. A typical paper goods manufacturer, for example,

employs chemists who research hydrogen bonds to discover ways to make paper
towels more absorbent. They may not need to spend much time debating strategy
in the abstract, but they do need to be aware of how their role fits in. Like the
apocryphal bricklayer who sees himself as building a cathedral, the highly skilled
technologists on your team must recognize that they are not merely fulfilling
a spec but rather developing a technology unlike anyone else’s, for the sake of
building highly distinctive capabilities. They might even help figure out what
those capabilities should be.
90 Similarly, your top leaders don’t have to be experts on hydrogen bonds or
cloud-based SQL server hosting, but they do have to be conversant enough with
technological and operational details to make the right high-level decisions. No
longer can a senior executive credibly say, “I don’t use computers. My staff is
my computer.” If your leaders aren’t ambidextrous, they risk being eclipsed or
outperformed by someone who is.
In The Self-Made Billionaire Effect: How Extreme Producers Create Massive
Value (Portfolio, 2014), John Sviokla and Mitch Cohen suggest using the word
producers to describe ambidextrous individuals. Self-made billionaires, such

as Spanx founder Sara Blakely, POM Wonderful cofounder Lynda Resnick,
Uniqlo founder Tadashi Yanai, and Morningstar founder Joe Manseuto have
this quality. They can both envision a blockbuster strategy and figure out in
detail how to develop and sell it to customers. There are similarly ambidextrous
people in every company, but they often go unappreciated. Find them, recognize

and reward them, and give them opportunities to influence others.
Foster ambidexterity in practices and processes as well as in people.
For example, in your annual budgeting exercises, ask people to explain the
relationship of each line item to the company’s strategy, and specifically to the
capability it is enabling. Over time, this approach will channel investments
toward projects with a more strategic rationale.
4 91
Clarify Everyone’s Strategic Role

When the leaders of the General Authority of Civil Aviation (GACA) of Saudi
Arabia decided to improve the way they ran the country’s 25 airports, they started
with the hub in Riyadh, one of the largest airports in the country. They had already
outsourced much of their activity, redesigning airport practices and enhancing
operations. But not much had changed. Convening the directors and some
department leaders, the head of the airport explained that some seemingly minor
operational issues — long customs lines, slow boarding processes, and inadequate
basic amenities — were not just problems in execution. They stood in the way of
the country’s goal of becoming a commercial and logistics hub for Africa, Asia,
and Europe. Individual airport employees, he added, could make a difference.
The head of the airport then conducted in-depth sessions with employees
on breaking down silos and improving operations. In these sessions, he turned
repeatedly to a common theme: Each minor operational improvement would
affect the attractiveness of the country for commercial travel and logistics. A wake-
up call for staff, the sessions marked a turning point for the airport’s operational
success. Other airports in the Saudi system are now expected to follow suit.
The people in your day-to-day operations — wherever they are, and on
whatever level — are continually called upon to make decisions on behalf of the
enterprise. If they are not motivated to deliver the strategy, the strategy won’t
92 reach the customers. It is well established that financial rewards and other tangible
incentives will go only so far in motivating people. Workers cannot make a greater
personal commitment unless they understand why their jobs make a difference,
and why the company’s advancement will help their own advancement.
Successful leaders spend a great deal of time and attention on the
connection between strategy and personal commitment. One such leader has
run the trade promotion effectiveness (TPE) capability at two global consumer
products goods (CPG) companies over the past several years. CPG companies
use this capability to build the momentum of key brands. It involves assembling
assortments of products to promote, merchandising them to retailers, arranging
in-store displays and online promotions, adjusting prices and discounts to test
demand, and assessing the results. A great TPE capability consistently attracts
customers and compels them to seek out the same products for months after
the campaign ends. TPE and related activities often represent the second-largest

item (after the cost of goods sold) on the P&L statement. This in itself indicates
the capability’s strategic importance for CPG companies.
In both enterprises, this executive took the time to go up and down the
organization, making a case for why the specific mechanics of trade promotion
matter to the value proposition of the company and, ultimately, to its survival.
He made it a point to talk numbers but didn’t limit the conversation to them.
“We spend billions at this company on promotions,” he might say. “We have
to get back $100 million in added revenue next year, and another $100 million
on top of that the year after.” He then urged employees to develop better
promotions that would attract more consumers and increase their synergies with 93
retailers. This combination of numbers and mission made it clear how people’s
individual efforts could affect the company’s prospects.
5
Align Structures to Strategy
Set up all your organizational structures, including your hierarchical design,
decision rights, incentives, and metrics, so they reinforce your company’s
identity: your value proposition and critical capabilities. If the structures of your
company don’t support your strategy, consider removing them or changing
them wholesale. Otherwise, they will just get in your way.

Consider, for example, the metrics used to track the results delivered by call
center employees. In many companies, these individuals must follow a script and
check off that they’ve said everything on the list — even at the risk of irritating
potential customers. Better instead to get employees to fully internalize the
company’s strategy and grade them on their prowess at solving customer problems.
Danaher, a conglomerate of more than 25 companies specializing in
environmental science, life sciences, dental technologies, and industrial
manufacturing technologies, is intensely focused on creating value through
94 operational excellence. Critical to this approach are metrics built into the
Danaher Business System, the company’s intensive continuous improvement
program. Only eight key metrics, called “core value drivers” to underline
their strategic relevance, are tracked constantly in all Danaher enterprises.
The financial metrics (core growth, operating margin expansion, working
capital returns, and return on invested capital) are used not just by investors
but also by managers to evaluate the value of their own activities. Danaher also
tracks two customer-facing metrics (on-time delivery and quality as perceived
by customers), and two metrics related to employees (retention rates and the
percentage of managerial positions filled by internal candidates). Lengthy in-
person operating reviews, conducted monthly, are very data driven, focusing on
solving problems and improving current practices. The metrics are posted on
GREAT CAPABILITIES ALWAYS
TRANSCEND FUNCTIONAL BARRIERS.
the shop floor, where anyone can see the progress that’s being made — or not
being made — toward clear targets. The meetings are constructive: People feel

accountable and challenged, but also encouraged to rise to the challenges.
Data analytics is evolving to the point where it can help revitalize metrics and
incentives. A spreadsheet is no longer enough to capture and analyze this body
of material; you can use large information management systems programmed to
deliver carefully crafted performance data. No matter how complex the input, the
final incentives and metrics need to be simple enough to drive clear, consistent
behavior. More generally, every structure in your organization should make your
capabilities stronger, and focus them on delivering your strategic goals.
95
6
Transcend Functional Barriers
Great capabilities always transcend functional barriers. Consider Starbucks’
understanding of how to create the right ambience, Haier’s ability to rapidly
manufacture home appliances to order, and Amazon’s aptitude for launching
products and services enabled by new technologies. These companies all bring
people from different functions to work together informally and creatively.
Most companies have some experience with this. For example, any effective
TPE capability brings together marketing, sales, design, finance, and analytics
professionals, all working closely together and learning from one another. The
stronger the cross-functional interplay and the more it is supported by the

company’s culture, the more effective the promotion.
Unfortunately, many companies unintentionally diminish their capabilities
by allowing functions to operate independently. It’s often easier for the functional
leaders to focus on specialized excellence, on “doing my job better” rather than
on “what we can accomplish together.” Pressed for time, executives delegate
execution to IT, HR, or operational specialists, who are attuned to their areas
of expertise but not necessarily to the company’s overall direction. Collaborative
efforts bring together people who don’t understand each other or, worse, who
96 pursue competing objectives and agendas. When their narrow priorities conflict,
the teams end up stuck in cycles of internal competition. The bigger a company
gets, the harder it becomes to resolve these problems.
You can break this cycle by putting together cross-functional teams to
blueprint, build, and roll out capabilities. Appoint a single executive for each
capability team, accountable for fully developing the capability. Ensure this
person has credibility at all levels of the organization. Tap high-quality people
from each function for this team, and give the leader the authority to set
incentives for performance.

There’s always the risk that these cross-functional teams will be seen as
skunkworks, separate from the rest of the enterprise. To guard against this
risk, you need a strong dotted line from each team member back to the
original function. Sooner or later, the capabilities orientation will probably
become habitual, affecting the way people (including functional leaders)

see their roles: not as gatekeepers of their expertise, but as contributors to a
larger whole.
7
Become a Fully Digital Enterprise
The seventh principle should affect every technological investment you make 97
— and with luck, it will prevent you from making some outdated ones.
Embrace digital technology’s potential to transform your company: to create
fundamentally new experiences and interactions for your customers, your
employees, and every other constituent. Until you use technology this way,
many of your IT investments will be wasted; you won’t realize their potential in
forming powerful new capabilities.
Complete digitization will inevitably broaden your range of strategic
options, enabling you to pursue products, services, and innovations that
weren’t feasible before. For example, Under Armour began as a technologically
enabled sports apparel company, specializing in microfiber-based synthetic
fabrics that felt comfortable under all conditions. To keep its value proposition
as an innovator, it aggressively expanded into fitness trackers and the
development of smart apparel. The company is now developing clothing that
will provide data that can both help athletes raise their game and point the
way to design improvements.
Adopting digital technology may mean abandoning expensive legacy
IT systems, perhaps more rapidly than you had planned. Customers and
employees have come to expect the companies they deal with to be digitally
sophisticated. They now take instant access, seamless interoperability,
smartphone connectivity, and an intuitively obvious user experience for
granted. To be sure, it is expensive and risky to shift digital systems wholesale,
and therefore you need to be judicious; some companies are applying the Fit
98 for Growth approach to IT, in which they reconsider every expense, investing
more only in those that are directly linked to their most important capabilities.
(See “Building Trust while Cutting Costs,” by Vinay Couto, Deniz Caglar,
and John Plansky, page 64.)
Fortunately, cloud-based technologies provide many more options than
were available before. To boost agility and reduce costs, you can outsource some
tech activities, while keeping others that are distinctive to your business. You
also can use embedded sensors and analytics to share data across your value chain
and collaborate more productively (an approach known as “Industry 4.0” and
the “Industrial Internet of Things”). The biggest constraint is no longer the cost
and difficulty of implementation. It’s your ability to combine business strategy,
user experience, and technological prowess in your own distinctive way.
DON’T TAKE A MACHETE TO
YOUR PRODUCT LINEUP OR ORG
CHART. REMEMBER THAT NOT ALL
COMPLEXITY IS ALIKE.

