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AETNAS MARK BERTOLINI LEADING WITH FRANCES HESSELBEIN LETS MEGADEAL

The Massive
Payoff of Planned
CEO Succession

Summer 2015
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editors letter
editors letter

Illustration by Lars Leetaru

Sharp-Edged Professionals
Many business leaders resist the idea
that management, like medicine,
law, or education, is a profession.
They regard professionals as insular
academics, and businesspeople as
freewheeling entrepreneurs who do
whatever it takes to attract and hold
customers. Nonetheless, management expertise doesnt come easily.
As an executive, you may be naturally sharp-edged, pragmatic, and
down to earth. But like any pro you
have to learn your counterintuitive
skills through years of apprenticeship and practice.
For evidence that management
is a profession, see the cover story on
succession planning, by Ken Favaro,
Per-Ola Karlsson, and Gary L. Neilson (The $112 Billion CEO Succession Problem, page 42). Companies that pay attention to developing
their top executive talent achieve
better nancial performance, on
average, than other companies, and
they avoid the messy, expensive re
drill of a sudden, forced chief executive departure.
Frances Hesselbein, the ageless
leader of the eponymous institute
she cofounded with Peter Drucker,
also clearly understands the value
of management professionalism. In

contributing editor Sally Helgesens


prole, Frances Hesselbeins Merit
Badge in Leadership (page 72), we
see how this supremely inuential
networker and writer has helped
hundreds of not-for-prot organizations (starting with the Girl Scouts,
where she was CEO) realize their
potential.
Another consummate business
professional is Aetna CEO Mark
Bertolini. In our Thought Leader
interview (page 82), by Jon R. Katzenbach, Gretchen Anderson, and
me, Bertolini reveals the thinking behind his headline-making
recent decision to raise the wages
of Aetnas lowest-paid employees. (Other companies, including
Walmart and McDonalds, have
since followed suit.) He frames it
as a strategic shift in the companys
culture, which will help Aetna make
the transition from pure-play insurance provider to visionary catalyst in
the healthcare system.
On page 34, Strategy&s John
Jullens explains how emerging economies must cultivate their business
professionals to gain entry into the
global economy. And on page 58,
a prole of the global cement company CEMEX, based on interviews

with six executives, shows how one


Mexico-based company did exactly
that, becoming a world leader in
its eld through the capabilities it
developed. Other articles describe
how to raise your professional business acumen in innovation decision
making (page 12), technology megadeal success (page 22), and organization design (page 28). This editions
Young Prof, Kristin Behfar of the
Darden School at the University of
Virginia, points out the subtle cues
in arguments that can make it easier
to overcome dissent and return to
your professional cool (page 9).
With this issue, strategy+business
welcomes senior editor Jan Alexander, and begins its second year as
part of PwCs network of rms, a
community of more than 195,000
people. So if youll excuse me, I
have to go sharpen my management
skills. In an enterprise this large, you
never know when youll have to augment your freewheeling entrepreneurship with some truly polished
professional acumen.
Art Kleiner
Editor-in-Chief
kleiner_art@
strategy-business.com

leading ideas
6

18

The Right Track for Connected Cars


Evan Hirsh, Marian H. Mueller, and Kumar Krishnamurthy
Five ways automakers can design for safety and protability.

Kristin Behfar on How We Fight at Work,


and Why It Matters
Laura W. Geller
The Darden School of Business professor describes a new
framework for predicting conict outcomes.

12

Boost Your Innovation Condence


Catherine Palmieri
Know your customers, understand new technologies,
embrace failure, then take a leap of faith.

14

Brands and Retailers Should Team Up in


Emerging Markets
Nikhil Bhandare, Pali Tripathi, and Aparajita Kapoor
When companies share the shelf, everyone wins.

58
18

Agility Is Within Reach


Kayvan Shahabi, Antonia Cusumano, and Sid Sohonie
With strategic responsiveness and organizational exibility,
you can move quickly when your industry changes.

20

s+b Trend Watch


R&D Investment Pays Off in Oil and Gas

essays
TECHNOLOGY

22

Lets Megadeal
Rob Fisher, Gregg Nahass, and J. Neely
Seven strategies for managing the unique challenges of
large technology acquisitions.

ORGANIZATIONS & PEOPLE

28

10 Principles of Organization Design


Gary L. Neilson, Jaime Estupin, and Bhushan Sethi
These fundamental guidelines can help you reshape your
organization to t your business strategy.

GLOBAL PERSPECTIVE

34

How Emerging Markets Can Finally


Arrive
John Jullens
Building world-class domestic rms is the overlooked key
to economic development.

54

features
42

STRATEGY & LEADERSHIP

THE THOUGHT LEADER

The $112 Billion CEO


Succession Problem

INTERVIEW

82

Jon R. Katzenbach, Gretchen


Anderson, and Art Kleiner

Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson

For Aetnas CEO, the lauded move


to raise employee wages is just
one part of a broader strategy to
adapt to changes in healthcare.

Poor planning for changes in leadership costs


companies dearly. Getting it right is worth more
than you might think.
46 Succession Planning and Financial Performance
50 The Incoming Class of 2014: No Surprises

Mark Bertolini

BOOKS IN BRIEF

90

The Ghost of Financial Crises Past


Marc Levinson

STRATEGY & LEADERSHIP

54

92

Edward H. Baker

The Decline of the COO


Gary L. Neilson

94

Is it time to add chief operating ofcers to the list


of endangered species?

GLOBAL PERSPECTIVE

58

Hey, Leaders: Stop Thinking So Much


and Just Do It
Daniel Gross

96

CEMEXs Strategic Mix


An s+b Roundtable
Moderated by Thomas A. Stewart

Whats Wrong with the Internet?

Everyone Prots from the Return


on Character
Tom Brown

97

This Mexican cement company redened itself


as a global solutions provider with the critical
capabilities to match.

Why Beanie Babies Boomed Then


Busted Badly
Mark Gimein
END PAGE: RECENT RESEARCH

68 The Very Model of an Emerging Market

Multinational
Pankaj Ghemawat
ORGANIZATIONS & PEOPLE

72

Frances Hesselbeins
Merit Badge in
Leadership

100

In New Product Design, Likes Can


Lead You Astray
Matt Palmquist
Your next innovation breakthrough probably wont
come from social media.

Cover illustration by Martin Leon Barreto

Sally Helgesen
The former CEO of the Girl Scouts has spent
decades bringing professional management
to nonprots.

Issue 79, Summer 2015

www.strategy-business.com

strategy+business

Published by PwC Strategy& LLC

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strategy-business.com

Contributing Editors
Edward H. Baker
Susan Cramm
Ken Favaro
Bruce Feirstein
Lawrence M. Fisher
Ann Graham

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Editor, Digital
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strategy-business.com

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William J. Holstein
David K. Hurst
Jon Katzenbach
Theodore Kinni
Tim Laseter

Eric J. McNulty
Gary L. Neilson
Rob Norton
Jim OToole
Matt Palmquist
Jeffrey Rothfeder

Michael Schrage
Thomas A. Stewart
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Vollmer

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leading ideas

Leading
Ideas
The Right
Track for
Connected
Cars
Five ways automakers
can design for safety
and protability.
by Evan Hirsh, Marian H. Mueller,
and Kumar Krishnamurthy

ts the Daytona 500 of vehicle


manufacturing: the race to bring
connected cars, light trucks, and
SUVs to market. Unprecedented
safety, driver assistance, and infotainment features promise to revolutionize the driving experience. Still,
few industry executives are condent
that their current connected vehicle
initiatives are on the right track.
Their uncertainty is understandable. For automakers, getting
connected requires joining forces
with the high-tech consumer electronics industry an unlikely
partnership, for several reasons. Ve-

hicle manufacturers have intricate


organizational structures and supply
chains that have evolved over decades. They have long design and
development horizons, and stringent regulatory and safety mandates. High-tech companies have
simpler structures and supply chains
that can shift more swiftly with
consumer demand. They have much
shorter development cycles and an
act now, apologize later mind-set
that isnt appropriate for products
whose failure can result in the loss of
life. And then theres Moores Law:
The continual compounding of
computing power implies that automakers will be called on to navigate
a mind-boggling explosion of connectivity features and functions.
Auto companies have never before been confronted with an opportunity and challenge of this magnitude. The following ve imperatives
can help soften the speed bumps.
1. Treat connectivity as an integral element of the automotive
value proposition. Auto manufactur-

ers naturally covet the high returns


and fast growth of the digital sector
if for no other reason than to offset the substantial investments required to bring vehicles to market.

They are also eyeing the money that


could be made selling endless terabytes of customer data generated
from connected vehicle technology.
But they cannot afford to set up
connectivity initiatives as separate
business units with the sole purpose
of generating incremental revenue
(which implies a lack of strategic
focus) and selling customer data
(which carries brand-threatening
privacy risks). Like the car phone
fad of the 1980s and early 1990s,
these enticing prospects are a dangerous distraction from the automakers real game, which remains
selling cars.
That said, automakers should
be integrating rich connectivity features as a way of differentiating
themselves as much as possible from
their competitors. Such features,
which we estimate currently cost
only about US$500 per vehicle to
manufacture, already represent an
outsized portion of vehicle value in
consumers minds: In a 2014 Autotrader.com survey of car shoppers,
56 percent of vehicle owners said
they would switch to a different vehicle brand to get the digital features
they want.
To protect and build their

strategy+business issue 79

2. Follow the dictates of safety


in driving every aspect of the connected vehicle. Safety is king. Al-

Illustration by John Hersey

though consumers might relish the


idea of using more entertainment
apps in their cars, and some hightech companies might want to
simply plug their infotainment systems into vehicles, vehicle manufacturers cannot compromise on safety.
Stretching prudence to gain a
marketing advantage would put
their customers lives at risk, a mistake from which it would be hard
to recover.
Even drivers who are clamoring

for new technology consider their


own safety to be paramount. Autotraders survey found that 84 percent
of vehicle owners value safety features over infotainment features.
And lawmakers already have their
eye on regulating these new features
to cut down on driver distractions:
In February 2014, Senator Jay Rockefeller, chairman of the U.S. Senate

pands, most vehicles will include


wireless connections, the ability to
diagnose their own mechanical
problems, and smart device connections, all of which will generate and
house enormous amounts of data.
Some of these vehicles will be expensive and ashy, attracting thrillseeking hackers. And theyre a vulnerable target for hackers with the

Cybersecurity cant work with a design-it-once


approach; it demands constant monitoring.
Committee on Commerce, Science,
and Transportation, warned carmakers and technology companies
that they needed to make it a priority to reduce driver distractions
linked to new Internet-connected
features. Vehicle makers should
therefore prioritize safety in their
infotainment investment, by creating features that are fun to use without taking the drivers attention off
the road.
3. Build the capabilities to ensure security. Aside from safety concerns, automakers must be prepared
to defend connected vehicles against
cyberattacks. Tesla has built wireless
connection into its sticker price, and
BMW is not far behind. Soon, as
costs decline and functionality ex-

malicious intent to damage property


and inict harm.
Unfortunately, vehicle manufacturers are lagging behind in this
regard. They have to work harder to
develop cybersecurity measures and
technology to address a level of risk
higher than that facing most hightech companies. They will need to
build backups for critical systems, as
well as multiple rewalls that separate a cars subsystems from one another. That way, if one fails or is
hacked, the others will stay functional and protected. And still, this
will not be enough.
The way vehicles are currently
designed and engineered will also
have to evolve. Cybersecurity cant
work with a design-it-once approach;
it demands constant monitoring for
new threats and the continuous adaptation and updating of protection
systems. Further, when threats
emerge, automakers wont have the
luxury of time. They must proactively build highly evolved cybersecurity skills and capabilities.
4. Revamp the traditional product development cycle. The typical
automotive product development
cycle is currently three to ve years,
with a mid-cycle facelift that
changes features such as electronics

leading ideas

brands, automakers should focus on


determining which kinds of digitally
connected functionality to integrate
into their vehicles and how to achieve
that integration. They shouldnt try
to fully control the design process
for infotainment features. Consumer device makers and app developers
have the scale, product development
speed, technical know-how, and innovation ecosystems in place to
quickly develop the features. But vehicle manufacturers must always
have the nal word on what goes
into their vehicles. They should govern and curate how a driver interacts
with the machine, and they should
design and own driver-assist and
safety features.

ready, consumers are insisting on


more seamless integration of these
devices according to a 2015 J.D.
Power study, theyre dissatised
with the quality of offerings currently on the market. To catch up,
automakers will need to continually
monitor market trends and react
quickly, as well as tap into the vast
ecosystem of app developers.
5. Adapt the vehicle manufacturing operating model to accommodate connected vehicles. The nature

and needs of automotive manufacturing have produced a complex and


highly specialized operating model
in which functional silos coordinate
with one another in unique ways.
Although highly successful for
many years, this model cannot
withstand the addition of the myriad requirements that come with
connected vehicles.
Developing and producing this
technology will require rms to layer
a broad set of considerations and
constraints into design deliberations.
These vehicles will simultaneously
engage multiple internal functional
organizations, product development
programs, and vehicle platforms.
And they will require that the automakers supplier ecosystem expand
to include new and unfamiliar players, such as technology and app developers, who come from a very different operating environment.
These challenges are incredibly
difcult to manage. In order to address them, most vehicle manufacturers are structuring their initiatives in one of two ways: by
establishing one or more new silos
or by appointing a connected car
czar charged with coordinating the
initiative across existing silos. Neither strategy will be good enough.
Instead, these rms will need to
take an evolutionary approach to in-

tegrating connected vehicle activities into their existing structures.


They should start by prioritizing
connectivity initiatives, building a
truly cross-functional connected vehicle team, making clear who has
governance and decision-making
rights, and identifying and establishing the new capabilities that
such vehicles will require. Eventually, connected vehicle activities must
be as established and structurally
integrated as other groups such
as those that design powertrains
are today.
The possibilities afforded to vehicle manufacturers by the accelerating rate of technological progress are
thrilling. Indeed, they are limited
only by human imagination, regulatory requirements, and customer
demand. But as with any other opportunity of such magnitude, the
unknowns can be nerve-racking for
anyone whose future rides on getting it right. These ve imperatives
will ensure a smooth start. +
Reprint No. 00329

Evan Hirsh
evan.hirsh@strategyand.pwc.com
is a partner with Strategy& based in
Chicago. He leads the rms North
American automotive practice.
Marian H. Mueller
marian.mueller@strategyand.pwc.com
is a partner with Strategy&s automotive
practice, and is based in Florham Park,
N.J.
Kumar Krishnamurthy
kumar.krishnamurthy@
strategyand.pwc.com
is a partner with Strategy&s digital
business technology practice, and is based
in Chicago.
Also contributing to this article were
Strategy& senior associates Arjun Gupta
and Akshay Singh.

strategy+business issue 79

leading ideas
8

or exterior design elements. Connected vehicles will fundamentally


disrupt that pattern. Automakers
have to work swiftly to keep up with
the lightning-fast development and
updating of the devices and apps
that will populate their vehicles.
Imagine how quickly a vehicle manufacturer could fall behind if it
offered new electronic architectures
and functionality only two or three
times a decade. And imagine the
dissatisfaction of customers, who
have grown accustomed to instant
gratication when it comes to new
technology, nding themselves stuck
with generations-old features until
they buy a new vehicle.
A few automakers are beginning to update software-oriented
features more often. But they will
all need to rethink and reconcile
these conicting development cycles. Theyll have to build a more
modular electronics system rather than one thats vehicle-specic
and virtual updates will be needed
to deliver electronics and software
content more quickly, along with
updated cybersecurity.
This will require a more segmented and nuanced approach to
telematics offerings. Multiple generations of electronics architecture
and content for driver-assist and
safety features will have to be designed using parallel and overlapping design cycles, so that interim
updates are possible. Automakers
will also need to invest in extra vehicle networking and memory capacity in anticipation of interim upgrades, and provide the means of
delivering updates to their dealer
networks and customers. Even
shorter cycles will be required for infotainment features, especially as
consumers smart devices become
more powerful and ubiquitous. Al-

The Darden School of Business professor


describes a new framework for predicting
conict outcomes.
by Laura W. Geller

Photograph by Susan Wormington

ou know the types. Theres


the ofce yeller, intimidating others with vitriolic
rants. Theres the passive-aggressive
underminer, nodding assent but
then dragging her feet. Theres the
colleague who gets angry over a perceived slight, but then quickly shifts
tone. Conict in the workplace is
pervasive and unavoidable. And it
isnt always a bad thing. A healthy
debate can ensure that diverse perspectives are considered, clarify a dilemma, or light the re a team needs
to move from a stalemate to a creative solution. But when they turn
ugly, conicts are distressing and
divisive. As they escalate, they strain
relationships and put teams at risk.
Academic research has long focused on understanding conict in
hopes of enabling faster resolution
or better yet, avoiding conict in
the rst place. Its been a recurring
theme for Kristin J. Behfar, an associate professor of business administration at the University of Virginias Darden School of Business who
studies high-performance teamwork
and effective leadership in organizations. Her most recent study, conducted with colleagues at several
leading business schools, turns the
traditional thinking about conict
on its head. Typically, substance

what we are ghting about


is thought to be the best
predictor of a conicts
outcome. But Behfar and her coauthors argue that were approaching it from the wrong angle. Its how
we ght, she explains in an interview with strategy+business, that determines what happens next. Behfar
also offers some guidance on best
practices for arguing (in U.S. workplaces, because cultural norms play
a role in each country): Be direct,
but not too intense. And when you
validate your venting colleagues
feelings of hurt and anger, know
that you may be doing a disservice.
S+B: How are you trying to change
the conversation about conict?
BEHFAR: Previous studies catego-

rized conict by type. For example,

Kristin Behfar

leading ideas

Kristin Behfar on
How We Fight at Work,
and Why It Matters

task conict emerges when team


members have differences of opinions about their work, and relationship conict involves interpersonal
animosity and ego clashes. Researchers would ask members of a team
how frequently they engaged in each
type of conict, aggregate their
responses, and use that as a team
score. But this method
yields mixed results the
empirical ndings are not
always consistent with what
theory would predict. Why?
This approach doesnt consider that people can ght about the
same thing in different ways, which
will provoke different kinds of emotional responses.
This distinction is important,
because we know that people respond to threats in fairly predictable
ways. Of course, over time, coworkers get to know one another. They
come to understand that the colleague who always seems to be undermining others isnt malicious,
shes just a terrible communicator.
But at many companies, teams are
uid. Moreover, some teams will
have a great success on one project,
but cant replicate the experience if
you put them on a project that requires a different process.
My colleagues and I set out to
understand how peoples conict expression [how they express opposition verbally and nonverbally] creates or perpetuates these challenges.
In other elds, including research
on marriage, researchers have taken
a similar approach. For example, the
body of work by psychologist John
Gottman and his colleagues includes years of observation and a
codied scheme to describe different ways that couples ght all of
which enabled them to predict with
great accuracy (94 percent in a 1999

Debating
Straightforward exchanges
between disputing parties the
most likely scenario to lead to
resolution

Arguing
Fights in which parties are clearly
angry and entrenched, and
typically refuse to budge

Disguising
Vague expressions that indicate a
degree of opposition, but cover up
the reasons

Undermining
Passive-aggressive or dismissive
behavior, such as teasing and
backstabbing

LOW

10

LOW

Intensity
Degree of Expression

HIGH

Source: Adapted from Laurie Weingart, Kristin Behfar, et al., The Directness and Oppositional Intensity of Conflict
Expression, Academy of Management Review, Apr. 22, 2014

study) which couples would split in


the future.
S+B: When observing conicts,
what are you looking for? How do
you measure expression?
BEHFAR: We developed a frame-

work based on the idea that you can


measure how people express conict
using two dimensions: their directness and their oppositional intensity. The rst describes how directly, using words and body language,
someone communicates information to the other party. A direct expression is literal and explicit. An
indirect expression often involves a
third party, like the proverbial game
of telephone or ofce gossip, or occurs when a problem is hinted at but
left to the listener to gure out.
To understand the other dimension, consider the difference between
a trench and a foxhole. In a highintensity scenario, the person has really dug in hes going to defend
his trench or die trying. In a lowintensity situation, the person can
still see the enemys position from his
foxhole, and can adjust his position
according to what the enemy does.