8
Keep It Simple, Sometimes
Many company leaders wish for more simplicity: just a few products, a
clear and simple value chain, and not too many projects on the schedule.
Unfortunately, it rarely works out that way. In a large, mainstream company,
execution is by nature complex. Capabilities are multifaceted. Different
customers want different things. Internal groups design new products or pro-
cesses without consulting one another. Mergers and acquisitions add entirely 99
new ways of doing things. Although you might clean house every so often,
incoherence and complexity creep back in, along with the associated costs
and bureaucracy.
The answer is to constantly seek simplicity, but in a selective way. Don’t take
a machete to your product lineup or org chart. Remember that not all complexity
is alike. One advantage of aligning your strategy with your capabilities is that it
helps you see your operations more clearly. You can distinguish the complexity
that truly adds value (for example, a supply chain tailored to your most important
customers) from the complexity that gets in your way (for example, a plethora of
suppliers when only one or two are needed).
As Vinay Couto, Deniz Caglar, and John Plansky explain in Fit for
Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal (Wiley,
2017), effective cost management depends on the ability to ruthlessly cut the
investments that don’t drive value. Customer-facing activities can be among

the worst offenders. Some customers need more tailored offerings or elaborate
processes, but many do not.
For example, Lenovo, a leading computer hardware company with twin
headquarters in China and the U.S. (Lenovo’s ThinkPad computer business
was acquired with its purchase of IBM’s personal computer business), has
a strategy based on cross-pollination of innovation between two entirely
different markets. The first is “relationship” customers (large enterprises,
government agencies, and educational institutions), which purchase in large
100 volume, need customized software, and are often legacy IBM customers. The
second is “transactional” customers (individuals and smaller companies),
typically buying one or two computers at a time, all seeking more or less the
same few models; these customers, however, are sensitive to cost and good
user experience.
Lenovo has a single well-developed hardware and software innovation
capability aimed at meeting the needs of both types of customers. But its
supply chain capability is bifurcated. The relationship supply chain is complex,
designed to provide enterprise customers with greater responsiveness and

flexibility. Lenovo’s computer manufacturing plant in Whitsett, N.C., which
opened in 2013, was designed for fast shipping, large orders, and high levels
of customization. Meanwhile, the company maintains a simpler supply chain
with manufacturing sites in low-cost locations for its transactional customers.
The principle “keep it simple, sometimes” is itself more complex than it

appears at first glance. It combines three concepts in one: First, be as simple
as possible. Second, let your company’s strategy be your guide in adding the
right amount of complexity. Third, build the capabilities needed to effectively
manage the complexity inherent in serving your markets and customers.
9
101
Shape Your Value Chain
No company is an island. Every business relies on other companies in its
network to help shepherd its products and services from one end of the value
chain to the other. As you raise your game, you will raise the game of other
operations you work with, including suppliers, distributors, retailers, brokers,
and even regulators.
Since these partners are working with you on execution, they should
also be actively involved in your strategy. That means selling your strategy to
them, getting them excited about taking the partnership to a whole new level,
and backing up your strategic commitment with financing, analytics, and
operational prowess. For example, when the Brazilian cosmetics company
Natura Cosméticos began sourcing ingredients from Amazon rain forest villages,
its procurement staff discovered that the supply would be sustainable only if
they built deeper relationships with their suppliers. Beyond paying suppliers,
they needed to invest in the suppliers’ communities. The company has held to
that commitment even during down periods.
Use leading-edge digital technology to align analytics and processes
across your value chain. In the past, companies that linked operations to
customer insight in innovative ways did it through vertical integration, by
bringing all parts of the operation in-house. For example, Inditex created a
robust in-house network that linked its Zara retail stores with its design and
production teams. Real-time purchase data allowed designers to find out what
102 was selling — and what wasn’t — more quickly than their competitors could.
This approach has helped Zara introduce more items that would sell quickly
while keeping costs down. And it has helped Inditex outpace its rivals in both
profitability and growth.
At the time Inditex developed its system, vertical integration was a
prerequisite for that kind of integration. But now the technology has changed,
and in a cloud-based computer environment, you no longer need full vertical
integration. You can achieve the same result through integrated business
platforms (some managed by third-party logistics companies such as Genpact,

and others being developed as joint ventures). By allowing several companies
to share real-time data seamlessly, these platforms enable each participating
company to set more ambitious strategic goals.
10
Cultivate Collective Mastery
The more bound your company is by internal rules and procedures for making
and approving decisions, the slower it becomes. Hence the frustration leaders have
with the pace of bureaucracy, in which people can’t make decisions because they
don’t know what the strategic priorities are — or even what other stakeholders
will think. In a world where disruption has become prevalent, your company
can’t afford the time or expense of operating this way. 103
The alternative is what we call collective mastery. This is a cultural attribute,
often found in companies where strategy through execution is prevalent. It is the
state you reach when communication is fluid, open, and constant. Your strategists
understand what will work or not work because they talk easily with functional
specialists. Your functional specialists know not only what they’re supposed to
do, but why it matters. Everyone moves quickly and decisively, because they have
the ingrained judgment to know who to consult, and when. People trust one
another to make decisions on behalf of the whole.
Many of the attributes of Silicon Valley companies owe a great deal
to the high level of collective mastery in the area. The culture of these
companies encourages risk taking, because it’s expected that people will make
COLLECTIVE MASTERY MAKES IT
EASIER TO EXPERIMENT: TO LAUNCH
A PROJECT AND LEARN FROM THE
RESPONSE WITHOUT MAKING A
HUGE COMMITMENT.
mistakes — not as a goal, of course, but in the process of learning. People

expect their colleagues to be informal, quick-thinking, and unassuming.
They rely on systems and processes only when they add value, and are willing
to jettison them at other times. With this type of culture, people can focus
on getting results.
Collective mastery builds over time when people have the support and
encouragement they need to work easily and readily across organizational
boundaries, with a high level of trust and frequent informal contact. Even when
they hold different perspectives, they get to the point where they understand one
another’s thinking.
To operate this way, you have to be flexible. That doesn’t mean giving up
104 your strategy; you still should pursue only opportunities with which you have
the capabilities to win. Indeed, knowing what you do best allows you to be
closer to the customers who matter, and to give more autonomy to employees.
Because you are less distracted by nonstrategic issues, you have the attention
and resources to pursue worthwhile opportunities as soon as they arise.
Collective mastery also makes it easier to conduct an experiment: to launch
a project and learn from the response without making a huge commitment.
This high level of fluidity and flexibility is essential for navigating in a volatile
economic landscape.
In the end, the 10 principles of strategy through execution will do more
than help you achieve your business goals. They will also help build a new
kind of culture, one in which people are aware of where you’re going and
how you’re going to get there. The capabilities you build, and the value you
provide, are larger than any individual can make them. But by creating the

right kind of atmosphere, you make it possible to not just stand in the weeds
and look at the stars, but reach a higher level than you may ever have thought
you would. +
Reprint No. 17109
105
Resources
Deniz Caglar, Namit Kapoor, and Thomas Ripsam, “Think Functionally, Act Strategically,” s+b, Feb. 26, 2013: When a company competes on
capabilities, its specialist leaders — in HR, IT, finance, and elsewhere — play a new, influential role.
Shoshanah Cohen and Joseph Roussel, Strategic Supply Chain Management: The Five Core Disciplines for Top Performance (2nd ed., McGraw-Hill,
2013): Source for the story about Lenovo.
Paul Leinwand and Cesare Mainardi, with Art Kleiner, Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap (Harvard
Business Review Press, 2016): Five unconventional acts for building an ambidextrous enterprise, including translating the strategic into the everyday.
Christopher A.H. Vollmer, Kristina Bennin, and Deborah Bothun, “The Marketer’s Dilemma,” s+b, Oct. 24, 2016: To stay relevant, all participants
in the vast marketing ecosystem must develop new capabilities. Every function has similar concerns.
More thought leadership on this topic: strategy-business.com/strategy_and_leadership
106
feature technology
Siri,who is
feature technology
Terryy
Winograd?
For 40 years
years, the Stanford
professor has steered
107
the increasingly complex and

meaningful interactions between
humans and computers.
Photographs by Vern Evans
by Lawrence M. Fisher
Lawrence M. Fisher
larryfisher1@me.com
is a contributing editor
of strategy+business.
He covered business
and technology for the
New York Times from
1985 to 2000, and his
work has also appeared
in Fortune, Forbes, and
Business 2.0. He lives
near Seattle.
On the Stanford University campus, you could practically throw a rock and hit
100 graduate students who are building apps that enable people to communicate
feature technology
more effectively. But Terry Winograd is particularly enthusiastic about the

app one of his graduate students, Catalin Voss, is working on. Voss, a native of
Germany who completed his bachelor’s and master’s degrees last June at the age
of 21, is working on an app that deploys Google Glass, linked to a smartphone,
to help autistic children recognize human emotions through facial expressions.
Venture capitalists weren’t interested, even though Voss had created and sold
a startup that used eye-tracking technology to monitor attentiveness to a Toyota
subsidiary while still a freshman. But Terry Winograd was interested. “It runs,
it has AI [artificial intelligence],” says Winograd, who 20-odd years ago advised
108 another graduate student on the then nascent field of searching the World Wide
Web. “It’s at a stage where we’ve actually put 30 devices into homes. Our goal is
to have 100 in the trial.”
Voss says his objective is to build a medical product that insurers will be
willing to pay for. “We want to prove the investors wrong, who didn’t believe in
it, and build an aid for people with autism, and other mental disorders as well,”
he says. “We believe we’ve built a fairly holistic system for mental health.”
Winograd was Voss’s first choice for an advisor even though the 70-year-old
professor retired from teaching three years ago. (He continues to advise graduate
students, without pay.) “I knew Terry from my freshman year at Stanford,” Voss
says. “He’s known for all the fantastic work he’s done, but even more known
for the people he’s advised.” Among them are Silicon Valley aristocrats such as
feature technology
109
Winograd with Stanford

graduate student Catalin Voss
Google cofounder Larry Page and LinkedIn founder Reid Hoffman.

“Terry has such a broad world view. One day he’s in Jerusalem with members
of the U.S. Congress working on peace, the next writing a book, the next sitting
in his office talking to me about my problems,” Voss continues. Winograd
connected Voss with the Wall Lab at Stanford’s medical school, which is housing
the research. “When you take them to Terry, suddenly they don’t seem like
problems anymore,” Voss added. “He’s a technology expert, Ph.D. advisor, and
personal therapist all in one.”
The proper role of artificial intelligence,
Winograd concluded, was to help
humans live more fully human lives.
An app to help autistic individuals relate better to other people is classic

Winograd. He cares deeply about the human side of human–computer
feature technology
interaction, and especially about harnessing the power of technologies such as

artificial intelligence to augment human capabilities rather than to supplant
them. Although Winograd has nothing against powerful algorithms, he wants
them to reflect and incorporate the complexity of being in the world, of being
human and using language.
Indeed, few people have been as important in the development of our
hyperconnected, smart-machine world as Terry Winograd. As a graduate student
at MIT in the late 1960s, Winograd wrote one of the seminal programs in the
emerging discipline of artificial intelligence. But after he moved to California
110 and became more deeply immersed in philosophy and the real-world experience
of machines, Winograd reached a conclusion that marked him as something
of an apostate. Intelligence wasn’t simply a matter of pattern recognition and
processing data; it involved being and existing. And as a result, computers alone
couldn’t possess true intelligence. The proper role of artificial intelligence was
therefore to help humans live more fully human lives, not to replace them. He
became, in the words of historian and New York Times technology writer John
Markoff, “the first high-profile deserter from the world of AI.”
In a remarkably fruitful career that has spanned four decades, the “deserter”
founded Stanford University’s graduate program in human–computer interaction,

created programs in symbolic systems and liberation technology, and, with
David Kelley of IDEO and colleagues in several departments of the engineering
and business schools, cofounded the Hasso Plattner Institute of Design at
Stanford, better known as the d.school. Along the way, he became the advisor
of choice for second-generation Silicon Valley. A classic Fortune magazine cover
shows Larry Page with a broad smile and the caption, “The Best Advice I Ever
Got.” That was Winograd’s suggestion that he work on Web search. Hoffman
credits Winograd with steering him down the path that led to the founding of
LinkedIn. Countless other successful engineers and entrepreneurs credit him as
a mentor nonpareil. Mike Krieger, for example, the chief technology officer and
cofounder of Instagram, was a Winograd advisee, as was Sean White, who heads
up technology strategy for Mozilla.
“I’m often asked what the strongest thing about Stanford University is,
and the answer is the students it attracts,” Winograd says. “The reputation gets
feature technology
people here who are going to do big things whether you meet them or not. My
whole concept is to understand the context, not how you write the algorithm.
Think about the people, not the technology.”
Since its inception, AI’s development has traced a sine wave, with peaks of
achievement and elation followed by troughs of stasis and despair. In the so-
called AI winter of the mid-1980s, when I started writing about technology for
the New York Times, my editors wanted only stories about why AI had failed.
Now, as headlines hype self-driving cars, robotic surgery, and sex droids, it’s
springtime for AI again. Funding in AI startups more than quadrupled between
2011 and 2015, to US$681 million from $145 million, and it could reach $1.2 111
billion in 2016, according to CB Insights. An anti-AI backlash is also under
way; multiple new books are predicting a dystopic jobless future, and even
celebrity techies such as Tesla founder Elon Musk are warning that AI could be
the greatest danger facing humanity.
Winograd’s calm, grandfatherly demeanor is a welcome respite in this
overheated milieu. Soft-spoken, with a halo of white curls around a friendly
face, Winograd is less Han or Luke, Darth or Obi-Wan — more Yoda. He has
authority and understands how things work at the most fundamental bits and
bytes level, but is neither thrilled nor overly concerned about AI’s potential. AI
could do a few things in the 1970s, and it can do more things now, but it is still
up to humanity whether AI will be a force for good or ill.
Winograd is neither thrilled nor
overly concerned about AI’s potential.
It is up to humanity whether AI will
be a force for good or ill.
Understanding Natural Language

In a lecture about human–computer interaction, or HCI, Winograd shows a slide of
feature technology
a researcher operating a replica of the Babbage Engine. The mechanical calculating

machine built in London in the early 1800s is widely considered the first computer,
even though Charles Babbage’s original prototype never worked properly. In the
photo, the researcher has his hands deep in the guts of the working replica, which
weighs five tons and has more than 8,000 parts. This is visceral HCI.
Winograd flashes forward to a picture of the first computer he ever touched,
a Control Data Corporation 160, which he encountered as one of the few math
majors at Colorado College in the 1960s. It was about the size of a desk, small
for its day, and Winograd’s interaction with it was nearly as physical as that
112 of the Babbage operator. “I wrote a program for it, along the way reinventing
various wheels that I didn’t know existed in computing,” he recalls. “I literally
programmed it by pushing the console buttons; I didn’t know they had
assemblers,” programs that convert basic computer instructions into a pattern of
bits that the computer’s processor can use.
Winograd’s father had a B.S. in electrical engineering, though he made his
living in the steel business, and his mother was a “civically involved” homemaker
who went back to college in the late 1960s to get a degree in sociology. Growing
up in Greeley, Colo., Winograd was interested in science, technology, math,
and tinkering. “I did things like building a Heathkit amplifier and hooking up
a Model T coil to doorknobs to shock my brothers.” His high school science
project was designing and building a primitive computer.
After graduating in 1966, Winograd received a Fulbright scholarship and
pursued his other interest, language, earning a master’s degree in linguistics at
University College London. He applied to MIT, where Marvin Minsky had built
one of the hubs of artificial intelligence — the then fanciful idea that a machine
could mimic human cognition, by learning and solving problems that appeared
to require conscious thought. MIT was also then home to Noam Chomsky,
who posited a privileged place for language — and linguistics — as the key to a
true science of human cognition, stemming from a structurally unique language
faculty that could not be reduced to general intelligence.
The Minsky and Chomsky camps had little to say each other. And although
Winograd’s mix of interests might have made him a bridge between these two
shores, it was not to be. “I took one class from Chomsky, and he flunked me,”
feature technology
Winograd recalls. “If you told his people you were from AI, they would walk
away from you.”
Winograd soon became a star of the AI department, working directly with
Minsky and Seymour Papert, coinventor of the Logo programming language, an
early tool to help children think and solve problems. He claimed his place in the
firmament when he developed SHRDLU, which allowed a user to interact with
a computer using natural language. The name came from ETAOIN SHRDLU,
the first line of keys on a linotype machine. A typical SHRDLU exchange looked
like this:
PERSON: Pick up a big red block. 113
COMPUTER: OK.
PERSON: Grasp the pyramid.
COMPUTER: I don’t understand that pyramid you mean.
PERSON (changing his mind): Find a block which is taller than the one
you are holding and put it into the box.
COMPUTER: By “it,” I assume you mean the block that is taller than the one
I am holding.
PERSON: What does the box contain?
COMPUTER: The blue pyramid and the blue block.
PERSON: What is the pyramid supported by?
COMPUTER: The box.
PERSON: How many blocks are not in the box?
COMPUTER: Four of them.
PERSON: Is at least one of them narrower than the one which I told
you to pick up?
COMPUTER: Yes, the red cube.
PERSON: Is it supported?
COMPUTER: Yes, by the table.
PERSON: Can the table pick up blocks?
COMPUTER: No.
If that doesn’t seem very exciting, remember that in 1968 human–computer

interaction consisted of punched cards and printouts, with a long wait between
feature technology
input and output. To converse in real time, in English, albeit via teletype, seemed
magical, and Papert and Minsky trumpeted Winograd’s achievement. Their
stars rose too, and that same year, Minsky was a consultant on Stanley Kubrick’s
2001: A Space Odyssey, which featured natural language interaction with the
duplicitous computer HAL.
Inevitably, there was a backlash. Some computer scientists said SHRDLU’s
parameters were so narrow that it was a leap too far to call it intelligent. SHRDLU
“was just very constrained; there were very few words you could use,” says Ben
Shneiderman, a professor of computer science at the University of Maryland. “It
114 had the illusion of broader capabilities, but it was really restricted to just a few
words and concepts. It had that usual aspect of demos where what you see is very
good and you assume it can do a lot more, but it doesn’t.”
Nowadays, Winograd calls that “a perfectly legitimate critique.” But
Minsky and Papert brooked no criticism. Minsky had already announced,
“Within a generation, the problem of creating ‘artificial intelligence’ will be
significantly solved,” and held up SHRDLU as an example. The narrow domain
of SHRDLU and other early AI programs constituted “micro worlds,” Minsky
and Papert wrote. And although there would be many micro worlds, a computer
with enough memory and processing power could understand them all.
The most scathing critique came from an unexpected quarter: Hubert
Dreyfus, a philosopher and Heidegger scholar, who had recently left MIT
for the University of California at Berkeley. In a series of papers and books,
Dreyfus blasted AI research in general and SHRDLU in particular for a grave
misrepresentation of the very nature of understanding. He pointed out that the
programs had repeatedly failed to understand simple children’s stories.
“The programs lacked the common sense of a four-year-old, and no one
knew how to give them the background knowledge necessary for understanding
even the simplest stories,” Dreyfus wrote in What Computers Still Can’t Do: A
Critique of Artificial Reason (MIT Press, 1972). “An old rationalist dream was at
the heart of the problem. GOFAI [good, old-fashioned artificial intelligence] is
based on the Cartesian idea that all understanding consists in forming and using
appropriate symbolic representations.”
Dreyfus, then dubbed the Dark Knight of AI, said his study of philosophers
feature technology
such as Heidegger, Maurice Merleau-Ponty, and, later, Ludwig Wittgenstein
supported his intuition that the symbolic representation and micro worlds of early
AI would inevitably fail. He was correct in that prediction; today’s successful AI
programs use different technology. But he probably couldn’t have predicted that
he and Terry Winograd would later become friends.
Understanding Computers and Cognition

In the early 1970s, the three loci of artificial intelligence development were
Carnegie Mellon, where Herbert Simon and Allen Newell invented the field in
the 1950s; MIT, where Minsky and Papert held sway; and Stanford, where John 115
McCarthy created SAIL, the Stanford Artificial Intelligence Laboratory, in the
foothills behind the university. The three labs had very different approaches,
reflecting their founders’ different mind-sets. “Simon at Carnegie had received
a Nobel for economics, Newell had done research in cognitive psychology, and
they had the idea that AI would enable understanding of human cognition,”
Winograd recalls. “McCarthy at Stanford was a mathematician. His view was
that intelligence was basically a kind of logic. MIT was the realm of the hackers.
Minksy’s idea of intelligence was that it was just a lot of bits and pieces of code
that evolution has hacked together over the years.”
Winograd left MIT for Stanford in 1973. His wife, Carol, had just
completed her medical degree and landed a residence at San Francisco General
Hospital. Stanford happened to have open a one-year position filling in for a
professor on leave who specialized in natural language. That professor never
returned; Winograd stayed for 40 years.
But it was the labs at the nearby Xerox PARC, the copier giant’s Palo Alto
Research Center, that fired Winograd’s imagination. “Stanford was a home,
Stanford was students, but it wasn’t really an intellectual center for what I was
doing,” Winograd says.
Those were heady times at PARC. The Xerox Alto, the first computer with a
graphical user interface, was launched in March 1973. Alan Kay had just published
a paper describing the Dynabook, the conceptual forerunner of today’s laptop
computers. Robert Metcalfe was developing Ethernet, which became the standard
for joining PCs in a network. Winograd, with characteristic self-effacing humor,
feature technology
says, “You know all those cool things invented at PARC? I didn’t work on those.”
He did work on KRL — knowledge representation language, a branch of AI
that incorporates findings from psychology about how humans solve problems
and represent knowledge. It didn’t go well, in part because the machines available
weren’t sufficiently powerful to do the necessary computing work.
But in 1976, Winograd met Fernando Flores, and his life changed. Flores has
that effect on people. A former minister of trade under Chile’s socialist president
Salvador Allende, Flores spent three years in prison following the coup led by
Augusto Pinochet in 1973. Plucked from the gulag by Amnesty International,
116 Flores landed in the computer science department at Stanford because one
of his rescuers had a position there. He had spent his prison years reading
philosophy books smuggled in by friends and family, and emerged steeped in
phenomenology, the study of the structures of experience and consciousness.
Flores and Winograd began attending a series of informal lunches at
Berkeley, led by Dreyfus and John Searle, another bête noire of the AI crowd, who
had published a famous takedown of Alan Turing’s test for artificial intelligence.
The conversations were wide-ranging, and no efforts at conversion were made,
but Winograd emerged from them with a new understanding of cognition as a
fundamentally biological phenomenon.

Winograd’s embrace of phenomenology pushed him toward a firmer grasp
of AI’s limitations. Winograd and Flores began work on a book — Understanding
feature technology
117
Computers and Cognition: A New Foundation for Design (Ablex). It took them 10
years to complete, but it has never been out of print since its publication in 1986
and is still earning rave reviews on Amazon, some presumably from readers not
yet born when it was written.
The book draws from three inspirations. The first was Heidegger’s
concept of cognition. Cognition, he declared, was not based on the systematic
manipulation of representations, but was an artifact of dasein, of being in the
world. The second inspiration came from the Chilean biologist and philosopher
Humberto Maturana, who had been among those smuggling books to Flores in
prison. In The Tree of Knowledge: The Biological Roots of Human Understanding
(New Science Library, 1987), Maturana and his coauthor, Francisco Varela,
made the case that cognition is not a representation of the world, but rather a
“bringing forth of the world through the process of living itself,” and that “we
have only the world that we can bring forth with others.”
The third inspiration was John Searle’s concept of speech acts, a theory
first articulated by Cambridge University professor J.L. Austin in a series of
lectures published posthumously in 1962 as How to Do Things with Words
feature technology
(Oxford/Clarendon Press). Winograd and Flores use speech act theory as

a starting point for an understanding of language as an act of social creation.
Foreshadowing a world to come of groupware and social media, they write that
most communication between individuals consists not of information, but of
prompts for action: requests, offers, assessments.
Understanding Computers and Cognition doesn’t really attempt to synthesize
these three big ideas. But it draws upon them to arrive at a conclusion that, at the
time it was published, read as heresy in certain circles: “We argue — contrary
to widespread current belief — that one cannot construct machines that either
118 exhibit or successfully model intelligent behavior.”
This was not an argument calculated to win favor at Stanford, where
McCarthy’s lab was an acknowledged world leader, heavily invested in the
standard approach to artificial intelligence. “Terry was, of course, the bad
boy,” recalls Hoffman of LinkedIn, who was then one of his students. “I had
conversations with John McCarthy at the time, where John [said], ‘You know,
Terry’s totally crazy, gone off the deep end, needs to be on his meds,’ etc.”
Putting the H in HCI