At work, its more like the difference


between an argument and a debate.
In the former, which has high intensity, people cling ercely to their positions. In the latter, someone is
thinking about the other persons
point of view and incorporating it
into her response. Theres still a line
drawn in the sand, but it shifts with
every exchange. Intensity can also be
a matter of how subversive your intentions are. High intensity involves
taking something from someone or
intentionally blocking their interests. Low intensity is more about
protecting ones own interests.
S+B: So, if you can determine how
direct and intense people are,
you can predict how the conict will
play out?
BEHFAR: Yes, when you cross the

two dimensions, you get telling patterns, or spirals [see exhibit]. We believe our categorizations of conict
expression apply across cultures.
People everywhere use degrees of
directness and intensity to communicate opposition. But for this study,
we focused on U.S. organizations.
This enabled us to assume that peo-

ple shared the same blueprint for


how they perceive conict expression. Even though many workplaces
are multicultural, people working in
the U.S. become familiar with its
behavioral norms.
In conicts where both directness and intensity are high, people
might be shouting, storming out of
the room, or rolling their eyes. People tend to react with anger and
frustration. Little problem solving
happens, because both parties pay
more attention to defending their
own arguments than they do to understanding the other persons point
of view. Its worth noting that the
outcome might be different if the
conict pairs someone with high
status in the organization and someone with lower status. If the former
individual is being very direct and
intense, the lower-status recipient
might withdraw or just comply
but the source of the conict will
continue to fester.
When conicts are expressed
with low directness and high intensity, they typically involve dismissive
or passive-aggressive behavior. For
example, actions such as teasing,
backstabbing, or mobilizing a coalition send a message that there is a
problem the existence of a threat
is clear but the receiver has to gure out why the person is doing
those things. Although there is no
overt hostility or open ghting, people tend to respond by feeling anxiety and contempt, even humiliation
or anger. These conicts also tend to
escalate, because people are focused
on interpreting actions or protecting
their interests rather than problem
solving. Our anecdotal evidence and
preliminary empirical evidence have
shown that this type of conict is the
most common in U.S. organizations.
Also common are conicts with

strategy+business issue 79

HIGH

Directness
Clarity of Expression

leading ideas
ideas

Exhibit: Charting Conflict Expression

work that direct expression is always


better that everywhere in the
world unambiguous words and action are the best way to get the other
party to understand your position.
This is true in the U.S., where people appreciate directness, and where
most people are left confused and
frustrated by indirect confrontation.
But in some cultures, for example,
in Japan, people frown on direct
confrontation and perceive it as unnecessary or uncouth perhaps
even insulting. And research has
demonstrated that for those culturally conditioned to pick up on indirect communication, no meaning is
lost in conicts with low directness.
I said earlier that people respond to threats in predictable ways.
But we all interpret the degree of a
threat differently, depending on our
expectations. And these expectations arent just based on culture.
Other factors, such as gender and
race, also inuence perception. For
example, women are more likely
than men to become infuriated
when confronted with the same type
of conict expression repeatedly,
with no progress made toward a resolution. We are hoping to expand
our study to see how these differences affect outcomes.

S+B: What role do cultural differences play?


BEHFAR: Our framework outlines

S+B: Youve also done research on


venting. Can our reaction to peoples
everyday complaints help encourage
conict resolution?
BEHFAR: Venting is a common way

how to categorize expressions. But


culture is an important context for
predicting how those expressions
will be interpreted. It would be incorrect to conclude based on our

of making sense of frustrating events


like conict in the workplace,
because its not a formal or even an
informal type of grievance. After a
high-intensity conict, when you

are feeling anxious or insulted, turning to a trusted friend or coworker to


unload about what is bothering you
is a natural way to cope.
We were interested in understanding whether listeners could
help venters better understand how
to prevent the type of negative escalation I discussed earlier. We found
that when the listener was able to
give the venter new insight into or
perspective on her problem or feelings, the venter was better able to
work through the issue with the
other party. But the listener having
knowledge of the problem (and thus
the ability to give specic insight)
was not necessary. Just helping people reframe the annoyance into a
bigger picture enabled them get
back to work much faster.
What was ineffective? Unfortunately, it was what many of us do
when placed in the listener role:
sympathizing and reafrming the
venters frustration. But if we can
control our reaction, we can encourage better outcomes. This is one of
the most common and most important themes in all of my research. And its true across cultures,
in any context. If you understand
the patterns of how people respond
to different deliveries, you can ensure that you dont respond in kind,
and can engage in a more proactive
process of resolving conict. This
brings to mind the work of psychiatrist William Glasser, who said that
you cant control other people, you
can only control what you give them
to react to. I think a hallmark of executive talent is understanding how
to recognize the problem, rather
than just reacting to the noise. +
Reprint No. 00314

: Meet the next generation of business thought leaders


at strategy-business.com/youngprofs.

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

leading ideas

low directness and low intensity, in


which people avoid saying what they
really mean and withhold critical information often motivated by
self-preservation. Here we often see
less overtly threatening, more passive-aggressive behavior. For example, someone purposely misses a
deadline because he doesnt want a
proposal to go through, and sends
excuses to his colleagues. This leaves
it up to others to consider whether
his error was intentional. People often feel hurt or irritated, even guilty
or confused, because theyre not really sure what the problem is, and
whether they caused it. Escalation
here might be less obvious than with
the previous combinations, but the
uncertainty involved typically results in negative outcomes.
When directness is high and intensity is low, people are not entrenched, and theyre not being subversive. But they are communicating
unambiguously what they mean to
the other party. The emotions associated with this type of conict expression tend to be mixed. Someone
might think, Im frustrated that this
person is opposing me, but Im also
excited because I see a potential for
learning something. Because people
typically respond calmly and rationally, this scenario is the most likely
of the four to lead to resolution.

11

Know your customers,


understand new
technologies, embrace
failure, then take a leap
of faith.
12
by Catherine Palmieri

onsumers are incredibly


poor predictors of the next
big thing. Their knee-jerk
reaction to new technology is almost
always to say they dont need it and
will never use it. For many company
leaders, this creates a signicant
business challenge: They know they
must drive change to stay competitive, yet they have no way to determine with condence which moves
will be successful. They bring in experts to provide vision, they do market research until theyve exhausted
the deviations three sigmas from the
mean, and they analyze and plan
only to nd themselves no more certain about which direction to pursue
than when they started.
The answer is often hiding in
plain sight. Most executives know
their customers better than they realize, and in some cases better than
their customers know themselves. In
the late 1970s, for example, many
people were still wary of ATMs.
They were used to having their
money handed to them from a teller
inside their bank; the idea of entering a code into a machine on the
street was impersonal and unnerving. But in 1977, Citibank invested
about US$160 million to install

your competition and maybe


even redene your industry.
Understand what your customers want, and what they expect. Be-

fore developing a new product, get


inside your customers head. Ask
yourself: Will this product make her
life easier? Virtually every innovation that has transformed human
lives has reduced the time needed to
complete a task or the complexity of
that task. Consider the ATM. This
innovation not only increased the
available window of time in which a
consumer could complete her banking tasks, but also made banking
(and peoples cash) more accessible.
And remember that today, the constant connectivity enabled by mobile technology has created an even

Technology that can deliver against core


consumer needs will trump consumers anxiety
or hesitation.
at all interested in using their mobile
device for banking. But we formally
launched CitiMobile, the rst
downloadable mobile banking app,
early in that year.
The key to these and other successful innovation leaps? Knowing
that technology that can deliver
against core consumer needs will
trump consumers anxiety or hesitation. Instead of looking outside for
guidance, trust your own customer
insight, and combine it with a deep
understanding of what new technologies can deliver. Perhaps most
important, foster an internal culture
of experimentation, giving people
the freedom to fail. On its own, each
imperative may seem simple. But together they provide a powerful approach to innovation, enabling you
to improve your customer experience and differentiate yourself from

higher expectation of instant gratication. Consumers want goods and


services to be delivered immediately.
One of the best ways to nd out
the locus of consumers pain points
and thus your opportunities is
to talk to your frontline people. Your
retail and call center people have
heard it all; once every quarter,
spend half a day asking them what
challenges your customers face, and
then focus your innovation investments on nding ways to address
those issues.
Beyond understanding what
your customers want, its also important to understand the consumer
psychology of tech adoption. How
signicant is the perceived risk
physical, social, economic, psychological of using the innovation?
(Will the neighbors laugh, or will
they be envious?) This is a tricky

strategy+business issue 79

leading ideas
ideas

Boost Your
Innovation
Condence

ATMs all over New York City, and


in a few years, they were everywhere.
In 1979, despite signicant concern
from retailers that consumers
wouldnt buy a portable music playback device that didnt also record,
Sony introduced the Walkman. In
1995, according to a survey by the
Pew Research Center, 97 percent of
Americans had no online access,
and 42 percent had never heard of
the Internet. Yet that same year, Jeff
Bezos launched Amazon. And nally, an example from my own career at Citibank: In 2007, research
from Forrester and Ofcom showed
that 87 percent of mobile phone
owners didnt use their phones to access the Internet, and 72 percent of
online consumers said they were not

Determine what new technolo-

Illustration by Robert Neubecker

gies can (really) deliver. It is the cor-

porate leaders responsibility to push


the tech experts on how emerging
technologies can be applied to a specic purpose tempering the excitement that bubbles around new
technologies with a pragmatism
grounded in a rm understanding
of the consumer and the companys
own capabilities. Remember, an innovators goal is not to react to events
or jump on a bandwagon. Its to be
proactive in applying technology in
new ways that differentiate the company from competitors.
To illustrate, let me return to
my own experience with mobile at
Citibank. In 2001, wireless was in
the nascent stages of development,
and wireless carriers didnt have a lot
of network coverage. As a result, although mobile banking seemed to
offer promise and customers had expressed some interest, the technology just wasnt yet in place to deliver
a good customer experience. I decided to shut down the mobile initiative. But by 2004, carriers were
expanding their networks and buying new cell towers to reduce the irritation of lost calls. Whats more,
the new 3G phones in the pipeline
were going to be Java-enabled and
have increased memory, which
would allow for a more robust customer experience. Customers would

be able to download an application


and perform a banking transaction
on their device without a continuous
phone connection, providing better
security and eliminating the negative experience of failed transactions
due to dropped calls. We launched
the CitiMobile app before apps became common and even before
the iPhone was released.
Today, several new technologies
are emerging, and companies should
watch them closely considering
how they can use them, and whether
they are prepared to do so. The

Internet of Things promises to simplify our lives by providing connectivity between us and the machines
we use on a daily basis. The sharing
economy has leveraged technology
to create ride sharing, task outsourcing, peer-to-peer lending, and cooperative business management. The
disruptions to traditional employment, expertise, and pricing will
have a ripple effect for many years to
come. Well also see the line between
human and machine continue to
blur: 3D printing is already being
used to create prosthetics and

leading ideas

question, depending on your target


market, as early adopters are also
greater risk takers. But for most consumers, the products perceived risk
must not outweigh its benets. Consumers also need a compelling reason to change their behavior, and to
keep them from reverting to old
habits. Making their lives easier is
just the start. Youll also need to ensure a smooth experience at the
point of service.

13

Create an environment where


failure is acceptable. There can be

14

no innovation without experimentation, and there can be no experimentation without failure. That
goes against the grain of many corporate cultures. Nevertheless, I have
found that part of what gives corporate leaders condence is the accumulated wisdom of a lifetime of failures experiments that just didnt
pan out. It gives them an ever-clearer
vision of what will work.
Again, I look to my own career.
When I rst joined Citi in 1997, I
was part of a team that launched an

bonus is in jeopardy. Thus, there are


extremely powerful incentives for
people to play it safe. Corporate
leaders must work especially hard to
counter these forces and give their
teams the permission to fail and the
condence to make their case and
go out on a limb. Not only does this
encourage experimentation, but it
also encourages people to pull the
plug faster on projects that arent
working without fear of retribution.
In other words, fail, but fail as fast as
possible and take the lessons
learned to the next experiment.
New technologies offer many
opportunities to those who would
pursue them. It may seem like such
innovations are best left to Silicon
Valley mavericks, but in reality,

Brands and
Retailers
Should
Team Up in
Emerging
Markets
When companies
share the shelf,
everyone wins.
by Nikhil Bhandare, Pali Tripathi, and
Aparajita Kapoor

Fail, but fail as fast as possible and take the


lessons learned to the next experiment.
Internet bank that failed rather
spectacularly. It was embarrassing.
We might have abandoned the Internet right then. But we also had
reason to be condent in this pervasive technologys ability to deliver
more of what the customer was seeking: ease of access, greater control,
and frictionless transactions. So my
team spent the next few years building all the capabilities that would
enable us to create a superior customer experience. In 2006, we
launched Citibank Direct, an online
bank that gathered its rst billion
dollars in 10 days.
Unfortunately, no matter how
valuable the lessons learned from a
failed experiment, people worry
and sometimes rightfully so that
theyve lost political capital. They
think their next idea wont get backing, their path to the corporate suite
has been derailed, or their year-end

these opportunities are within everyones reach. You know your customers. And when you combine
what they want with a new technology that can enable it, and encourage your employees to go all in,
you can cultivate the kind of judgment that lets you make the right
leaps. Remember that you are playing the long game you may not
see immediate results. Trust your
newfound condence to pay off in
the end. +
Reprint No. 00320

Catherine Palmieri
cdpalmieri@gmail.com
spent years launching online and mobile
business platforms for various corporations, and now speaks and writes on innovation and marketing in the digital world.

onsumer packaged goods


(CPG) companies and retailers are natural allies.
They have many of the same objectives increased sales, cost savings,
optimized processes and systems,
and happy customers and already
work together in many parts of the
world. But in emerging economies,
such collaboration has yet to take
off. In a recent survey of 500 leading
CPG rms and retailers in India,
Strategy& and the Federation of
Indian Chambers of Commerce and
Industry found that although 91
percent of respondents had participated in at least one collaboration
initiative, most of these ventures
were one-offs rather than sustained
relationships. Only 15 to 20 percent
of respondents reported that these
collaborative projects had met their
objectives.
Its a huge lost opportunity.
Across Asia, Latin America, and,
increasingly, Africa, sales channels
are proliferating, demographics are

strategy+business issue 79

leading ideas
ideas

human tissue, and at an ofce park


in Sweden, employees can have a
tiny RFID chip implanted in their
hand to gain access to their building.

shifting, and individuals are gaining


greater access to online information
about companies and their products.
These trends have taken their toll on
revenue growth and prots. In India,
for example, sales growth has leveled
off since 2010; operating margins in
both the CPG and retail industries
are holding steady at best. Working
alone, frankly, is not really working.
Collaboration, however, could
yield quick wins and short-term
benets and could ultimately
transform the complex and fragmented consumer landscapes of
many emerging economies into
more sustainable, more efcient
business environments. Even limited
cases of collaboration between CPG
companies and retailers have led to
positive, enduring industry-level
changes. In 2007, consumer giant
Unilever joined forces with Migros,
one of Turkeys largest retailers.
Through an in-store survey, the
rms learned that shoppers perceived hair conditioner as unnecessary and expensive. Unilever and
Migros set up price promotions and
reorganized shelf space to put conditioners next to shampoos, encouraging shoppers to view conditioner as
an essential companion product.
Migross overall hair conditioner
revenue grew by 25 percent, and
Unilevers by 36 percent.
When collaboration expands to
include the automated sharing of
point-of-sale (POS) data, the results
can be even more dramatic. In 2012,
Godrej Consumer Products of India
set up electronic data interchange
(EDI) interfaces to automate the exchange of such data with retailers.
The company reported that revenues earned through these trade
channels grew 28 percent during the
second half of that year.
Although the benets may seem

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obvious, setting up and sustaining


these partnerships is difcult in
practice. To make the process more
manageable, CPG companies and
retailers need to create the circumstances that will enable effective collaboration, and to establish robust
and transparent systems that allow
collaboration to endure. Of course,
none of that will matter if both sides
cannot see at the outset why they
should be open with each other.
This is no small matter: Lack of
trust was the leading cause reported
by our survey respondents of their
rms avoiding or terminating collaborative initiatives.
Thats why the most signicant
collaborations are deliberately designed to foster trust, often by tackling daunting challenges and
demonstrating what each side can
gain. For example, although retailers
typically view e-commerce as a competing channel, it can also boost instore trade if its designed to do so.
Consider the bloggers club collaboration between Indian electronics
retailer Croma and Toronto-based
e-book publisher/tablet maker Kobo.
This club invites Indian bloggers to
post reviews of Croma products and

outlets. It is designed to forestall


complaints, provide customer support, and promote Croma through
contests for Kobo merchandise.
The use of real-time POS data,
in particular, can reshape how CPG
and retail companies make decisions. A company might use such
data to choose where to expand activity, or to manage product availability in a different way so that consumers are more likely to nd the
products they want in their local
community. Better access to data
from inventory tracking and demand planning can help remove
bottlenecks in the supply chain, direct R&D investment, improve
marketing, and maximize supply
chain efciency, all of which work
toward increasing prots for both
manufacturer and retailer.
Data-driven collaboration often
includes sharing insights on market
trends and consumer buying behavior. Our survey respondents said
such sharing leads to better idea generation involving products and trade
promotions, savvier use of e-commerce platforms, and more effective
workplace management. The most
useful technologies for gathering