In his history of artificial intelligence, Machines of Loving Grace: The Quest for
Common Ground between Humans and Robots (HarperCollins, 2015), John
Markoff recounts the schism between the devotees of artificial intelligence, such
as Minsky, who quipped that robots would “keep us as pets,” and the community
of intelligence augmentation, IA, whose members believed that computers should
aid humanity, not supplant it. Foremost among the second group was Doug
Engelbart at Stanford Research Institute, inventor of the computer mouse and of
hypertext. Markoff sees Winograd as a critical link between AI and IA.
“Winograd,” Markoff writes, “chose to walk away from the [AI] field after
having created one of the defining software programs of the early artificial
intelligence era and has devoted the rest of his career to human-centered
feature technology
computing, or IA. He crossed over.”
But Winograd did not desert Stanford, his students, or the computer science
department. Instead, he collaborated with faculty from a surprisingly diverse set of
departments to create a new undergraduate major that combined engineering, the
social sciences, and humanities: symbolic systems. The program, still going strong
today, draws faculty from computer science, linguistics, philosophy, psychology,
communication, statistics, and education. Its students pursue various occupations,
including software design and applications, teaching and research, law, medicine,
and public service. Stanford being Stanford, many graduates create startups.
Hoffman, the eighth student to enroll in the symbolic systems major in 119
1987, says the program saved him from having to create his own major, because
grasping the confluence of computers, cognition, and communication called
for Winograd’s interdisciplinary approach. The program, and Hoffman’s
relationship with Winograd, shaped his life. “Terry, among other things, was
probably directly responsible for me going to Oxford,” Hoffman says. “I became
convinced that we didn’t understand what thought and language were, and that
I had to go study philosophy in order to do this. I also probably wouldn’t have
paid as much attention to human–computer interaction if it weren’t for Terry.
In my very first real job, I was a contractor in user experience at Apple. It came
from having given years of thought to how to do that well, from questions Terry
was asking.”
Although teaching has always been Winograd’s favorite role, he continually
pursued other endeavors. In the early 1980s, he wrote a textbook, Language as
a Cognitive Process: Syntax (Addison-Wesley, 1982). He cofounded Computer
Professionals for Social Responsibility, a group concerned about nuclear
weapons, the Reagan administration’s Strategic Defense Initiative, and increasing
participation by the U.S. Department of Defense in the field of computer science.
And he took a year’s leave to help Flores create a startup, Action Technologies.
In 1986, Action Technologies launched a program called the Coordinator
that organized office life in terms of speech acts. An email message had to be
explicitly labeled as a “request” or an “offer,” and a meeting added to employees’
electronic calendars would be termed a “conversation for action” or a “conversation
for possibilities,” depending on the intent. These actions were synchronized and
feature technology
linked across the network to facilitate scheduling and collaboration. Years ahead
of its time, the Coordinator attracted a loyal following and influenced many
subsequent groupware products, such as Lotus Notes.
“I became aware of the Coordinator, which to me was a real eye-opener, for
the idea of using interpersonal communication in a structured way,” says Mitch
Kapor, the founder of Lotus Development.
The Coordinator embodied Winograd’s human-centric approach. “He
anticipated and was an early leader in refocusing the attention of people in
computing professionally away from engineering and algorithms to taking up
120 questions of how do computers serve humans well, or don’t,” Kapor says.
With the launch of the Macintosh, and Microsoft’s 1990 release of
Windows 3.0, PCs spread beyond the original core of technology professionals
and hobbyists. The term user-friendly entered the lexicon, and the look and feel
of a software program suddenly mattered. The book Winograd edited in 1996,
Bringing Design to Software (ACM Press), became a go-to text for developers.
During the same period, human–computer interaction began to evolve from
the undertaking of a loose community of like-minded computer scientists to an
academic discipline. HCI encompassed cognitive science, cognitive psychology,
artificial intelligence, linguistics, cognitive anthropology, and philosophy

of mind, a match for Winograd’s diverse preoccupations. He helped create
Stanford’s HCI program in 1991.
Larry Page brought Winograd at least
10 different ideas for a dissertation
topic, including self-driving cars and
telepresence, both of which Google is
now pursuing quite seriously.
“I really wanted to start at the master’s level,” says Winograd. “[The HCI
program] was always much more oriented toward people going out and doing
feature technology
good jobs as opposed to the next big research thing. Students had realized that
understanding something about how people used computers was going to be
valuable in their jobs. I also had a few Ph.D. students.”
Downloading the Web

One of Winograd’s Ph.D. students was Larry Page. Page’s parents were both in
computer science, and he had actually met Winograd for the first time when he
was 7 years old. They spoke again years later when Page was choosing between
Stanford’s Ph.D. program and those of other universities.
“I had sort of researched all the people I could work with and I was surprised 121
that there was basically nobody else in the world who I wanted to work with
besides Terry,” Page said at the 20th anniversary celebration of Stanford’s HCI
program. “He was a really solid computer scientist, he understood that side —
but he also had a great passion around something that I wanted to work on that
I thought was very important, which was HCI, something almost nobody else
seemed to get. I think that’s still true. I’m amazed that people think computers
are about computers and not about people.”
Page brought Winograd at least 10 different ideas for a dissertation topic,
including self-driving cars and telepresence, both of which Google is now
pursuing quite seriously. But both were beyond the resources of a graduate
student, no matter how talented. Then Page got interested in search.
“At some point I woke up and I decided it would be easy, really easy, to
download the Web, the entire Web, and just keep the links,” Page recalls. “Terry
feature technology
said, ‘Yeah, that’s a good one, go and do that.’… I’m very indebted to him.”
Characteristically, Winograd downplays his role, even though his is the
third name, after Page and Google cofounder Sergey Brin, on the academic
paper describing PageRank, the algorithm behind Google search. Unlike
previous search engines, such as Alta-Vista, PageRank based its results not only
on internal references to the search term, but also on links from other sites,
created by humans using the content. The more links to a site people had built,
the more relevant it probably was, much the way academic papers’ ratings are
based on the number of times they are cited in other papers.
122 “Page and Brin were academic kids,” Winograd says. “They knew about
academia even before they became Ph.D. students. So this idea of citations was in
the back of their heads. The fact is that it wasn’t a very good dissertation project,
but I said ‘Give it a try. I don’t see how you’ll turn this into a dissertation.’”
Page never did make a dissertation out of it. But he did create one of
the world’s most valuable companies — Alphabet, Google’s parent, is worth
more than $500 billion — as well as what Markoff calls the most significant
“augmentation” tool in history. Page has often made time to lecture Winograd’s
HCI classes. After one seminar, in 2000, Winograd suggested they collaborate
on a book. Page quickly agreed and asked Winograd to take a year’s sabbatical
to come work at Google.
Instead of working on a book, Winograd joined Google’s design team,
a small group led by Marissa Mayer, then a fresh Stanford graduate. Among
various projects, he worked on Caribou, which became Gmail, now the most
used free email service in the world. He also became advisor to the company’s
associate product managers, or APMs, as Google calls its new recruits. “I had half
a dozen, maybe more, over time, basically grad students at Google,” Winograd
recalls. “It was another opportunity to mentor, and I still have good relationships
with a lot of them. They’ve done very well.”
So has Winograd. Half of his compensation at Google was in company
feature technology
shares, and the result has given Winograd and his wife the resources to donate
generously to political campaigns and philanthropies that they care about. Many
of these organizations are involved in forging peace between Israel and Palestine.
The Three Myths of AI

Winograd has no high-profile piece of technology to point to. In an age of
software, it makes sense that his contributions are less tangible. He says his
world view is most visible in Google’s many applications, not so much from his
relatively brief tenure, but from the hundreds of his former students who work
there. Many of them, he argues, have internalized his assumption that technology 123
shouldn’t just work on its own, but that it should work for and with people.
“What are you producing for the person who’s using your system?”
Winograd asks. “How do they experience it, not just in the sense of what do they
see on the screen and so on, but what is the world you are creating that they’re
then entering into by interacting with a device? Being conscious about that and
then asking questions about what works and what doesn’t work is such a different
point of view from the standard engineering approach to building interfaces.”
Heidegger used the term readiness-to-hand, and the example of a hammer.
When you are hammering successfully, the hammer withdraws from your
conscious awareness; it becomes transparent. Winograd uses the term fluency.
When you speak your own language or are truly fluent in another, you don’t
Winograd has no high-profile
piece of technology to point to.
His world view is most visible in
Google’s many applications.
think about nouns, verbs, and tenses, you just speak. He aspires to that kind of
transparency in HCI, and it’s not one size fits all. The keyboard interaction is
feature technology
still best for email, and the touch interaction of smartphones may be better for
other things, such as finding a hookup on Tinder.
Smartphone interaction is evolving, as voice- controlled AI “assistants” —
for example, Apple’s Siri and Microsoft’s Cortana — augment the touch-based
interface. Winograd’s influence shows here as well. Even 20 years ago, he was
demonstrating multimodal systems that combined huge screens with voice and
physical manipulation.
“Siri is so often used as an example of AI today and progress, and maybe
to some extent it kick-started this latest AI revolution, the ‘AI Spring,’” says
124 Adam Cheyer, who developed Siri and is now chief architect of Viv, a second-
generation digital assistant. “To me, Siri’s emphasis was purposely on the human
augmentation side. Terry’s journey, from AI to IA, got me thinking maybe this is
the right side to be on. Even in the very first version of Siri, there were elements
of what Terry was working on at that time.”
Isaac Asimov first postulated his three fundamental “rules of robotics” in
a 1941 short story, “Runaround,” which was set in 2015: “One, a robot may
not injure a human being, or, through inaction, allow a human being to come
to harm. Two, a robot must obey the orders given it by human beings except
where such orders would conflict with the First Law. Three, a robot must protect
its own existence as long as such protection does not conflict with the First or
Second Law.”
Seventy-five years later, it seems to many that we are inhabiting a world
of Asimov’s creation. Amid the startling real-world development, and the
sometimes fanciful, sometimes apocalyptic musings of today’s futurists, it often
seems as if software is eating the world and the machines are ascendant. Amid
this gold rush, Winograd notes that three old myths have resurfaced: Robots
will take our jobs; robotic sex will become a substitute for human intimacy; and
(the big one) artificial intelligence will take over.
Winograd dismisses the first as simple Luddism and accepts the second as
inevitable — “the robotics industry will find a market in robotic sex toys” —
but he has a more nuanced view of the third myth. Our fate, he argues, relies less
on machines and more on ourselves.
“The worry should be that we are choosing to give control to systems that
feature technology
don’t have human wisdom, human judgment,” he says. “We’re putting them
into our infrastructure in a way which loses our control. It’s not because of the
malevolent computers. It’s because we’ve decided we’re not going to bother. It’s
more efficient to let the computer do it. Some examples are very mundane, like
who gets loans. The algorithm decides who gets a loan. Are there any human
considerations? Well, whatever was put in the algorithm. But then once that
happens, you lose it. You don’t have a person in the loop.”
Whether it is perfecting the Google search algorithm or devising ways to
more fully connect autistic individuals with their peers, Terry Winograd is still
striving to ensure that people remain present in the infinite loop of code. + 125
Reprint No. 17110
Resources
Hubert Dreyfus, What Computers Still Can’t Do: A Critique of Artificial Reason (MIT Press, 1972): A philosopher’s early skepticism of AI.
Lawrence M. Fisher, “Fernando Flores Wants to Make You an Offer,” s+b, Nov. 24, 2009: Deeply reported profile of Winograd’s mentor and coauthor.
Sally Helgesen, “Hugh Herr Wants to Build a More Perfect Human,” s+b, Oct. 3, 2016: A pioneering scientist regards the body as a new platform for
human–computer interaction.
Ray Kurzweil, The Singularity Is Near: When Humans Transcend Biology (Penguin, 2006): Optimistic manifesto arguing that the future of human–
computer interaction will be an effective merger of human and machine.
John Markoff, Machines of Loving Grace: The Quest for Common Ground between Humans and Robots (HarperCollins, 2015): Wide-ranging history of
artificial intelligence by veteran New York Times reporter.
Terry Winograd and Fernando Flores, Understanding Computers and Cognition: A New Foundation for Design (Ablex, 1986): Early and enduring treatise
on how computers relate to human behavior.
More thought leadership on this topic: strategy-business.com/technology
THOUGHT LEADER
The Thought
Leader Interview:
Bill Ruh
During the next few years, says GE
Digital’s leader, the Industrial Internet
will turn every company into a digitally
empowered enterprise.
BY ART KLEINER
thought leader
Photograph by Matthew Septimus
126
A
ccording to Bill Ruh, the underpinnings of our industrial society
will be profoundly changed by 2020. Every form of large-scale
machinery will be suffused with sensors and software controls, all
more and more interoperable. Increasing productivity, raising profits,
eliminating waste, ensuring environmental quality, and improving manufacturing
processes will all be automated activities, functions of a kind of ghost in the
machine. There will be at least 1 billion more digital electric power meters than
there were in 2015; more than 100 million lightbulbs will be connected to the
Internet, turned on and off by sensor or smartphone; and machines produced by
just one company, GE, will generate a million terabytes of data per day, much of
it in the form of operational statistics that adjust machines to make them more
efficient every day they are in use.
Whereas Northwestern University economist Robert Gordon argues that
productivity growth is fated for a permanent slowdown, and MIT’s Erik
Brynjolfsson expects automation to erode employment even if productivity
recovers, Ruh sees himself as a productivity activist. He is building the software
and hardware platforms that will take industrial technologies into a new,
prosperous stage of development.
GE, of course, has been at the forefront of technological change since it was
created in 1892 through the merger of Thomas Edison’s and Charles Coffin’s
electric companies, supported by financier J.P. Morgan. After embracing financial-
services and media businesses in the 1980s and 1990s under CEO Jack Welch,
and then retreating from them after Jeffrey Immelt took over in 2001, the company
has gradually reshaped its identity around the industrial platforms it maintains as
thought leader
a maker of turbines, jet engines, power systems, and healthcare equipment. Because
platforms of this sort are rapidly evolving to incorporate sensors, data analytics,
and Internet connections, GE is redefining itself as a producer of software-driven
offerings — or, as Immelt puts it, “a top 10 software company by 2020.”
Ruh was hired in 2011 to oversee GE’s digital strategy. As chief digital officer
for GE, he was in charge of embedding software-oriented technologies and
practices throughout the company’s operations and product lines. (Before 2011,
he had been vice president at Cisco Systems, in charge of advanced services and
solutions.) Although he has never been the company’s chief information officer
127
Art Kleiner John Sviokla
kleiner_art@ john.sviokla@pwc.com
strategy-business.com is a principal with PwC
is editor-in-chief of US and its marketing
strategy+business. leader. He is the
coauthor of The Self-
Made Billionaire Effect:
How Extreme Producers
Create Massive Value
(with Mitch Cohen;
Portfolio, 2014).
(that role is currently held by Jim Fowler), he works with the IT departments,
strategists, and senior leaders throughout GE to reinvent the company’s
technological practices from the inside out.
In September 2015, Ruh’s purview expanded when he also became the head
of GE Digital, a new division that, like Amazon’s cloud services, is building a
business for customers from the capabilities originally reserved for GE itself. The
endeavor is focused on what GE calls the “Industrial Internet” — the tight
integration of the physical and digital worlds, enabled by embedded computer
intelligence, connected devices (as in the Internet of Things), and sophisticated
data analytics. GE Digital now includes the company’s software development
services, its industrial security business, and Predix — an operating system and
platform for industrial applications. (GE Digital has also launched an Industrial
Internet alliance with this magazine’s publisher, PwC; see www.pwc.com/
gedigital for more information.)
thought leader
Ruh sat down with strategy+business at his office in San Ramon, Calif., just
outside Silicon Valley. The conversation covered not just the lessons emerging
from GE’s own businesses, but the productivity and progress available as the “big
iron” of industrial technology shifts to “big electron.”
S+B: What was the origin of GE Digital?

RUH: It started with our interest in increasing our customers’ productivity through
the equipment and services we sell them. Up through around 2010, most
companies enjoyed a relatively high rate of productivity growth. This meant that
128
their top-line versus bottom-line ratios were increasing at 4 percent per year on
average. Then, in 2011, that productivity growth rate dropped. You could attribute
this to slowing GDP growth and higher oil prices, but perhaps the biggest factor
was the decline of process innovation. It could no longer generate the major
productivity gains that it once did.
We asked ourselves: Where will the next great leap come from, to again
provide productivity gains in industrial firms? The answer was digital technology
— specifically, analytics. We live in a data-rich world. If we can organize that
data effectively and look for patterns of behavior that an unaided human being
couldn’t see, we could drive productivity
“In the industrial company gains that couldn’t be had before.
of the future, there However, that means you can’t
keep IT separate from the rest of the
won’t be a separate IT
business. The days when you could say,
department. Top leaders
thought leader
“Here’s my tech guy, go talk to him,”
will understand digital are over. In the industrial company of
innovation.” the future, there won’t be a separate IT
department. Top leaders will under-
stand digital innovation in the same way they understand finance and accounting
today. They will design digital technology into their products and their practices.
This is a profound change from where we were even five years ago — in the kinds
of leaders we have, their backgrounds and training, and how they look at
themselves, their people, and their products.
129
S+B: Are you talking just about GE, or about a broader group of businesses?
RUH: It’s broad. It reflects the nature of competition today. The consumer-facing
industries, for example, are being completely remade by startups with deep digital
talent. The startups can rethink the taxi, hotel, or music business at a faster rate
than the traditionalists who have zero digital background. The traditional
companies can only compete by embedding digital inside everything they do.
S+B: What does that competition look like?

RUH: Take Uber or Lyft. Conventional taxi firms could have invented the same
technology. You would think they would do it better, because they own the asset
— the automobiles. But owning an asset in itself isn’t enough. You have to figure
out how to get more productivity out of it than anyone else can. That’s what the
ride-sharing services did; they got more productivity out of the cars and drivers.
If you’re an asset-rich company, like a taxicab firm, or GE for that matter, then
shame on you if you can’t provide the greatest productivity for that asset.
Sooner or later, someone will figure out how to make power plants more
productive using software. It ought to be the industrial firms that own the plants,
because they understand the operations better. But some other type of company
might beat them to it.
S+B: Have any examples of digital productivity particularly impressed you?

RUH: In 2013, we launched a digital analytics capability called PowerUp for wind
energy. By optimizing each blade for the wind it was receiving, the software
could get 5 percent more electricity out of a wind turbine. That’s profound,
thought leader
because 5 percent more electricity generated equals 20 percent more profit for the
wind farm owner. And it’s been improved further — to 20 percent more electricity,
with the same hardware.
Similarly, for a North American railroad, we enabled a one mile per hour
average increase in locomotive performance. For the railroad, that was equal to
US$200 million in added profit each year. You can use similar analytics to boost
fuel productivity for an airline or a power utility; this is game-changing for them.
In general, if we can obtain operating information from industrial assets,
develop analytics based on our knowledge of how these assets perform, and
130
provide insight on the fly, we think we can get productivity growth in the
industrial world back to 4 percent. Maybe higher, because technology like this
can get more out of the industrial asset base than anybody ever has.
S+B: Do you see this as a one-time leap, or are you creating a platform for
ongoing productivity gains?
RUH: This is a great question to think about, and it’s not fully answerable today.
Fifteen years ago, many IT professionals thought, “If we had a good ERP
application, we’d be done. Our businesses are perfect.” Then came smartphones.
We’re going to end up in an
“We’re going to end up in industrial world where nothing ever
breaks, because it’s fixed first; where no
an industrial world where
individual in an industrial setting is put
nothing ever breaks, in harm’s way; and where the efficiency
because it’s fixed first.”
thought leader
of resources is close to perfect. That
won’t happen all at once; we’ll see a 30-
year progression through little apps that, when strung together, optimize the three
vectors of growth, safety, and efficiency, in ways we hadn’t thought about before.
In a sense, this is the digitization of everything that people like [quality
pioneer] W. Edwards Deming talked about: the use of better management
systems to build quality and productivity into products. Except now, in addition
to training people to continuously improve systems, we’re building continuous
improvement into the technology.
131
We’re also going to change the way we design products. When a product is
used, operational data will go right back to engineering and R&D. The engineers
will change products at a faster rate because their designs will go right into
manufacturing. With additive manufacturing [3D printers and digital fabrication],
we’ll be able to enhance products at rates we couldn’t before. Those are
foundational changes.
S+B: Is that the rationale behind Predix?

RUH: It is. We think of the Predix platform as an ecosystem where everyone can
develop B2B apps for the Industrial Internet market. And of course, we’re in the
early stages — similar to where Amazon Web Services was in 2007, driving the
consumer Internet, or where Salesforce.com was in pioneering software-as-a-
service in the early 2000s. We’re early on in rethinking this industrial world and
trying to bring it to a new place.
“Great strategies
are like children:
thought leader
You never love

someone else’s as
much as you love
your own.”
Ken Favaro
Why Popular Strategies
Always Fade
Visit strategy-business.com for a

daily dose of the best ideas in business.
132
S+B: How do you expect to do this?
RUH: We are following the example of the consumer Internet. There’s a lot to
learn there. The consumer Internet has foundationally changed daily life; it has
made people much more productive as individuals. It has done this, in part, by
having a great user experience evolve from day-to-day practices. It does this with
data analytics–based modeling, which simulates interactions among elements of
a computer system — for instance, in a search engine.
The Industrial Internet has an additional core approach that doesn’t exist in
the consumer world. It is the idea of physics-based modeling. All assets —
buildings, vehicles, fleets, even financial assets — have physical properties.
Physics-based modeling simulates the behavior of plants, generators, engines, and
other tangible assets. The Industrial Internet, or Industry 4.0, as some call it, is
powered by data analytics–based and physics-based models coming together.
Data analytics–based modeling allows you to look at patterns of behavior
“When the emotional energy

of a team is reinforced through a
few clear practices, the team
continues to develop its mastery
and mutual commitment.”
Jon Katzenbach
Great Teams Build
Great Cultures
thought leader
Visit strategy-business.com for a

daily dose of the best ideas in business.
133
and act on them earlier than you would otherwise. For example, it can recognize
when there is a high probability that a part is going to break. A machine may be
within its operational parameters but the coupling of two or three indicators —
one type of vibration along with a particular type of stress or environmental
condition — suggests that it could break earlier than you might expect. Analyzing
the past allows you to predict future behavior.
Physics-based modeling gives you options for that future. Having discerned,
through analytics, that the machine may be vulnerable, you now have choices.
Should you take it out of service now to fix it? Or could you put it into maintenance
that is already scheduled for later that night? With a cloud-based, physics-based
model, you can run a million scenarios simultaneously and pick one that is optimized
for what you’re trying to accomplish. When you combine analytic processes and
physics-based modeling, you can have that happen automatically. That’s a feature
of the Industrial Internet that usually doesn’t appear on the consumer side.
S+B: Except when my car tells me I have 104 miles to go before I run out of gas,
based on its estimates of my mileage and gasoline supply. That’s analytics-
based modeling, isn’t it?
RUH: Yes, but I’d take the example a step further. When an electronic automobile
dashboard tells you to replace your oil at 6,000 miles, that is done with basic
analytics-based modeling. Based on analysis of past performance, it picks an oil
replacement schedule that is best for the average person.
The problem is that everybody drives differently. Some conservative drivers
could wait 10,000 miles to replace their oil, and that delay would make the asset
thought leader
more efficient. Others probably should replace it at 3,000 miles. And if you
operate in a very hot, harsh environment, that plays into it as well. The decision
about when to change your oil should not be based on averages. You want to use
physics-based modeling to figure out the optimal schedule for you.
This is exactly how we maintain jet aircraft engines. Not every jet aircraft
engine needs to operate on a fixed schedule. In fact, we now tailor the maintenance
process to every engine, using physics-based modeling. Engines that operate in a
hot, harsh, dusty Middle East environment are maintained differently than those
in colder climates.
134
With the combination of analytics-based and physics-based modeling, we
can predict a problem before it occurs and allow you to maintain it at the optimal
rate and cost. This is becoming a killer application for the industrial world. For
example, if I can anticipate that a pipeline oil leak or jet engine malfunction is
likely, I can fix the problem before it occurs. I still can’t predict a nail puncturing
a tire, but I can predict a blowout related to ongoing stress on the tire.
I can also make every process
“I can make every more efficient in its use of resources, as
process more efficient PowerUp does with wind turbines.
This is groundbreaking: I’m constantly
in its use of resources.
adjusting the control systems in real
I’m adjusting the control time to match the system’s environment
systems in real time to at that exact moment.
match the environment.” Again, this cannot be accomplished
thought leader
just from the IT department. The
digital experts who work there have a role to play, but not in isolation. They have
to be close to the business, and business leaders need more digital acumen. When
those two ways of thinking are combined, magic occurs.
S+B: What specific skills do IT people need to operate this way?