Illustration by Benoit Tardif

leading ideas
ideas
16

this data are those that enable direct


interaction with consumers: customer relationship management systems,
Web 3.0 (which uses natural language search, data mining, and articial intelligence technologies), online applications such as digital media
campaigns, and contests on social
networking sites such as Facebook.
Collaboration on demand planning enables CPG rms and retailers
to set realistic targets, meet market
demand, and minimize stockouts.
For example, when one U.K. retailer
and a global market leader in oral
care initiated a joint business planning pilot several years ago, they
took certain steps to foster their relationship. The enterprises leadership
teams met monthly to discuss shortand long-term opportunities. They
reviewed the performance against
forecasts, planned the next months
assignments and developed new
forecasts, and agreed on changes
such as promotions. The initiative
has led to improved delivery rates,
increased on-shelf availability, new
targeted promotions, better margins, reductions in inventory levels,
and streamlined agreement on other
collaborative initiatives.
Finally, co-branded advertisements enable CPG rms and retailers to visibly market products
together. For instance, Indian ecommerce retailer Flipkart and
Motorola recently splashed marketing campaigns across television and
print media for the joint launch of
the Moto G phone. Collaborative
advertising may be extended to include distributors as well: Apple in
India co-brands its iPhone advertisements with pan-India distributors
Redington and Ingram Micro. By
outsourcing its advertising this way,
Apple saves on costs and engages
more actively with distributors. The

Wherever possible, set up common processes and technologies,


with the goal of seamless integration, the incorporation of mobile
devices, and a shared view of data.
These can include common IT systems and back-end processes such as
robust inventory tracking systems,
to streamline the order-ow process
and manage distribution information. You may also wish to align
other systems such as those dedicated to billing, labeling, and EDI to
enable real-time updates, the sharing of nancial data, and the crossmanagement of logistics.
The collaboration can now begin, but the work is far from over. It
is critical that both companies be
able to track and measure progress
as the project unfolds, using key performance indicators established by
a joint team. Link them to performance of the joint account team
members, so they serve as incentives
for variable pay.
Youll also need to ensure that
you have the right talent in place as
the partnership activities progress.
In India, CPG manufacturing companies such as Coca-Cola, Dabur,
Hindustan Unilever, ITC, and
Marico have heavily invested in developing programs to help traditional retailers train their employees in
specialized skills, such as operating
credit card machines, maintaining
inventory logs, and creating attractive merchandise displays. The goal
is to create a dialogue with traditional stores, which make up 90 percent
of Indias retail landscape. Thanks
to such initiatives, these CPG companies have reached thousands of
traditional retailers throughout the
country. Intermediaries such as distributors, systems integrators, and
resellers can also play a role in training and overseeing the retail staff.

Through its Panasonic Partners program, the electronics company Panasonic introduces intermediaries to
new products, business opportunities, and special commercial offers.
These intermediaries use that knowledge to push sales independently
with retailers, enabling Panasonic to
build its channel community.
Finally, remember that trust in
your relationship is something you
will need to continually maintain.
The importance of transparency
with your partner company and
adherence to agreed-on processes
should be clear to everyone involved.
Building trust should begin with
your own organizations behavior,
not just what you expect from others.
In fact, knowing yourself is a critical
part of this process. Many companies are tempted to use collaboration
to make up for gaps in their own capabilities. In practice, however, the
most successful partnerships build
on strengths rather than compensating for weaknesses. The best way to
view collaboration is as a joint
growth opportunity a chance to
develop more distinctive, stronger
capabilities together. +
Reprint No. 00326

Nikhil Bhandare
nikhil.bhandare@strategyand.pwc.com
is a principal at Strategy& in Mumbai, and
co-leads the rms consumer and retail
practice in India.
Pali Tripathi
pali.tripathi@strategyand.pwc.com
is a senior engagement manager at
Strategy& in Mumbai, and a member of the
consumer and retail practice in India.
Aparajita Kapoor
aparajita.kapoo@strategyand.pwc.com
is a senior consultant at Strategy& in
Delhi, and a member of the consumer and
retail practice in India.
This article is adapted from the authors
Strategy& white paper, CPG and Retail:
Natural Allies in Emerging Economies,
Mar. 2015.

leading ideas

distributors in turn benet from association with Apples brand along


with the higher margins they can
earn on its smartphones.
If your company is considering
a collaboration initiative, this may
all seem daunting. But if both you
and your partner have the right
mind-set and process, collaboration
can be successful. The foundation of
any partnership has to be a shared
vision of opportunities and challenges. The CPG company and retailer
need to lock in specic agreements
and expectations about targets, responsibilities, and accountabilities at
the outset. A retailer, for instance,
would likely be unwilling to share
category-level data with a CPG rm
unless the rm promised something
in return, such as assistance in optimizing the retailers product mix to
increase category sales.
Both companies need to nd
sponsors at the top leadership level.
CEO and chairmanlevel endorsement is a key element, positioning
you and your partner company to
achieve common strategic goals and
establish accountability. Further
down the hierarchy, youll need to
set up cross-functional teams, led by
a key account manager. These teams
could be organization-specic or
cross-organizational, depending on
the depth of the collaborative relationship. Members should come
from the supply chain, logistics,
marketing, and IT functions. If you
are pursuing multiple initiatives
with a target partner, to avoid ambiguous reporting lines or conicting commitments, ensure that each
initiative has a clear set of owners
and a governance body, such as a
steering committee or a higher-level
council comprising CEOs of the
two partners plus key members from
both sides.

17

With strategic responsiveness and organizational exibility, you


can move quickly when
your industry changes.
18
by Kayvan Shahabi, Antonia
Cusumano, and Sid Sohonie

any corporate leaders


think their companies are
agile. Surely, they assume,
we possess that combination of
speed, exibility, nimbleness, and
responsiveness that will enable us to
turn on a dime as circumstances
warrant. It often comes as a surprise,
then, when a signicant opportunity or challenge arises and the company cant deliver.
What these leaders realize too
late is that they are thinking about
agility in a counterproductive way.
In their view, agility is an end in itself, instead of a means to a more
important end: sustainable competitive advantage.
At one extreme of the agility
spectrum are startups and other
high-growth companies. They can,
in effect, be too agile, chasing every
potential opportunity without clear
strategic goals. At the other end are
large, incumbent companies, slowed
by lethargic or timid corporate cultures, combined with rigid business
processes and legacy information
technology systems. The sweet spot
lies somewhere in between.
The appropriate level of agility
wont be the same for everyone, but

on prerecorded music and publishing or digital fabrications effect


on conventional inventory management. The challenge is not just to
change quickly, but to change profitably: to know which products and
services should be switched out and
which should remain intact. To exercise this judgment, top executives
must have a thorough understanding of their industry and markets.
There must be mechanisms in place
not just traditional strategic
planning and market research, but
social media and even customer usage data collected through the Internet of Things to feed them information about trends. Decisions
must be made quickly, and communicated rapidly to every function in
the company.
Organizational exibility is the
facility to shift execution rapidly. In
many companies, such functional
skills as product development, manufacturing, marketing and sales,
and customer intimacy are deeply
entrenched, reinforced by IT systems and ingrained practice. But
when there is a change in strategic
direction, the company needs to be
able to retool and rework the most

Illustration by Francesco Bongiorni

leading ideas

Agility Is
Within
Reach

for all companies in all industries,


weve found that being agile depends
on developing two key attributes:
strategic responsiveness and organizational exibility. These two qualities
are mutually reinforcing but are developed in different ways, and it is
easy for a company to possess one
without the other. Until you explicitly develop prociency in both, you
wont have the agility you need.
Its an absence that will become
all the more glaring. In PwCs 2015
survey of chief executives, more
than half of CEOs surveyed said
they believe they will be competing
in new sectors in the next three
years, and 60 percent said they see
more business opportunities now
than they did three years ago. But
almost three-quarters of respondents expressed concern that their
companies lack the skills needed to
meet future competitive threats. In
these conditions, agility is critical.
Strategic responsiveness is the
ability to sense new risks and new
opportunities in the business environment and to craft a response to
those pressures quickly. Consider
the disruptive effect of new technologies, such as the Internets impact

leading ideas

Exhibit: Agility Profiles and Prescriptions


HIGH

Strategic Responsiveness

necessary activities, often within a


few weeks or months. Doing so requires the capacity and the willingness to innovate in every aspect of
the enterprise. Beyond developing
new products in response to perceived consumer needs and market
trends, companies must put in place
new organizational structures, business processes, and technologies.
Ask yourself, for example, whether
your supply chain is resilient enough
to rapidly develop new sources for
parts when the product portfolio
changes, or to maintain the required
ow of parts when natural disasters
or other external events lead to sudden breakdowns in logistics. Does
human resources have the means to
nd the right people when new talents and expertise are needed? Are
your various functions set up to respond to one anothers changes and
help one another move forward?
Agile companies have both
high strategic responsiveness and
high organizational exibility. Their
leaders accept the inevitability of
change. They have mechanisms in
place for sensing potentially disruptive forces and taking advantage of
them before the competition. The
rest of the organization understands
the value of rapid action; people are
practiced and condent, with the
skills and infrastructure support
they need. Although the company
encourages experimentation, it also
resists unnecessary complexity: At
any time, there are just a few new
initiatives, backed by everyone in
the company. There is also a strong
network effect people share the
insights from experiments and customer engagement up and down the
hierarchy.
Unfortunately, that combination is rare. Most companies are
strong in one attribute or the other,

The Faux-Agile Company


Focus on a few key strategic
imperatives, and develop the
cross-functional capabilities and
make the operational investments
needed to deliver on them.

The Agile Company


Continue to move in the most
profitable and value-driven
directions, which means developing even more discipline to focus
on the areas that will produce the
best results.

The Fragile Company


Start with your existing strengths.
What new value can you deliver by
making a few changes for
example, implementing real-time
data analytics to improve
senior-level decision making?

The Almost-Agile Company


Monitor the urgent issues and
disruptions facing your company
and its industry, and develop next
steps that represent clear
imperatives for change.

19

LOW
LOW

Organizational Flexibility

HIGH

Source: PwC analysis

but not both. In what we call fauxagile companies, where strategic responsiveness is high but organizational exibility is low, leadership is
visibly committed to agility, and
takes on ambitious initiatives. But
the company does not have all the
capabilities it needs to deliver results, especially when the strategy
changes. It may be that leaders are
detached enough from day-to-day
operations that they perceive the
company to be addressing customer
needs more effectively than it actually does. Functions and business
units are siloed: They dont communicate effectively, and they resist
working together. Processes and IT
infrastructure are not aligned with
strategy and may be out of date.
Those rms we refer to as almost-agile companies, in contrast,
have low strategic responsiveness
but high organizational exibility.
These organizations are known for
operational competence and skill
at continuous improvement. They
make and sell everything well, but
dont always make and sell the right
things. Strategy is bound up with
existing customers. However, com-

pany leaders dont easily recognize


when their needs and expectations
change. As a result, they dont develop the breakthrough products
and services that their customers
might respond to. Many projects are
proposed at relatively local levels,
and may get implemented on an ad
hoc basis, but few receive companywide support.
The worst-case scenario occurs
when companies are weak in both
dimensions. These fragile enterprises are typically characterized by rigid leadership, high cost structures,
and slow decision making, all of
which have often evolved over many
years of growth. Top executives divide the business among themselves,
each chasing a different group of opportunities or serving different sets
of customers, and often working at
cross-purposes. Several levels of approval are needed for any signicant
change. The culture reinforces stasis,
rather than responsiveness, in a way
that encourages business as usual.
Once you know which type of
company you are, you can understand where you need to do the most
work (see exhibit). Consider the story

sponse. When a company learns to


change itself this way, the fundamental qualities that made it great
in the rst place its view of how
value is created for its customers, its
capabilities in creating that value,
and its distinctive presence in the
market can remain the same. Because becoming agile doesnt mean
changing who you are. It means
gaining the ability to see both opportunities and threats and then executing the strategies needed to address them. +
Reprint No. 00316

Kayvan Shahabi
kayvan.shahabi@us.pwc.com
is the U.S. technology industry advisory
leader at PwC, and is based in San Jose,
Calif.
Antonia Cusumano
antonia.m.cusumano@us.pwc.com
is the U.S. technology industry people and
change leader at PwC, and is based in San
Jose, Calif.
Sid Sohonie
sid.a.sohonie@us.pwc.com
is a director in PwCs technology industry
advisory practice, and is based in Seattle.
Also contributing to this article were
PwC principal Chris Curran and director
James Saliba.

s+b Trend Watch


R&D Investment Pays Off in Oil and Gas
The recent boom in oil and gas reserves in the U.S. and around
the world has been due in large part to new technologies, such
as fracking, developed by oil-eld services (OFS) companies.
In fact, over the last decade, OFS companies have consistently
invested much more in innovation than oil and gas producers
(see top chart). And as the bottom chart shows, this focus,
among other factors, has led to higher stock prices.
4.0%

Oil-Field Services Companies

R&D spending as a % of sales

Oil and Gas Producers


3.0%

2.0%

1.0%

2006

$250

2007

2008

2009

2010

2011

2012

2013

2014

Bloomberg World OFS Index

Stock prices

Bloomberg World Oil and Gas Index


200

150

100

50

2005

2008

2011

2015

The U.S. Energy Policy Act


of 2005 exempts fracking
from certain regulations

Drilling activity
surges in the
Marcellus Shale

Oil reaches
US$110 per
barrel

Global oversupply
pushes oil prices
below $50 per barrel

2006

2007

2008

2009

2010

2011

2012

2013

2014

Note: R&D spending was calculated using a small but indicative sample of leading segment players.
Source: Surviving the Worst: Its Time for Oil Services to Address Shortcomings and Find Strategic Solutions,
by Viren Doshi, John Corrigan, Shawn Maxson, and Adrian del Maestro, Strategy& white paper, Feb. 2015,
strategyand.pwc.com/OFS; Bloomberg; University of Michigan Center for Local, State, and Urban Policy

strategy+business issue 79

leading ideas
20

of one major magazine publisher,


with more than 25 distinct periodicals in print and digital formats.
Company executives realized the organization would have to adapt in
the face of disruptive competition
and rapidly changing circulation
prospects. They saw the writing on
the wall their strategic responsiveness was high. But they also knew
that their organizational exibility
was low, with a siloed structure and
highly entrenched editorial culture.
The company had to make
some big changes: All of its titles
needed to leverage technology and
processes more efciently, create
new publications more quickly,
boost contact with readers through
better use of social media, and provide a single view for advertisers.
But the company also needed to
support and encourage each publications independent personality. To
accomplish these tasks, executives
developed a single, exible content
management architecture for creating and editing content. A standard
digital system enabled publications
to respond to opportunities and
advertisers more quickly and efciently. But each publication would
maintain its unique identity. Once
fully installed, the system would
have the added benet of enabling
editors to see how other publications
contributed to the companys overall
performance, and to look for ways
to collaborate and share content.
Regardless of your industry, increasing both strategic responsiveness and organizational exibility
can give your company the agility it
needs. Leaders must be able to discuss the nature and extent of the disruptions they see coming down the
road, and to experiment with new
types of products and services and
new organizational structures in re-

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22

Lets Megadeal
Seven strategies for managing the unique
challenges of large technology acquisitions.
by Rob Fisher, Gregg Nahass,
and J. Neely

o the outside world, deal


making in the technology
sector can often appear irrational, exuberant, and even insane.
In what other industry would a veyear-old startup with reported revenues of US$10 million and fewer
than 100 employees garner a $22
billion price tag? Thats how much
Facebook paid in February 2014 for
WhatsApp, a messaging service that
allows users to exchange text messages without paying for SMS.
Its easy to disparage the extravagance of such a megadeal. Indeed,
the tenor of the discussion within
the business community and in the
media at the time of the announcement veered from disbelief to dismay about tech valuation bubbles.
Facebook Buying WhatsApp Is a
Desperate Move, screamed a headline at Fox Business News.

But for established technology


rms, the only thing worse than
paying too much for a promising
tech startup is failing to pay enough
to acquire it. Generations of innovation gurus and consultants have
lambasted IBM for missing the
signicance of the personal computer operating system and thereby
enabling Microsoft to grow from a
junior partner into a titan. Analysts
have also criticized Microsoft for
failing to purchase Yahoo, dinged
Yahoo for missing the opportunity
to acquire Google in the late 1990s,
and chastised Google for not pursuing Facebook. To be sure, not every
technology deal is like WhatsApp.
But in technology, an industry unlike any other, a handful of people
working in a garage can transform a
market in the blink of an eye.
A New Megadeal Taxonomy

The unusual nature of deal making


in the technology sector, particu-

larly deals involving headline-grabbing transactions such as Facebooks


WhatsApp purchase and Microsofts
$8.5 billion acquisition of Skype in
2011, demands a closer look. How
should company leaders consider the
value creation potential inherent in
such deals? And how can they manage integration to ensure success
and avoid destroying value? To get a
handle on the megadeal universe, we
examined 131 technology deals of
at least $1 billion in size made over
the past ve years, with a collective
value of $388 billion. The deals fell
into four discrete categories.
Consolidation. These deals involve competitors, value chain participants, or companies with closely
adjacent products and overlapping
customers. The motivation in these
transactions is focused less on
growth and more on unlocking tremendous value by cutting costs and
improving efciencies. These deals
tend to be highly successful because
the companies know each other well
and the synergy potential is signicant and obvious. According to our
analysis, more than 60 percent (or
just over $25 billion) of the value
of megadeals in the semiconductor
subsector was related to consolidation (see Exhibit 1). Notable examples include Texas Instruments
$6.5 billion acquisition of National
Semiconductor in 2011 and Avago
Technologies $6.6 billion purchase
of LSI in 2013. Googles 2012 acquisition of the patent portfolio of Motorola Mobility stands as an example
of value chain consolidation. Google
held on to the patent assets after divesting the set-top box and mobile
device assets it received as part of the
$12.4 billion deal.
Capabilities extension. Deals
that fall into this category the
biggest of the four by value

Illustration by Lars Leetaru

essay technology

TECHNOLOGY

Technology-driven

market

transformation. Facebooks aggres-

sive move to buy WhatsApp typies


this category. Although these transactions constitute only 18 percent
of tech megadeals, they tend to garner signicant headlines. Why? Because they involve a new technology
that is driving customer behavior
in ways that could rapidly threaten
established business models and
transform existing markets, or that

represent the potential for the convergence of existing markets. These


deals tend to involve larger companies dishing out huge sums to buy
small upstarts whose technology
has great disruptive potential. Not
surprisingly, these deals are most
prevalent in the Internet subsector,
in which they accounted for more
than half of the total deal value from
2010 to 2014 (see Exhibit 1). Other
examples include Googles 2014 purchase of smart home products maker
Nest Labs ($3.2 billion), Facebooks
swoop for virtual reality company
Oculus ($2 billion), and Intels 2011
acquisition of security software rm
McAfee for $7.6 billion.
Going private. The fourth technology deal category consists of
transactions in which private equity
rms take companies private. In our
analysis, these deals accounted for
23.5 percent of the total technology
megadeals, and included the single
biggest transaction: the 2013 deal
that took Dell private for $24.3 billion. Such deals can occur for a variety of reasons. Because this article

Exhibit 1: Coming Together


Megadeals by sector and type, 201014, in US$ billions
$100

Strategic acquisition type


Capabilities Extension
Tech-Driven Market
Transformation

$80

Consolidation
$60

$40

$20

$0

Hardware

Software

Note: Does not include going private type of megadeals.