RUH: In the traditional industrial world, the IT function has focused on
infrastructure. Put in a network, build a data center, set up an ERP system. We
have been oriented toward transactions. This doesn’t require business leaders to
135
have much digital insight. They can say to their IT staff, “Automate this for me.”
That’s going to change. Industrial firms will have to develop the orientation
to user experience that you see on the consumer Internet, or at Google and Apple.
Business intelligence [the analysis of your own business processes and those of
competitors] will have to move forward from being just a reporting capability to
having hard-core data analytics that help you continuously improve systems and
practices. And we’ll have to change from an on-premises ERP approach to a
mobile-friendly, cloud-based world, giving people access to business systems
through smartphone apps.
When you look at these capabilities in combination, you see that they require
a new set of skills and practices. Silicon Valley–style skills — like agile software
development, user experience design, and deep machine learning — are not
common in traditional industrial firms. The mechanical and electrical engineers
who manage the IT functions at many companies are great at physics-based
modeling, but less great at, say, artificial intelligence. They also use legacy
development tools that are not necessarily in tune with where the cloud-based
mobile world is going.
So a retooling of technological skills and practices often has to take place. At
GE, we are going through that retooling now. It doesn’t mean getting rid of all
the capabilities we have, because we’re still working with ERPs and other legacy
systems. But we have to balance that old talent with new, and make both groups
work together in an integrated whole.
S+B: What are you discovering about recruiting, developing, and managing this
thought leader
new talent?
RUH: In the beginning, many GE people were skeptical. Why would talented
people come here instead of to a startup? Everybody wants to work in a startup,
right? And there was some truth to that.
But young people are coming to work for us for two reasons. They want to
work on the most advanced technology in the world, and that’s often the
technology of industrial systems. And they want to have a mission in life. Their
greatest ambition is to work on something that’s important. For us, that mission
is the Industrial Internet. We’re making rail travel safer when we design software
136
into locomotives; we’re helping healthcare deliver when we build new CT scanners.
It’s a great story to be able to tell their grandparents — that they have an effect
on transportation and healthcare. It can be easier to explain than gaming and
social networking, and they can take pride in the fact that they’re changing the
world. That’s why the Industrial Internet of Things is the next big thing.
S+B: How do you design an Industrial Internet project?

RUH: The cornerstone is always the same, whether it is a thermostat or a jet
aircraft engine. You have to have some form of connectivity. You will have to
collect performance data. You’ll need both analytics- and physics-based modeling
— not just to analyze the data, but to deliver it to a machine to improve its
performance, or to a person to improve the performance of the system.
You’ll also need to secure your assets against cyber-attack. When a thermostat
doesn’t work, it’s a nuisance. When an electric grid goes down because of a
cyber-attack, you can lose society. For reliability’s sake, not everything can run in
the cloud. A significant amount of processing must take place close to the activity.
We’re going to see an enormous amount of computer processing take place right
next to industrial activity, so that there isn’t concern about being disconnected.
Every power plant will become a big data center that generates electricity. Every
locomotive will be a data center on wheels.
S+B: How do you navigate the regulatory issues?

RUH: There are complicated relationships with national governments. They
don’t want to see industrial data leave their boundaries. This has huge
thought leader
implications. Many multinational companies have cloud-based activities
around the world, in Saudi Arabia, China, and the European Union. We will
probably see the separation of data and processing; technology may be managed
by a global infrastructure while countries retain sovereignty over their
management of data.
This won’t work for the consumer Internet. Data and processing are tightly
coupled and you lose the necessary economies of scale if you try to put a data
center and cloud in every country. I think the regulators will recognize this and
demand that local data be protected while companies retain the advantages of
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global operations. This affects the design of systems like Predix.
GE operates in more than 170 countries, and we understand all of their
regulatory environments. That is why the power utility industry, for example, is
so diverse; conditions are very different in, say, the United States versus Brazil
versus Dubai versus Thailand.
At the same time, the regulatory environment itself will be fundamentally
affected by the emerging approach to data. When there is an increase in the
amount and accuracy of insight into operations, regulators can report out more
completely and still reduce the cost of oversight. Security will be increasingly
important. Protecting an operational technology is a totally different game from
protecting an information system. We will see new types of cybersecurity emerge
as a result, to protect large installations like power plants and railroads.
S+B: Of course, you’re not the only company building a platform for the
thought leader
Industrial Internet. Siemens is doing the same, and others will undoubtedly
follow. As these platforms connect together, how do you distinguish GE from
the competition?
RUH: In the next decade, success will be based on driving productivity. Whoever
can pump a barrel of oil at the lowest cost, or use less fuel to fly an airplane, or
gain more energy out of a turbine will have the competitive advantage. I think
manufacturers everywhere will rethink their operations costs. Going to a low-
wage country will no longer be productive; instead, the answer will be putting
manufacturing close to your customers, to reduce the cost of transportation, and
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investing in technology. As additive manufacturing advances, you’ll be able to
invest your capital costs with greater confidence, because your digital infrastructure
will allow you to be more flexible. The platforms that provide better productivity
will thrive. For example, the winning agricultural equipment companies will be
those that make farmers most productive. Gradually, companies will compete
less on productivity and more on their distinctive approach to analytics.
S+B: As the Industrial Internet rolls out, how do you think it will affect jobs and
economic growth?
RUH: Automation is at the center. One class of jobs will be displaced; that’s the
nature of manufacturing technology. Our company and many others are bringing
manufacturing jobs back to the United
“Our company and many States. But the new plants are much
more efficient than they were, say, 20
others are bringing
thought leader
years ago. So the jobs are different and
manufacturing jobs back require a different skill set. In the early
to the United States.” part of the 20th century, a lot of people
were employed taking care of horses
and cleaning up after them. Those jobs went away with the automobile, but other
jobs came in. I think this will happen again; it’s not going to be as dire as the
negativity suggests.
It’s still hard to predict what new jobs will come in this time, and in what
numbers. But there is a growing need for data science and world-class
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programming capabilities. The technical skill requirements will go up, even for
people without college degrees. People will have to know how to handle
automated machinery and work effectively with robots. Companies will have to
get really good at managing and training the technological workforce through
this transition.
S+B: How does this transition fit with the overall GE story?
RUH: I have the title of chief digital officer, but the real chief digital officer is
CEO Jeff Immelt. The core leadership team members at GE — including
Immelt, chief financial officer Jeff Bornstein, and chief marketing officer Beth
Comstock — are digital leaders. They have deep technological backgrounds
that they’ve developed over a number of years that allow them to understand
and make decisions in a way I couldn’t have imagined before I joined. They
place a value on learning and extending your own capability that extends
through the company.
As we’ve moved toward the Industrial Internet, we realized that we didn’t
have enough data scientists on staff. We have gone from about 20,000 professionals
in this area three years ago to about 28,000 today. But we didn’t bring in new
talent to displace our existing workforce.
We need to blend the old skills and “How do these new
new skills into an integrated whole. If software capabilities
you can’t bring your physics modeling
connect with our machines,
people together with your data
modeling people, you don’t get the full repair shops, services,
and manufacturing
thought leader
value of your workforce.

We’re about halfway through the facilities?”
integration of these skills. It involves
shifting our leadership training so that digital is an important part of every
program. We don’t expect everybody to be fluent in Python [a popular and
influential programming language], but we do expect them to understand what

Python is, what other technologies we’re using, why they’re important, and how
the technology affects their business.
We are also in the process of rethinking the role of IT in a company like
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GE — including the CIO’s job, the organizational structure of the IT department,
and the titles and capabilities of the staff. We still have to run networks, create
data centers, and provide ERP. But how does all of that combine with the new
deep analytics and insight that will drive our business? How do these new
software capabilities connect with our machines, repair shops, services, and
manufacturing facilities? How does it all affect our product portfolio? We’ve
grown our annual digital revenues from virtually nothing to more than $6
billion across the company. That’s a substantive change that has affected
everything we do.
Jeff Immelt says that we’re on step 15 of a 50-step journey. At any given
point, you can see three or four steps ahead in enough detail that you’re confident
of what you’re doing. You can plan out 10 steps, and you can articulate where you
want to be at step 50. But you can’t jump from step three to step 45 in one leap.
You’ve got to know what you can accomplish in the near term that will produce
results that give you confidence and allow you to see how to change your journey
to get to your end result in the right way.
S+B: What does all of this mean to you personally?

RUH: I’m like most of the people we’re hiring: We want to work on the best
technology, and to feel like we’re on a mission. I’m driven by the idea of working
on foundational changes. I’ve been watching the Internet of Things [IoT]
movement for a decade, and I took that mission as my own: to drive a new
platform architecture that leads to renaissance-like effects, with higher productivity,
zero unplanned downtime, greater safety, and a more livable world. I realized that
thought leader
to take hold, the IoT would have to shift from a technology sale — where people
buy it as the next stage of IT — to an outcome sale, where people buy it for
productivity and expanded opportunities.
When I was approached by GE’s executive recruiters, it made sense to join. I
could see that GE was the kind of company that, with the right investment and
leadership, could take this movement forward. Hokey as it sounds, I believe we
are on the verge of the next industrial revolution. And what better way to spend
the last 10 years of your career than helping that change take place? +
Reprint No. 17111
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Books in Brief
Women’s Work
by Jill Priluck
Earning It: Hard-Won Lessons from Trailblazing

Women at the Top of the Business World,
by Joann S. Lublin, HarperBusiness, 2016
W
hen General Motors CEO Mary Barra first worked as a
controls engineer at a GM plant in Pontiac, Mich., she was
responsible for ensuring that the factory was running properly.
Every time she walked past one corner of the floor, an
assembly worker whistled in her direction. One day she stared at him. “What are
you doing?” she asked. He said he was trying to attract her attention. Barra
books in brief
suggested that a better way to do so was to say hello. He stopped whistling.

The anecdote is one of many that pepper Earning It, by Joann S. Lublin. A
management news editor at the Wall Street Journal, the author interviewed 52
female corporate leaders about their experiences advancing in the corporate world
Illustration by Noma Bar
— a world in which women run just 4.2 percent of Standard & Poor’s top 500
companies. About two-thirds of the women included are present or past CEOs
of publicly traded companies. The list includes Denise Morrison of Campbell
Soup and Maggie Wilderotter of Frontier Communications, who were among
the first women to lead public companies; Carly Fiorina of Hewlett-Packard, the
142
first woman to run a Fortune 20 company; and Beth
Mooney of KeyCorp, the first woman to lead a top 20
commercial bank.
Part self-help, part historical record, Earning It is
filled with anecdotes that will not surprise any woman
who has worked at the helm of any group, department,
or division. Men who discriminate against, sabotage,
and, yes, help their female counterparts have been as
ubiquitous in C-suites and cubicles over the past
several decades as pod-based coffeemakers are today.
The book is a useful diagnostic tool for what ails
women in corporate America. Lublin’s interview
subjects endured unequal pay and opportunities, were held to different standards,
and faced sexual harassment. Coworkers asked them to prepare coffee, supervisors
kissed them on the lips, male peers earned 25 percent more at jobs with the same
or fewer responsibilities, and competitors undermined their authority. Lublin
shares how she herself helped crack the glass ceiling at the Wall Street Journal.
When she arrived as a young reporter in 1971, she was one of just 11 women in
the 150-member reporting and editing staff.
The book aims to be a road map for women who are launching careers,
pursuing promotions, and tackling assignments. Each chapter ends with bulleted
takeaway lessons for opening doors, getting picked, negotiating pay, juggling
family life, and managing men, among
The book aims to be a other topics. These are helpful to a
books in brief
degree. But it’s clear that business has
road map for women who
changed dramatically since women
are launching careers and like Barra and Fiorina began blazing
pursuing promotions. their trails through large corporate
bureaucracies two and three decades
ago. Companies are slimmed down and less centralized than they once were,
and career paths have become less linear. And there has been progress on some
of the issues Lublin highlights. For example, although pay inequality and work–
life balance are still big concerns, women are more likely to face men — and
143
other women — vying for the same opportunities than to be kissed against their
will at meetings.
Lublin particularly excels when addressing the slim ranks of women in
boardrooms. In the fall of 2015, more than four of every five directors at the 500
biggest companies were men (see “Trend Watch: Female Board Members on the
Rise,” page 40). Frontier’s Wilderotter recalls that she became a board member
of the National Cable Television Association (now the Internet and Television
Association) in 1987 only after soliciting 2,000 industry members for support.
Of her win, she said, “It was a little bit
Lublin particularly excels like the shot heard around the world.”
When Denise Morrison was running a
when addressing the
Nestlé unit’s financials and staff, it
slim ranks of women in took eight years to get her first
boardrooms. directorship because management
claimed they wanted an “active CEO.”
In 1997, when former Citigroup managing director Janet Clarke sought to
become the first woman on the board of a chemical company, she was asked —
illegally, as she noted — whether she planned to have children. Clarke opted not
to continue seeking the position, telling the chief executive that being the first
woman on the board “is not going to be a good fit.”
Husbands make an appearance in Lublin’s narratives as both champions
and challenges. The women in Earning It are caring for sick spouses, sidestepping
conflicts, or benefiting from co-parenting. And we see, up close, the challenges of
juggling work and family life. Outgoing Securities and Exchange Commission
books in brief
chair Mary Jo White recused herself from at least 10 probes into clients of Cravath,
Swaine & Moore because her husband was co-head of a practice at the firm.
Dawn Lepore was running Drugstore.com, which had US$456 million in sales,
and sat on the boards of eBay and the New York Times while caring for a daughter
in kindergarten and a son in third grade when her husband was diagnosed with
multiple myeloma and received a bone marrow transplant. “That was the hardest
time of my career,” she recalled. One day she burst into tears in front of a
Drugstore.com board member, and some female acquaintances berated her for
continuing to work. Her husband urged her not to quit.
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No book on women in the workplace would be complete without mentioning
physical appearance. Lublin devotes a chapter to “presence” that explores the
emphasis in corporate America on women’s looks, including a tale of a female
supervisor scolding an underling for wearing an outfit that revealed too much
cleavage. Barra’s response when she was ridiculed for wearing designer shoes is a
telling takeaway from Earning It. “That’s really not that important,” she said.
“Judge me on the results.” +
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
145
Buying Our Time
by Edward H. Baker
The Attention Merchants:

The Epic Scramble to Get Inside Our Heads,
by Tim Wu, Knopf, 2016
T
h o s e of us of a certain age may remember the early days of the
Web, when the great debate involved whether the Internet should
ever be commercialized. How naive we were! That debate was
resolved in about a nanosecond.
In The Attention Merchants, a fascinating and sometimes moving history of
the industries — including advertising, media, and content distribution — whose
mission is to promote their clients’ products to us any way they can, Columbia
University law professor Tim Wu concludes with a chilling description of what
the Net has turned into since those halcyon days: “The Web, by 2015, was
thoroughly overrun by commercial junk, much of it directed at the very basest of
human impulses of voyeurism and titillation,” he writes. “[Its] bright spots were
engulfed by the vast areas of darkness, the lands of the cajoling listicles and the
celebrity nonstories, engineered for no purpose but to keep a public mindlessly
clicking and sharing away, spreading the accompanying ads like a bad cold.”
Yet Wu’s history makes clear that this pattern has been repeated time and
time again. From the early 19th-century penny press to the late 19th-century
books in brief
Parisian poster craze, from early 20th-century salesmen of patent medicines (the
most famous was actually named “Snake Oil”) to broadcast media such as radio
and television, commercial forces have deployed an astoundingly ingenious array
of methods to push their products.
And yet at virtually every turn, Wu shows, countervailing forces have arisen.
As advertisers pushed the limits with every new technology, consumers and
regulators pushed back when they decided that the dishonesty of the advertisers’
claims, or the sheer ubiquity of advertising itself, had become too much. Bowing
to popular demand, for instance, by the end of the 19th century, authorities in
146
Paris had restricted the placement of posters. In the
U.S., concerns about the sometimes lethal effects of
patent medicines helped lead to the creation, in 1906,
of the Pure Food and Drug Act, and a vast increase in
deceptive advertising through the 1920s and 1930s
forced the Roosevelt administration to push the so-
called Tugwell Bill, which strengthened the earlier
law. In response to each of these efforts, industry
lobbyists pushed hard — and successfully — to water
down the force of these regulations.
It is Wu’s genius not just to describe this lurid
history, but to cast it in terms of the ad industry’s increasingly effective claims on
human attention and its intrusion into how people live their lives. It used to be
that certain times and places were inviolable, or at least unreachable: private
homes, public schools, social interactions, physical exercise. Yet the industry has
succeeded in breaching every one of those walls — for example, by plastering
every square inch of Parisian outdoor wall space with advertising posters;
overwhelming radio and then TV with ads; offering commercial, ad-driven
Internet services to public schools; and, lately, suffusing ubiquitous social media
and mobile communications with marketing messages.
As fascinating, and sometimes terrifying, as this history is — see Wu’s
description of Nazi “radio guard” members herding people into “listening rooms”
to hear Hitler’s speeches — his description of the rise and fall of the Internet is
most compelling. Wu, who is credited with coining the term net neutrality, is at
books in brief
home on this turf. He takes us through the first spam email (sent in 1978), the
growth and democratization of celebrity culture, the commercialization of the
World Wide Web, the introduction of the smartphone, and the transformation
of social media into a commercial medium. It’s a compelling and sometimes
amusing story. In the 1990s, when AOL’s slick new head ad salesman showed
CEO Steve Case an early banner ad that would run on the service, Case remarked,
“What really bothers me is the ads are in a place where members will see them.”
(The ad salesman’s response is unprintable.)
One of Wu’s key insights is that “technology doesn’t follow culture so
147
much as culture follows technology.” Radio and then television created a mass
audience of eardrums and eyeballs, people who were all too willing to give up
their evening hours. Networks then realized they could sell that attention to
advertisers. The advent of the remote control, he argues, provided only the
illusion of control. In Wu’s view, channel surfing simply puts people into a state
of mind that makes them properly receptive to advertising while further
attenuating their capacity to concentrate.
In transforming the broadcast model, the new technologies of the Internet
have taken the capture of human attention to its logical conclusion. From morning
to night, Internet users constantly “check in,” hoping for some Skinnerian reward
— an email, a text, a new post from a social media “friend,” perhaps the latest
tweet from a celebrity we follow. Each little reward keeps people checking for
more, co-opting attention and serving up ads in the process. It’s brilliant.
Is there a way out of this maze? Will there be a backlash strong enough to
save users from themselves, as there was in response to earlier methods for
monopolizing our attention? Wu notes that when Apple feared the proliferation
of ads and other junk on the Internet threatened its products, the company
allowed ad blocking software on its mobile browser. But Wu offers little hope
that regulators will step in yet again to stem the tide.
Ultimately,Wubelievesthatitisuptoustofreeourselvesfromtheencroachments
of ever more effective attention-grabbing technologies into our lives. In that regard,
the growing movement to disconnect from our gadgets through “digital Sabbaths”
and the like is heartening. He also hopes that people will eventually turn to
subscription-based Internet services to avoid the advertising bombardment.
books in brief
But it’s likely the impact of such efforts will be limited. The attention
merchants always seem to find new ways to burrow into people’s lives. +
Edward H. Baker
baker@edwardhbaker.com
is a longtime business journalist

and a contributing editor of
strategy+business.
148
Cash Advances?
by Mark Gimein
The Curse of Cash,

by Kenneth S. Rogoff, Princeton University Press, 2016
L
ast spring, the European Central Bank announced it would phase out
the ¤500 note. If you have never seen one, you are not alone. The
value of having a single note worth that much money — about
US$560 — is clear to only a limited demographic. If you want to buy
a Kalashnikov rifle with just a couple of bills, or maybe discreetly tip your
sommelier in Saint-Tropez, it may be the banknote for you. For ordinary folks,
though, it’s not a big loss. The truth is that ¤500 notes have little value in the
licit economy.
In The Curse of Cash, Harvard economist Kenneth S. Rogoff, best known
for his study of financial crises, This Time Is Different (coauthored with Carmen
Reinhart), proposes a much more dramatic move. If it makes sense to get rid of
extra-large bills like the ¤500 and Canada’s $1,000 note, why not do away with
all paper money? It’s a striking and provocative idea, well worth a public hearing,
and likely points in the direction the world is headed — though it will probably
take a few decades longer to get there than Rogoff would like.
The Curse of Cash is really two short books: one aimed at general readers, and
one for economists and others with a strong interest in economic theory. The first
gives an overview of the use of cash, exploring some of its puzzles and many of its
books in brief
misuses. The second focuses on the economic problem of negative interest rates.
The best way to see the strengths and weaknesses of Rogoff’s case for doing
away with cash is to start with the second, more technical part. This is where
Rogoff’s greatest insights lie, and that’s to his credit — economists should be at
their best when they are talking economics. Rogoff tackles what’s technically
known as the “zero bound problem,” or in simpler terms, how central banks can
lower interest rates below zero.
When much of the current thinking on monetary policy was developed,
during the 1930s through 1970s, the biggest threat central banks were asked to
149
combat was inflation. And in an environment of high
inflation, stimulating the economy is easy: Lower
interest rates to push savings into productive uses.
But what happens if inflation is low and interest
rates have already hit zero? That’s pretty much where
we’ve been since the financial crisis of 2008.
Essentially, Rogoff argues that if we could lower
interest rates below zero — effectively taxing cash
— central banks would have much more powerful
measures to spur recovery in times of crisis. He makes
a good case that although taxing cash wouldn’t
endear the Federal Reserve to savers, the Fed has taken politically tougher steps
to get out of crises.
The only obstacle? Cash. It would be very hard to put Rogoff’s theory into
practice as long as savers could just turn their money into paper money. After all,
if inflation is zero and government bonds pay, say, a –2 percent or even –4
percent interest rate, why not just store your money in high-value bills?
Which brings us to the first part of Rogoff’s book. He understands that
getting rid of cash — starting with $100 bills and working down — is not exactly
an easy sell. So Rogoff builds the case
Paper money is the oil that against cash, loading up on all the
greases the machinery of things wrong with paper money.
The main thing: Paper money is
illegality. If you are buying
the oil that greases the machinery of
drugs or taking bribes,
books in brief
illegality. If you are buying drugs or