Source: Strategy&

Internet

Semiconductor

IT Services

Exhibit 2: Motivating Factors


Megadeal value share by type, 201014
Tech-Driven Market
Transformation
18.1%
Consolidation
18.3%

Capabilities
Extension
40.1%

essay technology

typically involve two large, mature


companies. In general, the buyer is
seeking new products, new talent,
or new customers in a large, tangential market where it doesnt already
possess the capabilities to compete.
Capabilities extension transactions
accounted for 40 percent of the total value of tech megadeals over the
last ve years (see Exhibit 2). Examples include SAPs $8.3 billion
acquisition of travel-expense specialist Concur Technologies in 2014,
Oracles $7.5 billion purchase of Sun
Microsystems in 2010, and Microsofts 2014 $7.2 billion acquisition of
Nokias device and services business.

Going Private
23.5%
$388 Billion
Total Value
Source: Strategy&

is addressing the unique considerations for strategic acquirers evaluating megadeals, we will discuss only
the rst three categories.
Avoiding the Megadeal Pitfalls

Corporate leaders experienced in


mergers and acquisitions are well
aware of the risks that come with
transactions of all sizes. Many have
honed deal-related processes and
playbooks that serve them well
when executing relatively small to
midsized deals. However, we have
observed that megadeals in the technology sector pose a unique set of
challenges. They thus create barriers
to success that are often unfamiliar
even to executives with signicant
acquisition and integration experience.
Indeed, many of the large spinoffs and divestitures occurring in
the technology sector today are the
consequence of past megadeals that
either did not pan out or no longer
t strategically. From the outset,
these deals faced challenges in capturing expected synergies and moving the parties seamlessly toward
becoming a single company. Today,
faced with the need to focus on core
capabilities or invest in new technologies such as cloud computing,
social media, and mobile technologies many leaders are shedding
prior investments.
Not all megadeals fail, of
course. Indeed, when executed correctly, these transactions can propel

23

lenges to evaluating the business


logic and post-close execution.
We have seen CEOs take a
number of approaches to these deals
and have generally observed that the
more effective deals tend to involve a
combination of the following:
Imposing enhanced functional
accountability. C-suite leaders in
technology, sales and marketing,
manufacturing and distribution,
and corporate functions are empowered with acquisition ownership.
And it is made clear that they are
accountable for the quantication,
execution, and delivery of synergies.
Increasing board governance.
Risks arise in transactions that are
championed or led directly by the
CEO. That warrants greater involvement by the board. Either a board
member assumes a co-leadership
role or the board more actively participates throughout the acquisition
process. This may also require a
greater use of external experts during
the evaluation and execution phase.

A strong conclusion emerges that


cost synergies are much more
achievable than revenue synergies.

the company is buying large operating units and needs experienced


managers in place from Day One
to ensure that these operating units
continue to run smoothly.
This reliance on acquired management poses a dilemma because
most of the senior team from an
acquired company can afford to
leave after the deal closes and will
have other opportunities. They
may also simply dislike the idea of
running a business unit in the new
company after having run the acquired company.
Given this reality, the acquiring
company needs to assess how much
it will rely on these senior managers and for how long. Retaining
people contractually is often just a
short-term solution; its important to
be mindful that retention does not
always correlate with performance.
Leaders need to judge whether
newly acquired talent will keep their
heads in the game, and put a succession plan in place for when they
do leave. This process will involve
signicant relationship building,
particularly with deputies and other
sub-line leaders at the acquired company who might be able to step in
and run the business unit over a longer term.
3. Valuing cost and revenue

more, the BU leader may take ownership of the integration and the
combined performance plan. Consolidation-oriented deals tend naturally to include strong BU accountability because of the high degree of
operational overlap.
However, in capabilities extension megadeals, almost by denition,
BU accountability doesnt exist. In
this vacuum, the chief executive ofcer often becomes solely accountable for the deals business success.
And that presents signicant chal-

In general, each of these approaches distributes focus and accountability, augments capabilities,
or provides for greater objectivity
and transparency to guard against
deal biases.
2. Relying on acquired management. This is particularly important

for technology-driven market transformation deals in which knowledge


about the new technology is held by
a small group of creative or technology leaders. Its also important for
capabilities extension deals in which

synergies. A strong conclusion that

emerges from our study is that cost


synergies are much more achievable
than revenue synergies. So when
evaluating targets, it is essential to
assign more weight to cost opportunities and less weight to revenue opportunities. This is particularly true
for consolidation plays, in which two
mature companies come together
and the cost synergies are apparent,
quantiable, and attainable. For example, when NXP Semiconductors
announced in March 2015 its ac-

strategy+business issue 79

essay technology
24

purchasers ahead of their competition by creating formidable capability platforms, realizing signicant
operational efciencies, and opening up new avenues for growth. To
succeed, experienced leaders need to
make adjustments and address certain challenges.
Weve identied seven critical
challenges to megadeals, and have
developed strategies to cope with
them. All seven apply to the three
technology deal types under consideration consolidation, capabilities
extension, and technology-driven
market transformation although
the degree of the challenge varies by
deal type.
1. Assigning accountability. In
a best-case acquisition scenario, a
business unit (BU) leader is charged
with driving the transaction because
the acquired operations fall within
his or her current scope. The BU
leader evaluates the technology, the
customers, the marketplace, and
core business functions. Whats

essay technology

quisition of Freescale Semiconductor, industry consolidation was the


rationale. NXP CEO Rick Clemmer
stated that the company anticipated
$200 million in cost synergies in the
rst year, and $500 million to follow.
It is particularly difcult to
achieve revenue synergies tied to a
big new strategic vision, or to longterm assumptions that require integrating technology or changing customer behavior over many months
or years. Such assumptions, which
many times are baked into capabilities extension deals, dont often materialize, or materialize more slowly
than expected, or materialize on a
smaller scale than was envisioned.
If the acquisition thesis is dependent on revenue, leaders must push
for truly granular detail during due
diligence, design a separate process
within the integration to carefully
manage revenue goals, and focus intently on driving revenue synergies
as quickly as possible.
That said, revenue synergies
cannot be completely discounted,
especially when it comes to technology-driven market transformation
deals. In 2006, when Google paid
$1.7 billion in stock for YouTube,
the price seemed high. However,
YouTube has delivered tremendous
growth. It posted revenues of about
$4 billion in 2014, up from $3 billion in 2013. Buyers of todays hottest startups, such as Instagram,
must take revenue synergies into
account or they can never arrive
at a competitive valuation. We have
observed companies failing to get
the most from capabilities extension
transactions because they are reluctant to prioritize revenue synergies.
And that can prevent the product or
solution transformation needed to
address converging technologies or
shifting customer propositions.

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acquisitive technology companies


have developed extensive M&A
playbooks and invested in internal
capabilities to execute and integrate
smaller tuck-in deals. But these
playbooks may not be useful for
megadeals. In particular, technology-driven market transformation
deals, with their huge valuations,
narrow focus, tiny revenues, and
entrepreneurial management, may
force an acquirer to toss out its playbook. Nothing in its recent corporate history would have prepared
Facebook to pencil out a $22 billion
purchase of an app. Not every deal
will require such a leap of faith, but
some will; its the nature of the technology industry.
For consolidation and technology-driven market transformation
deals, companies need to put their
standard M&A playbook on steroids. Given the size and complexity
of these deals, their unpredictability,
and the higher volume of requirements across the enterprise necessary to execute them successfully,
leaders need to step back, start with
a clean sheet of paper, and tailor the
integration approach to the specifics of the deal at hand. They must
ensure that sufcient resources have
been devoted to the undertaking.
5. Doing more diligence. Despite the size and complexity of
megadeals, companies sometimes
feel pressure to skimp on due diligence. An attitude often prevails
that big public companies, with their
sophisticated institutional investors,
legions of regulators, and audited
books, have less to hide than small
companies and thus require less due
diligence. Or senior leaders worry
about losing momentum by digging
too deeply. Condentiality issues are
also cited as a reason to curtail due

diligence, and leaders can be uncertain about the depth of due diligence
that is legally permitted.
The net result is that companies involved in megadeals may
know surprisingly little about each
other. A lack of due diligence may
not matter too much in the case of
a technology-driven market transformation deal, because the target
company is small and the potential
for due diligence is limited. But a
lack of due diligence can be quite
damaging for capabilities extension
deals if cost and revenue assumptions are not properly vetted.
Indeed, many of the megadeals
completed over the past several
years are unraveling today for the
simple reason that the original due
diligence did not uncover the barriers to success it should have. As a

ings; and reviewing pre-announcement integration plans and budgets.


6. Communicating effectively.

Good communication is critical for


all categories of tech deals from the
moment a deal is announced. Investors, employees, and customers must
all understand the goals, the integration activities necessary to achieve
those goals, the metrics used to
measure whether those goals are being met, and who is responsible for
delivering on those goals.
However, the emphasis of that
communication may vary by type
of deal. For example, consolidation
deals tend to create a lot of anxiety
and dysfunction among employees
worried that cost synergies translates
into lost jobs. Since theyre not entirely wrong, the senior executives
need to have laid out the integration

Companies involved in megadeals


may know surprisingly little about
each other.
result, the hoped-for synergies never
materialized. Before signing on the
dotted line, CEOs and their teams
should always consider what they
didnt validate, and be sure they can
live with the risk.
The adequacy of pre-acquisition
due diligence should naturally be a
critical focus area for the board. In
other surveys and board seminars,
we have noted a number of leading practices for boards approving
large transactions, such as approving
diligence priorities and non-negotiables; reviewing detailed (versus
highly summarized) diligence ndings; interacting with third-party
due diligence advisors on topics including scope, access, and key nd-

strategy for themselves in a detailed


way so they can communicate condently to employees especially
key employees whose jobs are secure.
An inability to clearly communicate
intentions inevitably creates uncertainty. Instead of focusing on deal
execution, people begin to focus on
personal survival.
By comparison, employees in
technology-driven market transformation deals are often less concerned about job security; after all,
they hold the critical intellectual
capital the acquiring company needs
to retain. In these deals, a greater
emphasis may be placed on communicating with investors and Wall
Street, which may be confused and

strategy+business issue 79

essay technology
26

4. Tailoring the playbook. Most

7. Managing

the

transaction

as a business process. The larger


the transaction, the more challenging the integration and the greater
the need for a well-dened business
process to focus resources and capital on the right activities at the right
times and to capture cost and revenue synergies as quickly as possible.
This is especially true for both consolidation and capabilities extension
deals wherein two big companies are
coming together with a large number of employees and customers.
Its helpful to remember that the
deal process has an inherent aw that
a t-for-purpose business process can
mitigate. The original valuation is
by necessity based on many assumptions. After the deal is announced,
those assumptions cannot be automatically accepted as fact. Once the
company gains access to people and
additional information at the target
company, the acquirer must put a
tailored business process in place
with the requisite accountability and
transparency to get data and test assumptions with fact-based analyses,
and then make further decisions.
The business process for these
types of deals must include a clear set
of guiding principles and goals connected to sustaining everyday operations and capturing synergies, and

relentlessly focus on quantifying,


reporting, and executing on value
capture opportunities. Whats more,
the process must empower leaders
to keep the integration on track by
giving them latitude to make quick
decisions regarding organization,
people, customers, and priorities
and hold these leaders responsible
for communicating those decisions
to customers, employees, shareholders, and partners.
However, in the case of a technology-driven market transformation deal, the integration should be
handled more like a relationship and
less like a business process. Thats
because the smaller, more entrepreneurial team from the target company usually needs a more personal
touch to stay engaged post-close.
The challenges associated with
technology megadeals are signicant
and vary with the type of deal. Even

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so, we believe that megadeals are


worth doing as long as the acquirer
acknowledges these challenges and
tackles them head-on. When executed correctly, these transactions
can boost efciencies, increase revenues, and propel a company ahead
of competitors. They can even reshape an industry. +

essay technology

upset by a very high price tag. Facebook CEO Mark Zuckerberg used
a statement to explain the WhatsApp deal to investors. WhatsApp
is a simple, fast, and reliable mobile
messaging service that is used by
over 450 million people on every
major mobile platform, he noted.
More than 1 million people sign
up for WhatsApp every day and it
is on its way to connecting 1 billion
people. More and more people rely
on WhatsApp to communicate with
all of their contacts every day.

Reprint No. 00330

Rob Fisher
rob.sher@us.pwc.com
is a partner and U.S. and global technology
industry deals leader at PwC. He is based
in Silicon Valley.
Gregg Nahass
gnahass@us.pwc.com
is a partner and U.S. and global leader of
the M&A integration practice at PwC. He is
based in Los Angeles.
J. Neely
j.neely@strategyand.pwc.com
is a partner with Strategy& based in
Cleveland. He is the global leader of the
rms deals platform and part of the
consumer and retail practice.

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27

28

10 Principles of
Organization Design
These fundamental guidelines can help
you reshape your organization to t your
business strategy.
by Gary L. Neilson, Jaime Estupin,
and Bhushan Sethi

global electronics manufacturer seemed to live


in a perpetual state of reorganization. Introducing a new
line of communication devices for
the Asian market required reorienting its sales, marketing, and support functions. Migrating to cloudbased business applications called
for changes to the IT organization.
Altogether, it had reorganized six
times in 10 years.
Suddenly, however, the company found itself facing a different
challenge. Because of the new technologies that had entered its category, and a sea change in customer
expectations, the CEO decided to
shift from a product-based business
model to a customer-centric one.

That meant yet another reorganization, but this one would be different. It had to go beyond shifting the
lines and boxes in an org chart. It
would have to change the companys
most fundamental building blocks:
how people in the company made
decisions, adopted new behaviors,
rewarded performance, agreed on
commitments, managed information, made sense of that information, allocated responsibility, and
connected with one another. Not
only did the leadership team lack a
full-edged blueprint they didnt
know where to begin.
This situation is becoming more
typical. In the 18th annual PwC
survey of chief executive ofcers,
conducted in 2014, many CEOs
anticipated signicant disruptions
to their businesses during the next
ve years as a result of global trends.

One such trend, cited by 61 percent


of the respondents, was heightened
competition. The same proportion
of respondents foresaw changes in
customer behavior creating disruption. Fifty percent said they expected changes in distribution channels.
As CEOs look to stay ahead of these
trends, they recognize the need to
change their organizations design.
But for that redesign to succeed, a
company must make its changes as
effectively and painlessly as possible,
in a way that aligns with its strategy,
invigorates employees, builds distinctive capabilities, and makes it
easier to attract customers.
Today, the average tenure for the
CEO of a global company is about
ve years. Therefore, a major reorganization is likely to happen only
once during that leaders term. The
chief executive has to get the reorg
right the rst time; he or she wont
get a second chance.
Although every company is different, and there is no set formula
for determining the appropriate design for your organization, we have
identied 10 guiding principles that
apply to every company. These have
been developed through years of
research and practice at PwC and
Strategy&, using changes in organization design to improve performance in more than 400 companies
across industries and geographies.
These fundamental principles point
the way for leaders whose strategies
require a different kind of organization than the one they have today.
1. Declare amnesty for the
past. Organization design should
start with corporate self-reection:
What is your sense of purpose? How
will you make a difference for your
clients, employees, and investors?
What will set you apart from others,
now and in the future? What differ-

Illustration by Lars Leetaru

essay organizations & people

ORGANIZATIONS & PEOPLE

tify the design in place today or any


organization designs of the past. Its
time to move on. This type of pronouncement may sound simple, but
its surprisingly effective for keeping
the focus on the new strategy.
2. Design with DNA. Organization design can seem unnecessarily complex; the right framework,
however, can help you decode and
prioritize the necessary elements.
We have identied eight universal
building blocks that are relevant to
any company, regardless of industry,
geography, or business model. These
building blocks will be the elements
you put together for your design (see
Exhibit 1).
The blocks naturally fall into
four complementary pairs, each

made up of one tangible (or formal)


and one intangible (or informal)
element. Decisions are paired with
norms (governing how people act),
motivators with commitments (governing factors that affect peoples
feelings about their work), information with mind-sets (governing how
they process knowledge and meaning), and structure with networks
(governing how they connect). By
using these elements and considering changes needed across each
complementary pair, you can create a design that will integrate your
whole enterprise, instead of pulling
it apart.
You may be tempted to make
changes with all eight building
blocks simultaneously. But too

Exhibit 1: The Eight Elements of Organization Design


Grouped into complementary pairs (the four rungs),
these components can be combined into a design
relevant to any company. When initiating the redesign
of an organization, start with just four or five
changes.

FORMAL

INFORMAL

Decisions
How decisions are made

Norms
How people instinctively act or take action
on

Governance forums
Decision rights
Decision processes
Decision analytics

Values and standards


Expectations and unwritten rules
Behaviors

Motivators
How people are compelled to perform

Commitments
How people are inspired to contribute

Monetary rewards
Career models
Talent processes

Shared vision and objectives


Individual goals and aspirations
Sources of pride

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

Structure
How work and responsibilities get divided
Hierarchy and reporting relationships
Role and responsibilities
Roles
Business processes
pro

Source: Strategy&

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

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

essay organizations & people

entiating capabilities will allow you


to deliver your value proposition
over the next two to ve years?
For many business leaders, answering those questions means going beyond your comfort zone. You
have to set a bold direction, marshal
the organization toward that goal,
and prioritize everything you do
accordingly. Sustaining a forwardlooking view is crucial.
Weve seen a fair number of
organization design initiatives fail
to make a difference because senior
executives got caught up in discussing the pros and cons of the old organization. Avoid this situation by
declaring amnesty for the past.
Collectively, explicitly decide that
you will neither blame nor try to jus-

29

3. Fix the structure last, not


rst. Company leaders know that

their current org chart doesnt necessarily capture the way things get

In an org redesign, youre not


setting up a new form for the organization all at once. Youre laying
out a sequence of interventions that
will lead the company from the past
to the future. Structure should be
the last thing you change: the capstone, not the cornerstone, of that
sequence. Otherwise, the change
wont sustain itself.
We saw the value of this approach recently with an industrial
goods manufacturer. In the past, it
had undertaken reorganizations that
focused almost solely on structure,
without ever achieving the execution improvement its leaders expected. Then the stakes grew higher:
Fast-growing competitors emerged
from Asia, technological advances

Too many interventions at once


could interact in unexpected ways,
leading to unfortunate side effects.
done its at best a vague approximation. Yet they still may fall into a
common trap: thinking that changing their organizations structure will
address their businesss problems.
We cant blame them after
all, the org chart is seemingly the
most powerful communications
vehicle around. It also carries emotional weight, because it denes
reporting relationships that people
might love or hate. But a company hierarchy, particularly when
changes in the org chart are made in
isolation from other changes, tends
to revert to its earlier equilibrium.
You can signicantly remove management layers and temporarily reduce costs, but all too soon, the layers creep back in and the short-term
gains disappear.

compressed product cycles, and


new business models appeared that
bypassed distributors. This time,
instead of redrawing the lines and
boxes, the company sought to understand the organizational factors
that had slowed down its responses
in the past. There were problems
in the way decisions were made
and carried out, and in how information owed. Therefore, the rst
changes in the sequence concerned
these building blocks: eliminating
non-productive meetings (information), clarifying accountabilities in
the matrix structure (decisions and
norms), and changing how people
were rewarded (motivators). By the
time the company was ready to adjust the org chart, most of the problem factors had been addressed.

4. Make the most of top talent. Talent is a critical but often


overlooked factor when it comes to
org design. You might assume that
the personalities and capabilities of
existing executive team members
wont affect the design much. But in
reality, you need to design positions
to make the most of the strengths of
the people who will occupy them. In
other words, consider the technical
skills and managerial acumen of key
people, and make sure those leaders
are equipped to foster the collaboration and empowerment needed from
people below them.
You must ensure that there is a
connection between the capabilities
you need and the leadership talent
you have. For example, if youre organizing the business on the basis of
innovation and the ability to respond
quickly to changes in the market,
the person chosen as chief marketing ofcer will need a diverse background. Someone with a conventional marketing background whose
core skills center on low-cost pricing
and extensive distribution might
not be comfortable in that role. You
can sometimes compensate for a gap
in prociency through other team
members. If the chief nancial ofcer is an excellent technician but
has little leadership charisma, you
may balance him or her with a chief
operating ofcer who excels at the
public-facing aspects of the role,
such as speaking with analysts.
As you assemble the leadership
team for your strategy, look for an
optimal span of control the number of direct reports for your senior executive positions. A Harvard
Business School study conducted
by associate professor Julie Wulf
found that CEOs have doubled
their span of control over the past
two decades. Although many ex-

strategy+business issue 79

essay organizations & people


30

many interventions at once could


interact in unexpected ways, leading to unfortunate side effects. Pick
a small number of changes ve
at most that you believe will
deliver the greatest initial impact.
Even a few changes could involve
many variations. For example, the
design of motivators might need to
vary from one function to the next.
People in sales might be more heavily inuenced by monetary rewards,
whereas R&D staffers might favor a
career model with opportunities for
self-directed projects and external
collaboration and education.

5. Focus on what you can control. Make a list of the things that
hold your organization back: the
scarcities (things you consistently
nd in short supply) and constraints
(things that consistently slow you
down). Taking stock of real-world
limitations helps ensure that you can
execute and sustain the new organization design.
For example, consider the impact you might face if 20 percent
of the people who had the most
knowledge and expertise in making and marketing your core products your product launch talent
were drawn away for three years
on a regulatory project. How would
that talent shortage affect your product launch capability, especially if
it involved identifying and acting
on customer insights? How might
you compensate for this scarcity?
Doubling down on addressing typical scarcities, or what is not good
enough, helps prioritize the changes
to your organization model. For
example, you may build a product
launch center of excellence to address
the typical scarcity of never having
enough of the people who know how
to execute effective launches.
Constraints on your business
such as regulations, supply shortages, and changes in customer demand

may be out of your control. But


dont get bogged down in trying to
change something you cant change;
instead, focus on changing what you
can. For example, if your company
is a global consumer packaged goods
manufacturer, you might rst favor
a single structure with clear decision
rights on branding, policies, and
usage guidelines because it is more
efcient in global branding. But if
consumer tastes for your product
are different around the world, you
might be better off with a structure
that delegates decision rights to the
local business leader.
6. Promote accountability. Design your organization so that its
easy for people to be accountable
for their part of the work without
being micromanaged. Make sure
that decision rights are clear and
that information ows rapidly and
clearly from the executive committee to business units, functions, and
departments. Our research underscores the importance of this factor:
We analyzed dozens of companies
with strong execution and found
that among the formal building
blocks, information and decision
rights had the strongest effect on
improving the execution of strategy.
They are about twice as powerful
as an organizations structure or its
motivators (see Exhibit 2).
A global electronics manufacturer was struggling with slow execution and lack of accountability.
To address these issues, it created a
matrix that could identify those who
had made important decisions in the
past few years. It then used the matrix to establish clear decision rights
and motivators more in tune with the
companys desired goals. Sales directors were made accountable for dealers in their region and were evaluated
in terms of the sales performance

Exhibit 2: The Importance of


Accountability
Survey responses suggest that changes in
information flows and decision rights are twice
as powerful as changes in an organizations
motivators or structure.

Average Strength Index Score (out of 100)

Information

54

Decision rights
Motivators
Structure

50

essay organizations & people

ecutives have seven direct reports,


theres no universal magic number.
For CEOs, the optimal span of control depends on four factors: the
CEOs tenure thus far, the degree
of cross-collaboration among business units, the level of CEO activity devoted to something other than
working with direct reports, and
whether the CEO is also chairman
of the board. (Weve created a Clevel span-of-control diagnostic to
help determine your target span, at
strategyand.pwc.com/spanofcontrol.)

26
25

Source: Strategy& analysis of Org DNA Profiler survey

of those dealers. This encouraged


ownership and high performance
on both sides, and drew in critically
important but previously isolated
groups, like the manufacturers warranty function. The company operationalized these new decision rights
by establishing the necessary budget
authorities, decision-making forums,
and communications.
When decision rights and motivators are established, accountability
can take hold. Gradually, people get
in the habit of following through on
commitments without experiencing
formal enforcement. Even after it
becomes part of the companys culture, this new accountability must
be continually nurtured and promoted. It wont endure if, for example, new additions to the rm dont
honor commitments or incentives
change in a way that undermines
the desired behavior.
7. Benchmark sparingly, if at
all. One common misstep is looking

for best practices. In theory, it can


be helpful to track what competitors
are doing, if only to help you optimize your own design or uncover
issues requiring attention. But in
practice, this approach has a couple
of problems.

31

to follow, and of the indicators to


track and analyze, should line up
exactly with the capabilities you
prioritized in setting your future
course. For example, if you are expanding into emerging markets,
you might benchmark the extent to
which leading companies in that region give local ofces decision rights
on sourcing or distribution.
8. Let the lines and boxes t
your companys purpose. For ev-

ery company, there is an optimal


pattern of hierarchical relationship
a golden mean. It isnt the same
for every company; it should reect
the strategy you have chosen, and it
should support the critical capabilities that distinguish your company.
That means that the right structure for one company will not be
the same as the right structure for
another, even if theyre in the same
industry.
In particular, think through
your purpose when designing the
spans of control and layers in your
org chart. These should be fairly
consistent across the organization.
You can often hasten the ow
of information and create greater
accountability by reducing layers.
But if the structure gets too at,
your leaders have to supervise an
overwhelming number of people.
You can free up management time
by adding staff, but if the pyramid
becomes too steep, it will be hard
to get clear messages from the bottom to the top. So take the nature of
your enterprise into account. Does
the work at your company require
close supervision? What role does
technology play? How much collaboration is involved? How far-ung
are people geographically, and what
is their preferred management style?
In a call center, 15 or 20 people
might report to a single manager be-

cause the work is routine and heavily automated. An enterprise software implementation team, made
up of specialized knowledge workers, would require a narrower span
of control, such as six to eight employees. If people regularly take on
stretch assignments and broadly
participate in decision making, you
might have a narrower hierarchy
more managers directing only a few
people each instead of setting up
managers with a large number of direct reports.
9. Accentuate

the

informal.

Formal elements like structure and


information are attractive to companies because theyre tangible. They
can be easily dened and measured.
But theyre only half the story.
Many companies reassign decision
rights, rework the org chart, or set
up knowledge-sharing systems
yet dont see the results they expect.
Thats because theyve ignored
the more informal, intangible building blocks. Norms, commitments,
mind-sets, and networks are essential in getting things done. They
represent (and inuence) the ways
people think, feel, communicate,
and behave. When these intangibles
are not in sync with one another or
the more tangible building blocks,
the organization falters.
At one technology company, it
was common practice to have multiple meetings before the meeting
and meetings after the meeting. In
other words, the constructive debate
and planning took place outside
the formal presentations that were
known as the ofcial meetings.
The company had long relied on its
informal networks because people
needed workarounds to many ofcial rules. Now, as part of the redesign, the leaders of the company embraced its informal nature, adopting

strategy+business issue 79

essay organizations & people


32

First, it ignores your organizations unique capabilities system


the strengths that only your
organization has, which produces
results that others cant match. You
and your competitor arent likely
to need the same distinctive capabilities, even if youre in the same
industry. For example, two banks
might look similar on the surface;
they might have branches next door
to each other in several locales. But
the rst could be a national bank
catering to millennials, who are
drawn to low costs and innovative
online banking features. The other
could be regionally oriented, serving an older customer base and emphasizing community ties and personalized customer service. Those
different value propositions would
require different capabilities and
translate into different organization
designs. The national bank might
be organized primarily by customer
segment, making it easy to invest
in a single leading-edge technology
that covers all regions and all markets. The regional bank might be
organized primarily by geography,
setting up managers to build better relationships with local leaders
and enterprises. If you benchmark
the wrong example, the copied
organizational model will only set
you back.
Second, even if you share the
same strategy as a competitor, whos
to say that its organization is a good
t with its strategy? If your competitor has a different value proposition
or capabilities system than you do,
using it as a comparison for your
own performance will be a mistake.
If you feel you must benchmark, focus on a few select elements, rather than trying to be best
in class in everything related to your
industry. Your choice of companies

10. Build on your strengths.

Overhauling the organization is one


of the hardest things for a chief executive or division leader to do, especially if he or she is charged with
turning around a poorly performing company. But there are always
strengths to build on in existing
practices and in the culture. Suppose, for example, that your company has a norm of customer-oriented
commitment. Employees are willing
to go the extra mile for customers
when called upon to do so. They
deliver work out of scope or ahead
of schedule, often because they empathize with the problems customers face. You can draw attention to
that behavior by setting up groups
to talk about it, and reinforce the
behavior by rewarding it with more
formal incentives. That will help
spread it throughout the company.
Perhaps your company has
well-dened decision rights, wherein each person has a good idea of
the decisions and actions for which
he or she is responsible. Yet in your
current org design, they may not be
focused on the right things. You can
use this strong accountability and
redirect people to the right decisions
to support the new strategy.
Conclusion

A 2014 Strategy& survey found that


42 percent of executives felt that
their organization was not aligned
with the strategy, and that parts of
the organization resisted it or didnt
understand it. If thats a familiar
problem in your company, the principles in this article can help you
develop an organization design that
supports your most distinctive capa-

bilities and supports your strategy


more effectively.
Remaking your organization
to align with your strategy is a project that only the top executive of a
company, division, or enterprise can
lead. Although its not practical for
a CEO to manage the day-to-day
details, the top leader of a company
must be consistently present to work
through the major issues and alternatives, focus the design team on the
future, and be accountable for the
transition to the new organization.
The chief executive will also set the
tone for future updates: Changes
in technology, customer preferences,
and other disruptors will continually test your business model.
These 10 fundamental principles can serve as your guideposts for
any reorganization, large or small.
Armed with these collective lessons,
you can avoid common missteps
and home in on the right blueprint
for your business. +

New from University


of Toronto Press

Leadership is Half the Story

A Fresh Look at Followership, Leadership,


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

Reprint No. 00318

Gary L. Neilson
gary.neilson@strategyand.pwc.com
is a senior partner with Strategy& based in
Chicago. He focuses on operating models
and organizational transformation.
Jaime Estupin
jaime.estupinan@strategyand.pwc.com
is a partner with Strategy& based in New
York. He focuses on consumer strategic
transformation and organization for the
healthcare industry.
Bhushan Sethi
bhushan.sethi@us.pwc.com
is a partner with PwC Advisory Services.
Based in New York, he leads the PwC
networks nancial-services people and
change practice.

Small Business and the City


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

utppublishing.com

essay organizations & people

new decision rights and norms that


allowed the company to move more
uidly, and abandoning ofcial
channels as much as possible.

34

How Emerging Markets


Can Finally Arrive
Building world-class domestic rms is the
overlooked key to economic development.
by John Jullens

hroughout much of human


history, economic output
was rmly yoked to the size
of a countrys labor force. Because
productivity growth was negligible,
the countries with the largest populations, such as China and India,
could put the most people to work.
They reigned as the worlds largest
economies. Things changed suddenly during the late 1700s. A number of economic, institutional, and
other factors coalesced in England
to unleash the Industrial Revolution, which was transformational
at least in the handful of Western
countries that rose to dominance
through their economic prowess
and resulting military and political
power. Everyone else fell behind.
Incredibly, this great divergence
has persisted for more than 250

years. Today, the global economy


still consists of only 30 or so highincome countries, roughly the same
number of middle-income countries,
and a very long tail of 140 or so lowincome countries. This last group is
still nding it difcult to industrialize, and at least 34 of these countries
remain fragile and vulnerable to outright collapse.
This circumstance doesnt really
jibe with orthodox economic theory.
As access to new technologies and
other know-how opens up, and as
domestic savings and investment are
complemented with external nancing, theory predicts that growth in
low-income countries should accelerate and the gap with wealthier
counterparts should narrow. In fact,
many pundits, including the Nobel
Prizewinning economist Michael
Spence, believe we are currently living in the middle of a century-long

journey, during which the rest of the


world will catch up with the developed economies of the West. By the
time what Spence dubs the great
convergence is over, around 2050,
he says, as much as 75 percent of the
worlds population will live in developed economies in contrast to a
mere 15 percent today.
But its not clear that Spences
optimistic prophecy will come to
pass. In reality, developing countries
almost invariably get caught in various types of growth traps that make
it difcult to reach high-income
status. Since the 1950s, at least 80
countries, in every major region of
the world, have achieved an increase
in annual per capita income of at
least 2 percentage points for at least
eight consecutive years. Yet during that same period, only a handful managed to escape the dreaded
middle-income trap (classied by
the World Bank as having a median gross national income [GNI]
of US$6,750 in 2011 dollars). The
few favored exceptions are largely in
East Asia: Hong Kong, Japan, Singapore, South Korea, and Taiwan.
Whats more, the rate of progress
recently slowed down again after
an unparalleled growth spurt in the
early 21st century. (Between 2000
and 2014, annual growth rates in
emerging markets had outpaced
those in developed ones by almost 5
percentage points, as reported in the
Economist). Its no wonder Morgan
Stanley strategist Ruchir Sharma,
writing in Foreign Affairs, coined
the term ever-emerging markets to
describe the all-too-common cycle
of promise and excitement when a
country appears to take off and
the bitter disappointment when its
growth stalls long before anything
close to economic parity is achieved.
Several interrelated issues ex-

Illustration by Lars Leetaru

essay global perspective

GLOBAL PERSPECTIVE

Getting Growth Wrong

Many economists and policymakers still believe that developing


countries should simply open up
domestic markets to foreign direct
investment, liberalize their nancial
systems and exchange rate regimes,
remove all barriers to competition,
and specialize in those activities in
which they have inherited a comparative advantage. These analysts are
inuenced by a near-religious belief

production of simple, low-margin


manufactured goods, agriculture,
and the extraction of nite natural
resources.
Similarly, the conventional wisdom holds that economic development is a function of democratic
political institutions that ensure
arms-length governmentbusiness
relationships, deregulated labor
markets, and private ownership and
shareholder control. At rst blush,

Without capable rms, emerging


markets will inevitably get stuck
somewhere along the way.
in free markets, trade, and competition that goes all the way back
to Adam Smiths invisible hand
and David Ricardos subsequent
musings on British cloth and Portuguese wine.
But the positive relationship
between trade liberalization, competition, and economic development is ambiguous at best. For
instance, trade restrictions can actually benet a country depending on
whether it is already developed or
still developing, whether it is big or
small, and whether it has a comparative advantage in those sectors that
are receiving protection. Conversely,
premature trade liberalization can
hurt a developing country, as the
entry of much more experienced
and better-resourced foreign multinationals can drive edgling indigenous rms out of business. This
can force the developing country to
de-industrialize and revert to activities with lower added value. In other
words, slavish adherence to the free
market orthodoxy may inadvertently doom a developing country to the

that makes sense the vast majority of todays high-income countries


are democracies. However, here
too, the evidence shows that major
institutional reform, and indeed
democracy, is not a prerequisite
for economic growth, at least initially. Some of the most successful
development cases in history, including China today and South
Korea in the postwar years, took
place under unambiguously autocratic governments.
A related growth fallacy is the
assumption that the best theoretical solution is also implementable
in practice. In reality, emerging
markets are characterized by numerous institutional voids, as Harvard
Business School professors Tarun
Khanna and Krishna Palepu have
written extensively about, such as
shoddy infrastructure, nascent capital markets, and endemic corruption, which make pursuing rstbest solutions virtually impossible.
In addition, these institutional voids
vary from country to country, making effective economic development

essay global perspective

plain why emerging economies


have found it so difcult to achieve
convergence. But ultimately, the
root cause is the lack of integration
among the three primary disciplines that must inform any coherent catch-up strategy: development
economics to guide a country from
low- to high-income status, political
science to design the enabling institutional environment, and strategic
management to create competitive
world-class rms over time. Perhaps
most alarming, the third discipline,
strategic management of domestic
rms, is often not even part of the
conversation. The result is a series of
growth fallacies that have led many
policymakers astray.
Emerging markets need a fundamental reversal in approach. The
conventional wisdom advocates
implementing large-scale economic
and institutional reforms that shape
the overall business and political
environment. But it would be more
effective to selectively use reform
initiatives tailored to each countrys
unique mix of business dynamics
and industries, to improve domestic
rms resources and capabilities at
each stage of a countrys economic
development.
Think about it like a professional sports team. For years, weve
been focusing on the playing eld
making sure the grass is cut, and
the lines are clear. But if the individual players dont have the capabilities they need to compete, none
of that really matters. Those players
are an emerging countrys domestic
rms. They need the right training
(and nurturing) to compete to win
against world-class teams from
more mature countries. Without
such capable rms, emerging markets will inevitably get stuck somewhere along the way.