cash is your friend. taking bribes, cash is your friend. If
you are collecting the proceeds of illegal
activity, big bundles of Benjamins are an excellent means of storage. And bribery
or drug sales are only the darkest edges of a much larger, hidden, cash-based
economy. Rogoff estimates that Europe and the U.S. alone lose hundreds of
billions of dollars in tax revenue annually due to cash transactions.
Rogoff’s case against cash is so cogently argued that it’s hard to believe that
we haven’t already gotten rid of paper bills and coins — or at least larger bills.
150
And there is the rub, and where Rogoff’s book skims over what should be some
of the most interesting terrain. He devotes only three sentences to “adjusting reg-
ulation” — which is hardly enough. Yet this is almost certainly the toughest
aspect of transitioning away from cash.
As The Curse of Cash repeatedly points out, Sweden has been moving quickly
toward cashlessness, eliminating large bills and cutting the amount of paper
currency in circulation. Clearly the shift is possible, and slowly — oh, ever so
slowly — the rest of the world has been moving in this direction. (Witness the
¤500 note’s death.)
But Sweden has a very different regulatory regime than the United States
does. It has different attitudes toward financial disclosure; how much you pay in
taxes in Sweden, for instance, is public record. It has different tax structures, and
different attitudes toward undocumented immigrants (it has a great many
immigrants, and almost all are there legally). And it’s not clear how much political
appetite there is in the U.S. for shutting down the gray economy of cash in the
short time frame that Rogoff envisions.
The Curse of Cash has all the strengths you expect of a book from an economist.
When it comes to figuring out how central banks would move away from cash,
Rogoff is careful, polished, and detailed, even including a chart-filled technical
appendix. On the politics, though, Rogoff punts, effectively saying that we don’t
need to sweat the details. That’s too bad, because that’s where all the little devils
who kill big ideas tend to hide. +
Mark Gimein
books in brief
markgimein@gmail.com
is a writer and editor in New
York. He writes regularly about
the economy for NewYorker.
com and Time.com, and blogs at
Chumpchanger.com.
151
It Pays to Get to Know Your Superconsumers
by Catharine P. Taylor
Superconsumers: A Simple, Speedy, and Sustainable Path to Superior Growth,

by Eddie Yoon, Harvard Business Review Press, 2016
S
uperconsumers may look like a slight volume. But appearances can be
deceiving. In 200 powerful pages, marketing consultant Eddie Yoon
finally puts some meat on the bones of an idea that’s been floating
around marketing for years, and applies a process to it. Focusing on the
best customers — in sheer numbers, a minority — can have a profound impact
on a brand’s overall success.
Yoon, a principal with the Cambridge Group, a marketing consultancy owned
by Nielsen, doesn’t limit the discussion to people who have what might be called
expected passions, such as wine or designer shoes. Rather, he kicks off by focusing
on “Sally,” a superconsumer who is obsessed with…office supplies. For Sally, staplers
and three-ring binders aren’t some sort of strange fetish; they bring sense to her job
at a car rental agency. A three-ring binder of perfectly organized contracts is, to Sally,
“like a trophy for a job well done and her way of bringing order to the chaos.”
Sally’s passion for just the right office supplies is the first window the book
offers into what makes superconsumers tick. As Superconsumers emphasizes
repeatedly, these customers aren’t just buying stuff. They are “hiring” a product
to fulfill a larger quest or set of needs. “Find out what they’re ‘hiring’ your
products for and what their quest is, and address both,” Yoon advises.
books in brief
“Laura,” a superconsumer of “Nacho Cheese” (a real product, assigned a

generic name by Yoon), is hiring the product to solve an array of problems related
to her passions for people, cooking, and cheese in a manner that other brands
don’t. When Laura met with the cheese’s brand team, she demonstrated an
attribute of the product that its marketers might not have noticed. Dipping a
piece of broccoli into melted Nacho Cheese, “she pointed out how the cheese
was viscous enough to form a perfect crown on the broccoli’s head without falling
off the side, yet melty enough to fill every crack and crevice.”
Yoon introduces us to superconsumers devoted to a wide swath of consumer
152
businesses and products, such as Netflix, grocery
stores, beer, and theme parks. Just as Yoon believes
most of us are superconsumers of something, there
seem to be superconsumers for every brand.
Companies would be well advised to seek them
out, and not simply because they can provide a
disproportionate share of sales. Rather, it turns out
that superconsumers can teach brands how to make
inroads into other groups of consumers — and it’s
here where Yoon’s argument really takes flight.
These other groups include potential superconsumers, who, as the name implies,
might come to love Nacho Cheese as much as Laura does but just haven’t been
alerted yet to its many virtues; autopilots, people who buy the product but are “going
through the motions,” and uninvolved consumers. As might be expected, the last
two groups are the most difficult to convert. Yoon suggests attracting them — if not
turning them into superconsumers — by using superconsumers to figure out ways
to shift a product’s “fun-to-chore” ratio. For instance, if a popular retailer suddenly
makes it possible for consumers to bypass the long checkout line by completing
transactions from their mobile phone, it can begin to convert the unconverted.
Superconsumers can also be a crucial component of a brand’s innovation
process, Yoon argues. Because they know a product so intimately, they could
have insights into brands that management teams may lack. For Nacho Cheese,
superconsumer outreach and other data led the brand team to believe the brand
had more potential superconsumers than it thought and also let it discover ways
books in brief
to attract those people. They learned that superconsumers preferred the product
to be sold in the refrigerated section rather than in the center of the store, where
it sometimes was. And the refrigerated section proved a better location for
potential superconsumers as well. Tapping into superconsumers led to a line of
brand extensions, which helped the brand grow annual sales by US$100 million
within a three-year period.
The vehicle through which brand passion spreads beyond its original
superconsumers is what Yoon calls the “super geo” — “a group of consumers
who are close enough physically or psychologically to inspire one another and
153
create new superconsumers.” These super geos are the conduits through which
brands can go viral.
Yoon explains super geos through the prism of American Girl, which has 20
percent higher sales in super geo markets. American Girl isn’t simply a doll brand;
its offerings include books, movies, and the experiences at its stores. As a result,
it is “hired” to do many things for many different people. A girl might “hire” an
American Girl as a toy. But other family members may view American Girl as a
way to teach history through books, or a way to create memorable experiences at
its stores. By being a brand that can be hired for multiple quests, it catches on.
The girl might inspire a friend to begin buying American Girl, and that girl’s
extended family may likely take to it, too…and so on and so on.
At times, Superconsumers drifts into being a promotional tool for Nielsen
and its products, which include consumer data and other marketing services, in
addition to the well-known TV ratings. On the other hand, some of the book’s
insights probably wouldn’t be possible without Nielsen’s data trove.
Yoon is most interesting, however, when he draws on experience and powerful
intuition. Yoon, a native Hawaiian, predicts the coming explosion of rash guards,
a lightweight version of a wetsuit that covers most of the body and is popular in
Hawaii. He believes many self-conscious consumers would clamor for a bathing
suit that hides their bodies, but rash guards also keep swimmers warm, and reduce
the need for sunblock. They could thus be “hired” to solve a trifecta of problems.
The key, Yoon explains, is for the product to break out of the super geo of
Hawaii, where it started as surfer-wear but is now worn by almost everyone. If
Yoon is correct, it’s only a matter of time before rash guards become more popular
books in brief
on the mainland.
Whether the product is a piece of surfer gear or Nacho Cheese, superconsumers
have the capacity to turn a ripple into a wave. +
Catharine P. Taylor
cathyptaylor@gmail.com
has covered digital media since 1994,
writing for publications including Adweek
and Advertising Age. She also wrote the
weekly Social Media Insider column for
MediaPost for seven years.
154
Stay informed.
Keep current.
Start a dialogue.
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Return on Design
Companies that receive awards for product design
see an immediate uptick in stock price.
BY MATT PALMQUIST
uperior product design has been widely touted as a competitive
S advantage. Apple is hailed for the sparse aesthetics and natural

functionality of its products; Kimberly-Clark owes its boost in
profitability to its more practical diaper design; and Lego’s financial
turnaround was fueled by its rededication to making fun, easy-to-use toys. But
the discrete value of product design can be hard to quantify.
We don’t have much evidence of whether good design affects a firm’s
market value, for instance — even though that would be a sure sign that
shareholders reward outstanding design, as they do positive earnings reports or
hot new products.
end page
To get around the subjective judgment of what defines excellent design, the
authors of a new study decided to trust the experts. A number of professional
design organizations hand out prestigious awards for functionality, aesthetics,
user interface, creativity, and environmental impact.
Illustration by Elwood Smith
By gauging a company’s stock movement over a two-day period following

the announcement of an award, the authors were able to quantify the value
shareholders place on superior design. (They also controlled for other factors
that might color shareholder opinion, such as a firm’s reputation, size, and
previous awards record.) The authors examined abnormal stock returns — or
156
the degree to which a firm’s stock price deviated from investors’ expectations
— following 264 announcements of design awards for commercialized products
from 1998 through 2011.
The analysis showed that shareholders significantly boost the value of firms
that are recognized for their effective product design. After controlling for the
other factors that might sway investors, the authors found that the increase in
stock prices over the period after the announcement ranged from 0.95 percent to
1.02 percent. Investors seem to believe that design honors reflect well on the
capabilities and long-term profitability of the firm.
The increase in stock price is higher for smaller firms, which suggests they
should consider putting their more limited resources into projects with a high
design upside. Consumer-oriented designs also facilitated higher returns than
industrial products, indicating that B2C firms should pay special attention to
creating relevant and intriguing design dimensions.
The competitiveness of an industry, by contrast, did not have much bearing
on market reaction. Nor did the growth potential of a firm. Good design may
matter irrespective of business cycles or the cutthroat nature of a particular sector.
“Because effective product design can lead to higher market value, firms
should not consider design as just a technical domain, but rather should leverage
it as a strategic tool and invest in design resources and building design capabilities,”
the authors write. The trend at many firms to add designers to their top
management team is a testimony to the strategic importance of product design
in today’s business environment. +
end page
Source: “Product Design Awards and the Market Value of the Firm,” by Yusen
Xia, Vinod R. Singhal, and G. Peter Zhang, Production and Operations
Management, June 2016, vol. 25, no. 6
More Recent Research at:

strategy-business.com/recent_research
157
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21 The CEO as Activist

27 Who Will Insure Self-Driving

34 Changing Ladders at a High Rung

40 s+b Trend Watch 34

42 The Art of Customer Delight

STRATEGY & LEADERSHIP

52 The Line between

64 Building Trust 106 Siri, who is Terry Winograd?

STRATEGY & LEADERSHIP

126 Bill Ruh

142 Women’s Work

146 Buying Our Time

149 Cash Advances?

152 It Pays to Get to Know Your

END PAGE: RECENT RESEARCH

156 Return on Design

Cover illustration by Martín León Barreto

Issue 86, Spring 2017

strategy+business Published by PwC

Editorial and Retail Subscriber strategy+business magazine Articles published in

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he conventional wisdom within the banking industry about its troubles

In studies of coherence in business — such as Strategy That Works, by Paul

Coherence and Recovery

Exhibit: Strategic Coherence and Financial Performance

20% Financial 2005–09 20% Financial 2010–14

Source: Strategy& analysis

Brainstorm, Innovate, and Create!

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Alan Gemes Joerg Ruetschi Also contributing to the analysis

t the Microsoft Accelerator in Beijing, engineers are developing new

A technologies that could transform industries as diverse as automobiles,

some of the roughly dozen startups working there. Microsoft is providing a

The Path to Partnership

A spin-off initiative called BizSpark One, managed from Microsoft’s Silicon

possible in the long-distance relationships of the BizSpark One program, saving

a new corporate venture group, Microsoft Ventures, which provides an additional

Shameen Prashantham George S. Yip

is an associate professor of is a professor of marketing and

hen news breaks, people expect public figures to respond.

the University of California at

S+B: Do you think tying CSR to a company’s core strategy — as Michael

GE’s initiatives in clean energy provide a classic example. Another is UPS,

Plan your attack—enroll now in these upcoming programs:

: Meet the next generation of business thought leaders

f you are an executive of an auto insurance company, pay attention — you

“hat eye-opening moment when

upcoming leadership programs:

Define your Wharton moment. High-Potential Leaders

(VMT), which is approximately 0.7 accidents per million VMT. This is

updates). This gives manufacturers an inherent advantage in valuing the

The Insurers’ Response

combining commercial liability with specific cybersecurity protection and

Chris Martin Haskell Garfinkel

Changing Ladders at a High Rung