35

seldom designed to address and improve individual rm performance.


Rethinking Development

Given the complexity and everchanging nature of the intervention required, it is not surprising
that so few countries have been able
to transition successfully from one
economic development stage to another. Although a comprehensive
theoretical framework has yet to be
developed, examples of successful
initiatives from various emerging
markets most recently those in
East Asia suggest a preliminary
set of guiding principles for each of
the four major phases of an emerging markets economic development
journey. A country can evolve this
way from relying primarily on country-based comparative advantages
(for example, ultra-low labor costs)
to developing a sufcient number
of domestic companies that possess
world-class differentiated capabilities of their own.
Phase 1: Breaking free. Many
emerging countries remain poor (a
GNI of $1,025 or lower) indenitely
not because local policymakers dont
understand the basics, but rather because their economies are stuck in
subsistence growth traps. In these
traps, market forces alone are insufcient catalysts for the industrialization and development process. Such
growth traps result from structural
impediments that differ from country to country, but typically include
some combination of economic constraints (such as inadequate access to
affordable nancing), political constraints (such as excessive bureaucracy), and rm strategy constraints
(such as the absence of a skilled
workforce).
For example, in emerging
economies where the vast major-

ity of the workforce is employed in


farming-related activities, the agricultural sector is typically controlled
by a wealthy, landed elite with little
incentive to upset the status quo
and enough power to block or stall
reforms. As a result, land reform
programs specically designed to
break the stranglehold of the landed
elite are often a prerequisite to longterm economic development. As described by journalist Joe Studwell in
How Asia Works: Success and Failure
in the Worlds Most Dynamic Region
(Grove Press, 2013), Japan, Taiwan,
South Korea, and China all implemented meaningful land reform
programs early in their economic
development journeys in contrast
to their less successful counterparts
in Southeast Asia, India, and South
America.
Phase 2: Catching up. Once
the initial set of growth barriers has
been broken, policymakers must
focus more broadly on the industrialization process. It is difcult
to become a high-income country
solely by producing and exporting
agricultural products and other natural resources while importing most
manufactured goods. Industrialization directly raises productivity and
income levels. It also prevents the
inevitable deterioration of a countrys terms of trade, which otherwise
occurs when the country must pay
for importing increasingly sophisticated and expensive manufactured
goods with its own exports of much
cheaper primary products (which
often have far less stable demand).
Several East Asian countries
have demonstrated that leveraging
land reform and other rural productivity initiatives (for example, investments in fertilization, irrigation,
and infrastructure) and migrating
the resulting surplus farm labor into

strategy+business issue 79

essay global perspective


36

policies highly situation-specic. In


other words, each countrys development journey will have to be unique,
due to initial differences in factor
endowments (land, labor, capital,
technology), institutional environments (political system, property
rights, nancial system, labor markets), domestic rm capabilities
(technology, processes and systems,
brand, management), and culture.
The conventional wisdom also
falters because it implicitly assumes
that economic development is a linear process, through which higher
and higher income levels are reached
in a progressive and gradual fashion.
In reality, a poor countrys long and
difcult journey from low- to highincome status runs through distinct
development stages. Each stage is
characterized by different challenges, policy objectives, and tasks at the
political, economic, and rm levels.
Policymakers will encounter new
growth traps at every step along the
way. What is needed to lift a country out of poverty may be quite different from what is needed to navigate across the middle-income trap,
which, in turn, may be entirely different from what is required to sustain a successful high-income country (a GNI of $12,476 or higher).
Policymakers thus face a formidable challenge, as they have to
change course several times along
the way each time having to
overcome stiff resistance from those
with a vested interest in maintaining the status quo. To add further
complexity, economic development
discussions normally take place at
the relatively abstract policy level,
as opposed to the rm-level trenches
where the battle is ultimately won or
lost. As a result, government policy
is typically focused on advancing the
overall business environment, and is

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or a large domestic market. Country


leaders should also consider the target industrys specic technological
and other spillover potential that
can be deployed in other industries.
For most emerging markets, the initial focus will likely be on simple,
nondurable consumer goods, such
as clothing, that are labor intensive,
are relatively simple to produce, and
do not require advanced technical
and managerial skills.

Growth rates will eventually come


down again, as the number of
imported goods suitable for
domestic production dwindles.
as higher prices for consumers, but
they should be seen as an investment
in the countrys future economic development. They are therefore every
bit as important as similar investments in infrastructure and education. From an emerging market
policymakers perspective, the real
question is not whether to intervene,
but what form the intervention
should take and which industries
should be targeted.
Some of these initiatives will
be horizontal, such as providing nancing and reducing bureaucratic
red tape to unlock entrepreneurial
activities. But policymakers should
also introduce complementary vertical initiatives to facilitate the ow of
surplus farm labor into high-potential target industries. Given the lack
of capable domestic companies at
this early stage, the focus should be
on whatever comparative advantages happen to be available locally, be
they ultra-cheap labor, access to natural resources, a favorable location,

The type of intervention can


take various forms, and will need to
be adapted to the requirements of
the target industry and the specic
economic, institutional, and cultural environment in each country.
Tariffs are an obvious choice, at least
initially, as they directly protect local
rms from premature foreign competition. Importantly, they dont
require funding through public
resources which are likely still
quite limited. Other options include
low-cost nancing, favorable tax
rates, below-market land and utilities prices, and direct subsidies to
selected industries.
Phase 3: Moving out and up.

Using the strategies described in


the previous phase, a low-income
country can experience a period of
economic development that can last
several years. But growth rates will
eventually come down again, as the
number of imported goods suitable
for domestic production dwindles,
the supply of surplus farm labor runs

dry, and costs begin to rise all of


which make local rms steadily less
competitive.
At this point, domestic rms
must enter into more value-added
activities and engage in head-tohead competition with rivals from
developed markets. The government will need to help homegrown
rms move from relying primarily
on country-based comparative advantages and copying basic production capabilities to developing
rm-specic competitive advantages
and acquiring advanced innovation,
operations, and go-to-market capabilities. Instead of passively relying
on whatever static set of resource endowments (natural resources, a large
labor force, and so on) their country
may have inherited, emerging market governments must play an active
role in dynamically creating new
sources of competitive advantage.
This is a difcult and timeconsuming process, because the difference between merely good and
world-class rms is often embedded in capabilities that may have
been honed for decades. In addition,
world-class rms naturally have
little interest in sharing their trade
secrets with anyone, let alone with
emerging market rms that could,
over time, become formidable global competitors themselves. And cutting-edge innovation in high-potential industries, such as green energy
and nanotechnology, increasingly
requires massive investments that
are far beyond the means of all but
the largest rms.
Therefore, it is important to
adopt a deliberate approach to upgrading the domestic industrial
base over time, perhaps starting, as
James Cypher and James Dietz recommend in The Process of Economic
Development (Routledge, 1997; rev.

strategy+business issue 79

essay global perspective


38

more productive activities, such as


manufacturing goods that are currently imported, can be an effective
strategy for jump-starting the industrialization process. Doing so will
typically require some form of direct
government intervention, as few local rms will have the capabilities
or scale to compete with their more
experienced foreign competitors.
Of course, such interventions may
have some initial downsides, such

vision to selected industries. More


controversially, they may want to
maintain some combination of capital controls, active currency management, close supervision over the
banking system, and mild nancial
repression to ensure that scarce capital is disproportionately directed
toward investment, and that domestic rms can meet economic and social developmental goals in a more
stable business environment.
Of course, there are strong arguments against such active government intervention. These include
not only the social costs, such as
higher retail prices, lower interest
rates on deposits, and fewer individual investment opportunities.
There is also the potential for widespread corruption, and for domestic
rms to become dependent on government protection. But the risk of
failure doesnt negate the necessity
of trying, as no country has ever
caught up without signicant, albeit
temporary, direct government support. To mitigate the risks of active
intervention, governments should
focus on enabling, even forcing, domestic rms to continually upgrade
their capabilities and competitiveness, helping to cull the losers rather
than pick the winners, and setting
clear and credible timetables for
phasing out support initiatives. For
example, in the 1960s and 70s,
South Koreas government enforced
a strong export regime, specic
performance standards, and sunset
clauses to expose domestic rms to
world-class performance standards
early and weed out those that ultimately couldnt compete.
To be sure, a more interventionist stance demands a highly
capable government sector that is
fully independent, yet sufciently
connected with the private sector to

jointly achieve ever-higher levels of


economic and societal development
while avoiding excessive degrees of
corruption and bribery. However,
these attributes are more a function of the domestic political system
and especially whether certain
groups enjoy privileged access to
key government decision makers
than they are a particular economic
development approach, as South
Korea, Taiwan, and others have
demonstrated.
Phase 4: Staying sharp. As the
economy matures and domestic
companies become more capable,
the governments role must change
again from active intervention during the initial three catch-up phases
to a more passive enabling stance.
However, that doesnt mean the
governments job is over once the
country has achieved high-income
status. The ever-accelerating pace of
innovation continually pushes out
the global productivity frontier to
higher performance standards, requiring ongoing investments. Countries whose companies fall behind in
this process of industrial upgrading
and knowledge acquisition will become steadily less competitive and
ultimately face lower growth rates.
Governments need to help local
companies stay sharp through such
means as sponsoring research in advanced new technologies, investing
in complementary upstream and
downstream industries, creating a
supportive regulatory environment,
and providing nancial incentives
to reduce up-front investment requirements and mitigate startup risk
for local entrepreneurs.
In addition, structural change
inevitably produces winners and losers (even when society on the whole
benets). That hands governments
an important related role in smooth-

essay global perspective

2007), with simply exporting the


goods that were previously imported
but are now produced locally, and
then expanding internationally into
more advanced countries and challenging categories, such as capital
goods (for example, factory equipment), intermediate products (such
as batteries), and, eventually, durable consumer goods (such as cars).
This step-by-step process would expose domestic producers to foreign
competitors early and encourage
them to reach global performance
standards themselves initially,
just for a few relatively simple goods,
but over time, also in more complex
and knowledge-intensive product
categories. This is precisely the economic development path followed
by Japan, South Korea, and Taiwan.
But simply exposing domestic
players to ever-tougher foreign competition is not enough by itself. If
domestic rms are ever to catch up
with their far more experienced foreign competitors or, in some cases,
to take advantage of latecomer advantages in sunrise industries where
rms from developed markets can
be burdened by their installed customer base and older technology
standards, emerging market governments will need to take an active
role. They must engage in a process
of incremental capability building
and innovation by encouraging the
transfer of technology and knowhow from developed markets and
the insertion of local companies into
global value chains and innovation
networks (for example, through local investment and partnering requirements). They must also make
substantial investments in areas
such as education, training, and applied research. In addition, they will
need to create an enabling nancial
environment, including credit pro-

39

and location of their business activities with the highest added value.
Timing Is Everything

The number of countries that remain mired in poverty today makes


all too clear the need to think differently about development both
to improve human welfare and to
reduce the global impact of related

The result of such efforts is


a winning team: a crop of highly
productive homegrown companies
that have the capabilities to compete
on the global stage, and that can
create an economic base at home
that is broad and resilient enough
to provide plentiful high-paying
jobs, encourage a thriving services
sector, spawn advanced technologies

Government leaders need to


apply the right remedies at the
right time, with interventions
directed at specic bottlenecks.
challenges, including pandemics,
terrorism, and military conict. In
addition, emerging markets will
remain the best potential source of
the economic growth many developed countries will need to meet
their rising social and public debt
obligations.
For emerging markets to avoid
the growth traps that have long
held them back, government leaders need to apply the right remedies
at the right time, with interventions
directed at the specic bottlenecks
that prevent domestic rms from
steadily improving their capabilities relative to world-class competitors. Such policies should focus on
integrating tailored economic, institutional, and rm policies at each
development stage, and engaging
in a continual process of industrial
upgrading and rebalancing. The key
is to craft a national development
strategy from the bottom up, rather
than starting with a general set of
policies and principles and trying
to deduce specic recommendations
and initiatives from the top down.

and innovation, and invest in local


communities.
Of course, all this is not to imply that capitalist free market economics and liberal democracies are
suddenly pass. Indeed, they will
probably still be the endgame in
most, perhaps even all, cases. But
the likelihood of getting there may
actually be much higher if governments and multilateral institutions
do not insist on them early on
and instead give countries the tools
and time they need to catch up. +
Reprint No. 00331

John Jullens
john.jullens@strategyand.pwc.com
is a partner with Strategy& based in
Shanghai. He co-leads the rms
engineered products and services
practice in Greater China.

strategy+business issue 79

essay global perspective


40

ing the transition process that goes


well beyond simply ensuring free
market competition, low tax rates,
and vigorously enforced intellectual
property laws. For example, many
governments of developed countries face serious policy challenges as
manufacturing activity migrates to
lower-cost countries. Their economies become increasingly reliant on
the tertiary sector: service industries.
As a result, many workers are forced
into subsistence service jobs unless
they have the education, experience,
and aptitude required for high-end
professional services sectors such as
healthcare, nance, or management
consulting. When few workers are
able to make this difcult transition, individual poverty can become
surprisingly common in otherwise
highly developed countries.
Finally, even developed countries may simply lack enough rms
with world-class capabilities to sustain their economy as a whole. For
example, Italy remains overreliant
on its many small, family-owned
businesses. They are capable of high
levels of craftsmanship but often
dont have the resources and scale
to compete with low-cost competitors from countries such as China.
Unless these companies can become
more capable (and larger), Italy will
be effectively forced to turn to oldfashioned protectionism, which
in the long term only undermines
its economic competitiveness. The
orthodox economists solution of
simply letting noncompetitive local
rms be replaced by more efcient
foreign competitors not only is challenging politically, but also fails to
recognize that local rm ownership
still matters to a regions prosperity.
Most multinationals remain overwhelmingly local in, for example,
the makeup of their executive teams

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strategy+business issue 79

feature strategy & leadership

42

The
$112 Billion
CEO Succession
Problem
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson

when the chief executive ofcer of a


large company is red or departs suddenly without an obvious
internal replacement. The typical seven-gure severance
package and six-gure retainer for an executive search rm
are just the beginning. Board members might have to y in
on short notice for an emergency meeting. A small army of
professionals all of whom charge by the hour begins
to mobilize: communications consultants and employment
lawyers, movers and relocation experts. The longer the clock
ticks, the higher the gure on the meter.
And those are just the hard, easily quantiable impacts.
They pale in comparison to the less visible costs. Turmoil
and uncertainty at the top lter quickly down through the
organization, slamming the brakes on growth initiatives,
hindering the closing of vital deals, and causing some valued
employees to start looking for new positions elsewhere.
Because unexpected successions can paralyze even the bestfunctioning companies, they can wreak a harsh toll on
revenues, earnings, and stock prices.

Illustration by Martin Leon Barreto

Costs can mount quickly

feature strategy & leadership

Poor planning for changes in leadership


costs companies dearly. Getting it right is
worth more than you might think.

43

feature strategy & leadership


44

Per-Ola Karlsson
per-ola.karlsson@
strategyand.pwc.com
is a senior partner with
Strategy& based in Dubai. He
serves clients across Europe
and the Middle East on
issues related to organization,
change, and leadership.

This year, in the 15th Strategy& annual study of


CEOs, Governance, and Success, we focused on CEO
succession as a business issue: How much is it worth to
get it right, and what is the cost of getting it wrong? The
answer to both questions: a lot. Large companies that
underwent forced successions in recent years would have
generated an average US$112 billion more in market
value in the year before and the year after their turnover
if their CEO succession had been the result of planning.
Thats a lot of money. Even in cases where successions
are planned, nancial performance suffers in the year
before and the year after the change (see Exhibit 1). In
other words, theres always a cost to changing leadership at the top, but companies pay a much bigger price
when they get into situations that can be resolved only
by forcing out their CEO.
We also looked at the correlation between total
shareholder returns and succession characteristics over
our entire data set from 2000 through 2014, and found
that underperforming companies tend to have more
forced turnovers, outsider appointments, and multiple
successions. (See Succession Planning and Financial
Performance, page 46.)
The upshot? Although ring the CEO and hiring an outsider is the right call for a board of directors
in some circumstances, it can be enormously costly
to shareholders. Companies that have to re their
CEO forgo an average of $1.8 billion in shareholder
value compared with companies that plan, regardless
of whether the replacement is an insider or outsider.
There is a far greater payoff to getting CEO succession
right than current succession practices and investments
would imply. The $112 billion price tag also raises the
question of CEO succession to a core strategic issue.

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

Also contributing to this article


were s+b contributing editor
Rob Norton and, at Strategy&,
senior manager Josselyn
Simpson, associate Veronica
Pirola, and senior analyst
Spencer Herbst.

Fortunately, substantial progress has been made


in recent years. Overall, boards of directors and senior
executives have become signicantly more practiced
at planning smooth successions during the 15 years
we have tracked CEO turnover. In the early 2000s,
about half of all CEO successions were planned, and
the percentage remained around that rate, with some
variation, through most of the decade. But from 2009
onward, the percentage of planned successions has
steadily increased, to a record 78 percent in 2014 (see
Exhibit 2). Forced turnovers have become much less
common. In 2000, 26 percent of departing CEOs
were forced out, but in 2014, that gure was only 13
percent a new low. (Each year, mergers and acquisitions account for a small minority of CEO changes;
the gure was about 9 percent in 2014.) The data also
Exhibit 1: Lagging Performance
Stocks suffer when companies change CEOs, especially when the
transition is forced.
Median return to shareholders for the two-year period from
one year before to one year after the succession, compared with
relevant regional stock index

4.0%
Planned

13.5%
Forced

Source: Strategy&

strategy+business issue 79

Ken Favaro
ken.favaro@
strategyand.pwc.com
is a senior partner with
Strategy& based in New York.
He leads the rms work in
enterprise strategy and
nance.

VIDEO FEATURE
CEO Succession: Why It Pays to Have a Plan
Large companies can lose billions of dollars when they
dont plan for changes in leadership.

Getting Succession Right

Failed CEO successions are usually a result of boards


having allowed succession planning to fall off their
regular agenda. This happens a lot, because many
boards treat succession as a discrete event, not as a process, leading them to overdelegate succession planning,
usually assigning it to the CEO. Moreover, neither the
board nor senior management typically pays enough atExhibit 2: Sustained Improvement
In 2014, the percentage of planned turnovers reached an all-time high,
while the percentage of forced tunovers reached an all-time low.
Succession reason, as a percentage of global turnover events
100%

80%

Planned
60%

40%

Forced
20%

M&A
0%
2000
Source: Strategy&

2005

2010

2014

tention to developing future generations of CEOs at all


levels. Weve also observed that boards tend to rely too
much on the candidates track records, thus effectively
making their choices based on what has worked in the
past rather than on what will work in the future.
To avoid the penalty for getting the transition
wrong, we recommend that companies undertake a
review to test whether their succession practices are as
good as they should be. This review should consist of
four key questions.

1.

features title
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leadership

shows that incoming CEOs include a growing number


of women, and incoming chief executives are also increasingly better educated than in the past. We believe
these trends reect an overall improvement in corporate governance but there is still plenty of room for
growth. (See The Incoming Class of 2014: No Surprises, page 50.)

Does your board really own the succession process?

At many companies, the succession narrative largely


revolves around the sitting CEO. When will the boss
leave? And who is being groomed by the CEO as heir
apparent? But this way of thinking ignores the requirements of corporate governance, in which the board is
theoretically the paramount governing body. The board
needs to have the responsibility and the accountability for choosing the next leader.
Although the incumbent CEOs judgment will
naturally be an important factor in the boards decision
making, simply delegating the choice of the next boss to
the current one is a mistake. Why? Incumbent CEOs
have an inherent conict of interest in identifying and
grooming potential successors. Most CEOs are not looking to be replaced, and the stronger the bench of potential successors, the more evident it may become to the
board and the CEO that he or she is not irreplaceable.
This conict can also affect the CEOs decisions about
which of the companys senior leaders should be identied as potential future CEOs, and should thus be given

45

as companies in the higher quartiles:


Forced turnovers accounted for 45
percent of all successions at companies in the bottom quartile, compared
with 21 percent for companies in the
top quartile (see Exhibit A). Companies

Exhibit A: Walking Papers

ow do we know that

In the latter case, the need to hire

good succession plan-

an outsider suggests an inability to

ning is good business?

develop senior leaders with the right

We reviewed the char-

mix of talent and experience to run the

acteristics of successions over our

company. Although there are instanc-

15-year data set, slotting all compa-

es in which hiring an outsider makes

nies that had a succession event into

sense (for example, when an industry

quartiles ranked by their total return

is undergoing disruption and new

to shareholders over each depart-

capabilities are required to compete),

ing CEOs tenure a total of 4,498

insiders delivered higher median total

succession events.* We then used two

shareholder returns annualized over

indicators as proxies for poor succes-

their entire tenure in 10 of the 15 years

sion planning: forced successions,

we have tracked.

wherein the board found it necessary

We found that companies in the

to unseat an incumbent CEO; and the

lowest performance quartile exhibited

choice of an outsider as the new CEO.

characteristics of poor succession

In the former case, as noted in the

practices at a greater rate than other

main story, forced turnovers suggest

companies. They forced out current

problems with succession planning.

CEOs more than twice as frequently

the kinds of assignments and responsibilities that will


better prepare them for the top job. Whats best for the
CEO may not always be best for the potential successors development.
One difculty in effectively controlling the succession process is that simply raising the issue can cre-

CEOs of companies with the poorestperforming stocks are often forced out.
Percentage of CEO turnovers in each
performance quartile that were forced,
200014
45%

26%
21%
19%

Lowest
quartile

Second

Third

Highest

Annualized shareholder returns


over outgoing CEOs tenure
Note: Excludes turnover events resulting from M&A,
interims, and events with incomplete turnover information.
Source: Strategy&

ate awkwardness or raise sensitivities. Indeed, circulating an agenda for a board meeting with a new item
labeled CEO Succession might set off alarm bells
throughout the company. For that reason, the board
should nd ways to make CEO succession planning
a routine, recurring, and candid topic of discussion.

strategy+business issue 79

feature strategy & leadership


46

SUCCESSION
PLANNING AND
FINANCIAL
PERFORMANCE

Over a 10-year period,


top-performing companies
had planned successions
79 percent of the time.

in the lowest quartile also appoint out-

Exhibit B: Second Time Around

companies share one succession

siders or interim CEOs to replace the

Companies in the top quartile of stock


performance replace one insider with another
more often than those in the lowest quartile.

characteristic with those in the bottom

outgoing CEO more often than other


companies in 40 percent of all sucfor the highest-performing companies
over the 10-year period from 2005

from the companies in the middle


Insiders hired in planned turnovers, 200514

companies in the top quartile tend

100%

to change CEOs somewhat more


High-performing
companies

through 2014. Companies in the lowest quartile also turn over their CEOs

frequently than average perform-

80%

ers. (Median tenure was 4.8 years

more quickly. CEOs in these companies have a median tenure of 3.4 years,

compared with median tenure of just

Low-performing
companies

over six years for companies in the

60%

compared with a median of 4.8 years

middle quartiles.) We hypothesize

for companies in the highest performance quartile. These characteristics

two possible explanations for this.


40%

First, it could be that CEOs of high-

suggest that companies in the bottom


quartile are frequently surprised by

performing companies are poached


more frequently by other companies.

20%

the need to nd a replacement and

Second, the increased frequency with

lack good internal CEO candidates.


By contrast, companies in the top
performance quartiles showed signs
of good succession practices. Topperforming companies had planned

quartiles. Like the low performers,

which top-quartile companies change


1st
TURNOVER

2nd
TURNOVER

Note: Excludes turnover events resulting from M&A,


interims, and events with incomplete turnover information.
Source: Strategy&

CEOs may reect a proactive drive


for excellence, whereas in the lowest
quartile, it suggests a reactive need
for survival.

successions 79 percent of the time,


and, coincidentally, hired 79 percent

companies an indication that high

of their CEOs from inside. And in

performers have more robust pipe-

planned successions, they were able to lines of senior executives prepared to


replace one insider with another more
frequently than were low-performing

features title
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cessions, compared with 31 percent

quartile both of which are distinct

ll the CEO position (see Exhibit B).


Interestingly, the best-performing

Board practices vary, but one simple way to ensure that


succession planning never falls off the table is to list it
as a standing item on the boards strategic agenda.
The best approach is to include a CEO-free session
during each board meeting, presided over by the lead
outside director. This is one reason that separating the

* We measure total shareholder return (TSR) as


TSR relative to the indexes on which companies
trade, annualized for outgoing CEOs total tenure as
CEO. The quartiles of performance were created by
dividing all companies having a turnover in a given
year into four groups.

roles of CEO and chairman of the board is a basic rule


of good governance.
It is common for boards to request that senior leaders who are potential successors present to the directors
on their businesses and other routine matters. The idea
is to give board directors regular, face-to-face interac-

47

feature strategy & leadership


48

tions so they can get a rsthand understanding of the


strengths and weaknesses of the companys CEO bench.
Unfortunately, this practice can easily devolve into a series of highly rehearsed dog-and-pony shows that never
shine a true light on the senior leaders in action. As a
better alternative, some boards have an issues agenda
on top of their strategy process, in which they review
specic threats or opportunities that may affect the
company. Board members can request that the leading
potential successors take charge of these issues and present on them. This has the great benet of killing two
birds with one stone: seeing the candidates in action
while making progress on the issues and opportunities
that are important to the companys future.

2.

Does your board really have a plan, and is it private? Life

can be cruel and uncertain, even for the worlds top


corporate leaders. A CEO can become debilitated by a
stroke, or die in a plane crash, decide to run for ofce,
or simply decide he or she would like to retire immediately. The board members should always have in
effect, if not in fact a secret envelope summarizing
the succession plan and the names of the senior leaders
they believe are capable of leading the company at any
given moment.
The board should take care to keep the names
on the list private to minimize the risk of key leaders
departing (should they learn theyre not on the list)
and also of undercutting the authority of the incumbent CEO. In some successions, companies have telegraphed the coming change by elevating the heir apparent to the chief operating ofcer position. But this

practice has become steadily less common. (See The


Decline of the COO, by Gary L. Neilson, page 54.)
In our view, this type of on deck promotion can be
counterproductive, and the better practice is to make a
clean break.
Keeping the succession plan private is difcult.
Companies dont keep secrets well. Shareholders and
other stakeholders may feel they have a right to know,
and the nancial media is always looking for a good
succession story. At Berkshire Hathaway, for example,
media speculation surrounding which executive might
succeed the now 84-year-old Warren Buffett has been
raging for more than a decade. Some large companies
have invited public attention by creating a horse race
in which several senior leaders are told, in advance of a
planned succession, that they are nalists, and invited to
compete for the job. Although some exceptional leaders
have emerged from this kind of process, it is disruptive
and divisive, and likely to result in an exodus of talent.
The interests of the company would be better served if
the board acted decisively and minimized uncertainty
about the future leadership.
Not having a plan makes it more likely that when
a change is needed, the board will be forced to act
precipitously. The result, all too often, is the choice of
the wrong person, or the appointment of an interim
CEO, which suggests indecisiveness and creates uncertainty. When Yahoo red CEO Carol Bartz in the
fall of 2011, it named then-CFO Tim Morse as interim
CEO while engaging in a secretive search for a new
chief executive. After four uncertain months, as the
future prospects of internal candidates were left
dangling, the board hired a new CEO from outside
former PayPal executive Scott Thompson. Thomp-

strategy+business issue 79

The board should make


succession planning a
routine, recurring, and
candid topic of discussion.

3.

Is your company truly proactive about developing future


generations of CEOs? Perhaps the best way to avoid the

disruption of having to bring in an outside leader is to


do a better job at developing talent internally. Boards
would be well served to treat CEO succession as a process that will be years in the making, not as a decision
made over the course of a week or two. The board, the
CEO, the chief human resources ofcer, and the senior
leadership team need to work together to ensure that
the companys leadership development process is preparing successors for the CEO position, and that other
executives are rising from further down on the management pyramid to ll other vacancies. The board is directly concerned with the names at the top: the two or
three executives who are candidates for a succession in
the short term, and the dozen or so senior leaders who
are on track to become CEO two to three successions
out. Responsibility for the career development of the
next-tier leaders 50 to 100 executives, at most large
companies rests with the CEO and the senior team.
General Electric, one of the most successful companies in U.S. business history, stands as an example of
orderly succession planning through internal develop-

ment. In its 117 years, GE has had fewer than a dozen


top leaders. And it has had only two CEOs in the past
34 years. In 2001, when Jeff Immelt succeeded Jack
Welch as chief executive ofcer, the change represented
the nal promotion for an executive who had joined
the company 19 years earlier and had risen through
the ranks. Immelt was replacing a CEO who had spent
21 years being gradually promoted at GE before being
named to the post in 1981. GEs continued effort to develop executive talent has qualied many top-tier alumni for chief executive positions at other companies a
fact that helps attract high achievers to GE.
Too often, development of the CEO talent pipeline becomes perfunctory a box-checking exercise in
which each manager lists who should take over if something happens, tagged on at the end of a performance
appraisal. Instead, the process should be proactive, with
care taken that the company is consistently developing
people for bigger jobs. Leadership development models
are frequently too concerned with vertical and functional roles, neglecting lateral moves, such as international
assignments, that can round out future leaders experience. Our data shows that CEOs at the highest-performing companies more often have had international
experience. Indeed, although only 33 percent of this
years incoming CEO class members have international
experience, it is reasonable to think that international
posts may soon become a sine qua non for promotion to
the corner ofce. Stephen Easterbrook, who was named
CEO of McDonalds in early 2015, joined the company
in the U.K. in 1993 and held important executive posts
in the U.K. and Europe before being named chief brand
ofcer in 2013.
(continued on page 52)

features title
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leadership

son, in turn, was let go within weeks as activist investors questioned his academic credentials and his suitability for the job. In this instance, the failure to plan
adequately led to apparent chaos. When a board of directors announces the departure of a CEO and the hiring of an executive search rm to identify a successor,
the board members are also announcing that they have
failed at succession planning.

49

CEOchairman appointments each


year ranged from 25 to 50 percent.
Companies that forced out their CEO
awarded joint titles to the incoming CEO 14 percent of the time over
the last decade, compared with 10
percent for companies with planned
successions.
As noted above, women made

he ways the 330 executives

71 percent in 2013, and up markedly

up 5 percent of the 2014 incoming

who became CEO in 2014

from 44 percent in 2006. The percent-

class, up from 3 percent in 2013. This

ascended to their job show

age of incoming CEOs who were pro-

continues a trend we observed in last

continued improvement in

moted from inside the company was

years study of slow but consistent

corporate governance at the worlds

also 78 percent, up from a recent low

growth in the share of women CEOs

2,500 largest companies. Forced

of 71 percent in 2012. At the 78 com-

(see Exhibit C). Our data continues to

turnovers, which are generally indica-

panies with planned successions that

show that women CEOs can expect to

tive of poor succession practices, are

followed the apprenticeship model,

face stiffer headwinds than their male

becoming less and less common.

whereby the outgoing CEO becomes

colleagues: Women CEOs were more

And the fact that 17 members of the

board chairman to mentor the new

often outsiders (33 percent over the

Class of 2014 (about 5 percent) were

CEO, the share of incoming CEOs who

11 years from 2004 to 2014, compared

women continues the trend toward

were insiders was particularly high:

with 22 percent for men), and were

greater diversity albeit from a

92 percent.

more likely to be forced out (32 per-

very low level that we noted in last

As we have noted (see Succes-

cent versus 25 percent for men).

years study. The demographics of the

sion Planning and Financial Per-

incoming class indicate that compa-

formance, page 46), these trends

Regions, Industries, and Education

nies continue to hire CEOs who are

point to improving CEO succession

Although the share of CEOs coming

otherwise familiar to them: Most are

practices and should presage better

from the same country as their com-

from the country where their com-

nancial results.

pany headquarters in 2014 remained

Another sign of progress: The

near its 82 percent average of the

most have worked in only one region

percentage of incoming CEOs who

last ve years, there were signi-

(67 percent), and most joined their

also hold the chairman of the board

cant variations by region. Western

company from another in the same

position, which we consider to be a

European companies most commonly

industry (57 percent).

poor corporate governance practice,

appointed CEOs from other countries

was near its all-time low in 2014, at 10

over the last ve years, making up

coming CEOs appointed in a planned

percent. This continues a major shift

nearly a third of all cases. Japan and

succession rose to a record high of 78

in corporate governance since the

China did so least often, appointing

percent in 2014, up noticeably from

early 2000s, when the number of joint

foreigners only 2 percent and 1 per-

pany is headquartered (85 percent),

Overall, the percentage of in-

strategy+business issue 79

feature strategy & leadership


50

THE
INCOMING CLASS
OF 2014:
NO SURPRISES

Women CEOs were


more often outsiders
and were more likely than
men to be forced out.
2014, with 89 percent and 84 percent

ing CEOs who hold an MBA reached

European countries also had the high-

of CEOs, respectively, coming from

a new high of 34 percent in 2014, a

est share, at 53 percent, of incoming

their own industries. Utilities com-

75 percent increase from the rate 11

CEOs in 2014 with experience working

panies, which face deregulation and

years ago. Additionally, 10.5 percent

in another region, compared with 24

are in need of new capabilities, looked

of incoming CEOs in 2014 held Ph.D.

percent in the U.S. and Canada, and

furthest aeld, with only 17 percent

degrees. And theyre getting a bit

none in China (see Exhibit D).

of new CEOs joining the company

younger. The median age for incom-

The proportion of incoming

from within the utilities industry (see

ing CEOs in 2014 was 52, one year

CEOs who joined their company from

Exhibit E). Overall, just 20 percent of

younger than that of those appointed

another in the same industry 57

incoming CEOs in 2014 had worked

in the previous two years.

percent has been about the same

in only one company throughout their

for the last three years, but varies

careers.

greatly among industries. Energy and

New CEOs are also becoming

nancials stayed closest to home in

more educated. The number of incom-

Exhibit C: More Women

Exhibit D: Global Experience

Though still low, the share of female incoming


CEOs in 2014 rose noticeably from 2013.

More than half of 2014s incoming Western


European CEOs had punched a career ticket
elsewhere.

Share of incoming women CEOs

Incoming CEOs who had experience working in


a global region other than where the company
is headquartered
HAVE HAVE
NOT

5.2%

4.3%

Exhibit E: Outsider Hires

Western Europe

53%

47%

Brazil, Russia, India

50%

50%

Other mature economies

47%

53%

4.0%

The utilities industry had the highest share of


incoming CEOs in 2014 who were recruited
from a different industry.
Incoming CEOs who joined company
from a different industry

51
Utilities

83%

Consumer staples

67%
56%

Consumer discretionary
Materials

3.1%

52%

Information technology

50%

2.6%

Other emerging economies

38%

62%

Industrials
Telecommunications
services

U.S., Canada

24%

76%

Japan

17%

83%

Healthcare

47%
43%

27%

Financials
16%
2010

2011

Source: Strategy&

2012

2013

2014

China

100%

Note: Excludes turnover events resulting from M&A,


interims, and events with incomplete turnover information.
Source: Strategy&

features title
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strategy
of the
& article
leadership

cent of the time, respectively. Western

Energy
11%
Note: Excludes turnover events resulting from M&A,
interims, and events with incomplete turnover information.
Source: Strategy&

Each company that appeared to

event as part of the effort to learn the

have changed its CEO was investigat-

reason for specic CEO changes in

ed for conrmation that a change oc-

their region.

trategy&s 2014 Chief Execu-

curred in 2014, and additional details

tive Study identied the worlds

title, tenure, gender, chairmanship,

and emerging economies, Strategy&

2,500 largest public companies,

nationality, professional experience,

followed the United Nations Develop-

dened by their market capitaliza-

and so on were sought on both the

ment Programme 2013 ranking.

tion (from Bloomberg) on Janu-

outgoing and incoming chief execu-

ary 1, 2014. We then identied the

tives (as well as on any interim chief

for a CEOs tenure was sourced from

companies among the top 2,500 that

executives).

Bloomberg and includes reinvest-

had experienced a chief executive

Company-provided informa-

To distinguish between mature

Total shareholder return data

ment of dividends (if any). Total share-

succession event between January

tion was acceptable for most data

holder return data was then region-

1, 2014, and December 31, 2014, and

elements except the reason for the

ally market-adjusted (measured as

cross-checked data using a wide vari-

succession. Outside press reports

the difference between the companys

ety of printed and electronic sources

and other independent sources

return and the return of the main

in many languages. For a listing of

were used to conrm the reason for

regional index over the same time

companies that had been acquired

an executives departure. Finally,

period) and annualized.

or merged in 2014, we also used

Strategy& consultants worldwide

Bloomberg.

separately validated each succession

Identifying the best candidates can be difcult


because there is frequently a bias within companies a
bias, in fact, in human nature toward relying on familiar faces. The board should resist this tendency. Most
boards have a grandfather principle whereby the CEO
suggests senior appointments, but the board must approve them. The board can in such cases have a large inuence on these appointments by asking the right questions and challenging the CEO about specic choices.
Oversight of the future-CEOs development program will also enable the board and the senior team to
spot current or emerging weaknesses in the manage-

ment lineup. The board may conclude that no senior


leader is the right candidate to lead the company if a
change becomes necessary, or that they have an insufcient number of candidates with development tracks
that will eventually make them the right choice. In such
cases, it is imperative to move early and proactively to
ll the void before the need to make a change arises.
This action enables the incoming leaders to get to know
the company, show their abilities, and become potential
CEOs over an appropriate time frame. The same practices should be used by the company leadership to ll
emerging gaps in the second tier of managers.

strategy+business issue 79

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52

Methodology

The way companies


manage CEO succession
is a reection of the
way they manage their
enterprise in general.

Is your succession planning backward-looking or forward-looking? The boards overall approach to choos-

ing the CEOs potential successors should start with


what the company will need in the future and how that
is different from what it has needed in the past. Instead,
many companies start with executives track records.
Track records are always more tangible than the
facts about executives capabilities, and boards of public companies understandably nd it easier to promote
people on the basis of tangible facts. But such facts are
backward-looking. As a result, boards tend to choose
candidates who have thrived under the business model
the company has pursued in the past. These candidates
may have been standouts in that context, but changes in
the industry, in markets, or in technologies may suggest
different competencies are required for success in the
future. When Ford Motor Company was seeking a new
CEO in 2006, it proved willing to look outside the traditionally insular auto industry and hired Alan Mulally,
the former CEO of Boeings commercial airplanes division. During his eight-year run, Mulally steered Ford
through difcult shoals and engineered an impressive
turnaround. There were surely many highly competent
executives within Ford who had superb track records of
delivering results. But Fords board rightly judged that
those executives did not necessarily have the skills the
company needed for this crucial juncture.
Many companies today are facing signicant
threats to their established business models. Indeed,
sooner or later, all companies do. Senior leaders in those
companies will have excellent operating experience
within those business models. But that may not be suf-

cient to guide their companies through the changes


necessary to secure their future.
Even if it is discussed openly and frequently at the
board level, the topic of succession will always raise
some discomfort. And good succession planning requires meaningful investments of time and resources.
But those investments are worth it the cost of doing things poorly is in the billions. Moreover, the way
companies manage CEO succession is a reection of
the way they manage their enterprise in general. Getting CEO succession right is one area where companies
can control their own fate. +
Reprint No. 00327

features title
feature
strategy
of the
& article
leadership

4.

Resources
Strategy&s 2014 Chief Executive Study (strategyand.pwc.com/
chiefexecutivestudy): The full report and data analysis of this years study.
PwCs 18th Annual Global CEO Survey: The Marketplace without
Boundaries, Jan. 2015: The latest PwC Annual Global CEO Survey
shows that the changes CEOs are making within their organizations now
have less to do with sheltering from economic headwinds and more to do
with preparing for the future.
Jon Katzenbach and DeAnne Aguirre, Culture and the Chief
Executive, s+b, Summer 2013: CEOs are stepping up to a new role, as
leaders of their companys thinking and behavior.
Matt Palmquist, The Value of the CEO Variety Pack, s+b, Jan. 15,
2015: A chief executive with a diverse background usually brings
innovation and new ideas to a company, but the shake-up doesnt
necessarily pay off.
Matt Palmquist, The Right Time to Separate the CEO and Chairman
Roles, s+b, Apr. 12, 2013: When performance is agging, splitting the
top jobs could well make sense otherwise, dont rock the boat.
More thought leadership on this topic:
strategy-business.com/strategy_and_leadership

53

54

Is it time to add chief


operating officers to the list
of endangered species?
by Gary L. Neilson

important, its good to be the COO right? The chief


operating ofcer has traditionally been the number
two person in the C-suite the senior executive
charged with overseeing all of the companys business
operations. As such, the COO has long been viewed
as the heir apparent, the leading insider candidate to
succeed the chief executive ofcer. Yet, according to the
senior executive search rm Crist Kolder Associates, the
percentage of Fortune 500 and S&P 500 companies
with a COO has declined steadily from 48 percent in
2000 to 36 percent in 2014.
The position is still valid and valuable at more than
a third of the Fortune 500 and S&P 500 companies.
Indeed, 44 percent of current CEOs were chief operating ofcers before ascending to the top spot. But the
decline is unmistakable: COOs are fading from view
throughout the business world. At many high-prole
companies, such as McDonalds and Twitter, companies deleted the position from the organizational chart
when their COO retired or resigned. At others, COOs
chose not to replace themselves in that role when they
were elevated to CEO.
Why are so many major corporations eliminating
the role? Why are COOs-turned-CEOs doing away
with their own former position and, in effect, pulling
up the ladder behind them? And when does it still make
sense to retain or even add the position of chief operating ofcer?
Based on our rms decades of experience advising
CEOs and other senior executives on organizational
leadership and change, we see three major reasons for
the decline of the COO: improvements in CEO management capacity, an overall trend toward atter orga-

strategy+business issue 79

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The
Decline
of the
COO

In a world where succession planning is increasingly

Illustration by Martin Leon Barreto

The Increasingly Effective CEO

CEOs today have greater management capacity than


ever before, and they are expected by their boards to
be closer to the business than they used to be. Over the

feature strategy & leadership

nizations, and a shift in the nature of succession planning. Although we expect these factors to remain in
place and even to grow stronger, we shouldnt count the
COO out just yet. There are still circumstances when
having a COO contributes real value.

past two decades, CEOs have been able to double the


number of their direct reports (from ve to 10, on average), because of a pronounced increase in their own
leadership productivity.
The advancing sophistication and reach of new information and communications technology extends the
CEOs ability to be everywhere at once. Digital communications technologies such as email, voice mail, videoconferencing, and (to a growing extent) social media
enable CEOs to be more hands-on in more of the companys operations. At the same time, enhanced access to
timely and customized nancial and operating information, often in the form of management dashboards,
brings key performance metrics to the CEOs attention
on a virtually instantaneous basis.
Another factor is a trend we have observed each
year in our studies of CEO succession and tenure: the
increasingly common split of the chairman and CEO
roles. In more companies every year, the chairman and
CEO are different individuals. According to our research, the percentage of incoming CEOs who are also
named chairman by their board has declined precipitously, particularly in North America from 52 percent in 2001 to 11 percent in 2014. (See The $112 Billion CEO Succession Problem, by Ken Favaro, Per-Ola
Karlsson, and Gary L. Neilson, page 42.) This division
of labor enables CEOs to spend more time running the
business and less time managing the board. Thus, as the
number of dual CEOchairman roles drops, we can expect a corresponding decrease in the number of COOs.
Meanwhile, boards have become more accountable,
especially in the aftermath of the nancial crisis. They
cannot afford to be seen as rubber-stamping the CEOs
decisions. They are thus more likely to want CEOs

55

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

insights and expertise to bear in a more distributed and


collective approach to information sharing and decision making. This allows CEOs to manage the business
more horizontally, which often leads them to remove
the COO position from the hierarchy.
No More Pre-Anointed Successors

Flatter, More Focused Companies

The second factor contributing to the disappearance of


the COO is the general trend toward atter organizations and more focused portfolios. (See How Many
Direct Reports? by Gary L. Neilson and Julie Wulf,
Harvard Business Review, Apr. 2012.) As companies
de-layer and concentrate more on their core capabilities,
there is less need for a COO to corral and quarterback
diverse operations.
This trend has long been on vivid display in the
consumer packaged goods industry. Companies such
as Unilever and Procter & Gamble expanded into giant
multisector enterprises in the 1980s and 90s. But since
2000, they have generally shed businesses that dont t
their distinctive capabilities. The more focused they are,
the more effectively they can compete. (See The New
Supercompetitors, by Thomas N. Hubbard, Paul Leinwand, and Cesare Mainardi, s+b, Autumn 2014.) As a
companys businesses become more related and more
concentrated, the COOs role naturally diminishes.
In most industries, chief executives are moving
from a hub-and-spoke model of engagement with their
top team to a more collaborative approach. The CEO
and COO no longer sit in the center, receiving information and issuing directives to satellite units and functions. Instead, the CEOs direct reports work with one
another as well as with the CEO, bringing their own

The third reason we see fewer COOs in major corporations relates to succession planning. As the perceived
CEO-in-waiting, the chief operating ofcer position
can inhibit executive recruiting and development.
For companies looking to cultivate a broad and
deep bench of executive talent, the presence of a COO
can be demotivating. Crist Kolder Associates president
Tom Kolder puts it this way: We dont see many oneover-one situations anymore where you have a COO
between the CEO and the rest of the executive team.
Its hard to attract a world-class chief nancial ofcer,
for example, who is not going to report directly to the
CEO. The same holds true for the general counsel, the
head of HR, and most staff functions.
Like organizations themselves, executive development is becoming more horizontal. When rms set up
lateral executive development opportunities and rotate
promising talent through operational and functional
assignments around the world, they develop a robust
cadre of executives who can handle the integration role
previously relegated to the COO. This approach works
well for companies that compete with distinctive capabilities. These companies, which often span the globe
with their products, services, and capabilities, need
many executives with integration skills. They cant rely
on just a COO.
To extend their reach without a COO, CEOs are

strategy+business issue 79

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56

to stay closer to the business. Many boards have begun to demand conrmation that CEOs are on top of
the companys operations and have rsthand knowledge
of their inner workings. The CEO can no longer delegate that sort of detailed insight and responsibility to
the COO.

The advancing
sophistication of IT extends
the CEOs ability to be
everywhere at once.

When to Keep the COO

To be sure, there are several situations in which the chief


operating ofcer role is not only relevant, but critical to
the effective governance of a company.
The rst is when companies wish to be transparent
about their succession plan. Our research conrms that
planned succession events have been on the rise since
2000, signicantly so since 2009. Appointing a COO
can be one way to advertise that a company has succession planning well in hand. The sitting CEO may
have made clear that he or she will retire or resign in six
months to two years, providing the board with a window to groom a single candidate for the role. Naming
a COO helps make that handoff as seamless as possible
and enables the road testing of external hires.
Second, sometimes the CEO needs to step away
from the day-to-day and focus on more strategic concerns. The company may have a signicant restructuring agenda that requires the CEOs dedicated attention,
or it may be undergoing a transformational shift. The
CEO needs a senior operational executive one with
an enterprise-wide perspective to be on point to drive

the comprehensive organizational, operational, and


cultural changes required at that moment, or simply to
keep the company on track.
Third, the COO can be a useful counterbalance
in the C-suite. The CEO may be a strong leader but
lack operational experience. He or she may be new to
the enterprise. There are also instances where there are
a number of candidates vying for the CEO chair, and
there is signicant value in keeping the runner-up involved in the company, notes Kolder.
In these situations, the board may wish to complement the CEOs experiences, abilities, and skills with
those of a strong COO, thus creating a more complete
set of competencies at the top. When they work, these
combinations stimulate the performance of both the
CEO and the COO (and sometimes the CFO as well),
by creating a dynamic in which each challenges the
other to excel. +
Reprint No. 00328

Resources
Crist Kolder Associates, Volatility Report 2014: Trends in CEO recruiting
and succession, based on a survey of 669 Fortune 500 and S&P 500
companies.
Matthew Daneman, Companies Do Away with Chief Operating Ofcers, USA Today, Aug. 26, 2014: One source of references to McDonalds
and Twitter eliminating the COO role.
Thomas N. Hubbard, Paul Leinwand, and Cesare Mainardi, The New
Supercompetitors, s+b, Autumn 2014: Explains the trend toward greater
focus by leading companies in each industry.
Gary L. Neilson and Julie Wulf, How Many Direct Reports? Harvard
Business Review, Apr. 2012: Research-based guide to the appropriate span
of control for CEOs, COOs, and other top executives.
More thought leadership on this topic:
strategy-business.com/strategy_and_leadership

feature strategy & leadership

setting up enterprise-wide governance committees and


forums. These committees are given a mandate to prosecute the business of the organization make decisions,
convey information, and deliberate about the companys
prospects. They also serve as powerful executive development bodies, ensuring that horizontal often global
teaming works to knit the organization together and
bring collective perspectives to bear on emerging issues.
In short, the COO role is becoming less relevant as
organizations foster a deeper, broader, and richer executive bench.

57

strategy+business issue 79

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58

CEMEXs
Strategic
Mix

feature global perspective

This Mexican cement


company redened itself
as a global solutions
provider with the critical
capabilities to match.
AN S+B ROUNDTABLE

Moderated by Thomas A. Stewart

Illustration by Javier Jaen

59

Thomas A. Stewart
stewart.1490@osu.edu
is the executive director
of the National Center for
the Middle Market at Ohio
State University, and the
former chief marketing
and knowledge ofcer of
Booz & Company (now
Strategy&).

This article was developed as


part of the Strategy& Capable
Company Research Project,
aligned with the forthcoming
book Strategy That Works: How
Winning Companies Close the
Strategy-to-Execution Gap, by
Paul Leinwand and Cesare
Mainardi with Art Kleiner
(Harvard Business Review
Press).

Also contributing were


Strategy& global campaigns
director Nadia Kubis and
senior manager Josselyn
Simpson, and contributing
writer Rob Hertzberg.

PREVIOUS PAGES: CEMEX participated in

the 2006 restoration of Centennial Hall


in Wroclaw, Poland, a UNESCO world
heritage site.
BELOW LEFT: The original CEMEX plant

opened in Monterrey, Mexico, in 1906,


with an annual production capacity of
20,000 tons.
BELOW MIDDLE: CEMEX concrete was
used in the construction of the Coral
Highway in Dominican Republic. Completed in 2012, the road has cut travel
times in half and increased tourism.
BELOW RIGHT: The new Town Hall in

Bagnolet, France, opened in 2013, was


built with a high-performance white
concrete developed by CEMEX.

feature global perspective

onsider the challenges of selling cement and


concrete. These are the most widely used
building materials in the world. They are ancient (dating back to at least 3,000 B.C., they form
the literal foundation of civilization), energy-efcient,
durable, versatile, and inexpensive. Three tons of concrete are poured each year for every person on earth. In
most places, the business of providing these materials
is capital-intensive and cyclical. Cement is bulky and is
delivered to construction sites in giant bags. Concrete
must be used soon after it is mixed, because of the way
it hardens.
For all these reasons, concrete and cement are generally seen as commodities. The company that can pro-

vide them at the lowest price in any particular location


would seem to have an unbeatable edge. Yet since the
early 1990s, the Mexican company CEMEX, whose
primary businesses are cement and concrete, has pursued a strategy of differentiation. It denes itself as a
provider of solutions for builders and local governments, particularly in emerging economies and for
those seeking environmental sustainability. As part of
this evolution, CEMEX rebounded from a near bankruptcy during the 2008 economic crisis to regain its position as a leading company in the global construction
materials industry.
This roundtable with CEMEX senior executives
recounts how the company used its distinctive capa-

strategy+business issue 79

60

PARTICIPANTS

Jaime Elizondo
is president of
CEMEX South,
Central America,
and the Caribbean.

Luis Farias
is CEMEXs senior
vice president
of energy and
sustainability.

Luis Hernandez
is CEMEXs
executive vice
president of
organization and
human resources.

Ignacio Madridejos
is president of
CEMEX Northern
Europe.

Juan Pablo
San Agustin
is the executive
vice president of
strategic planning
and new business
development.

Karl Watson Jr.


is the president of
CEMEX USA.

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All photographs courtesy of CEMEX

61

bilities and developed some new ones to bring an


international business strategy to life. (See CEMEXs
Coherence Prole, page 63.) CEMEXs global expansion represented a 180-degree turn for a company whose
very name is an abbreviation of Cementos Mexicanos.
Founded in 1906, the company did business nearly exclusively in its home country until the early 1980s; even
then, it moved past the national boundaries very tentatively. But in the early 1990s, when the companys leaders saw that the North American Free Trade Agreement
(NAFTA) would be signed in some form (it became law
in 1994), the vulnerabilities of the companys position
became evident. If CEMEX stood still, it would be up
against competitors with greater scale and more access

to capital markets. There was no choice but to build


new capabilities both to defend its home turf and to
grow abroad.
Under Lorenzo Zambrano who took the helm as
CEO in 1985 and remained in ofce until his death in
May 2014 at age 70 CEMEX embraced information
technology and inorganic growth. Zambranos successor as CEO, Fernando A. Gonzalez, was previously the
rms executive vice president of nance and administration, and its CFO. Building on its long track record
in lean operations (ruthless operating efciency is a
catchphrase within the company) and its pride in being
one of the most successful companies from an emerging
market, CEMEX developed a high level of customer

sis. It lost major revenues overnight when the global


construction industry imploded, and it suffered from
having paid $14 billion to acquire the Australiaheadquartered materials company Rinker Group just
before the crisis struck. During 2008 and 2009, the
company staved off bankruptcy through a series of major cuts and renancing efforts. CEMEX recovered only
when the economy in its markets began to rebound. By
2012, the distinctive capabilities it had been developing
in sustainability and in providing services to governments and business customers were inherent to the
companys identity.
In this roundtable discussion, six CEMEX leaders,
all interviewed at company headquarters in Monterrey,
Mexico, talk about the companys capabilities system,
how it developed, and the value that it has provided.
M&A and Operational Efciency: 19922000
JAIME ELIZONDO: I joined CEMEX in 1985, shortly before Lorenzo Zambrano became our chief executive
ofcer. Mexico was basically our sole market in those
days, and we were the biggest cement company in the
country. I remember that trucks used to line up outside
our plants to get cement, and it wasnt unusual for them
to wait for several days to pick up an order.
When Mr. Zambrano took ofce, we initiated a lot
of changes to reduce cost and improve our processes and
our quality. Then we started buying up cement companies throughout Mexico.
This all happened right before NAFTA, which
opened up Mexico [to global competition]. Mr. Zambrano recognized NAFTA for the huge strategic threat
it was. There was a real chance a larger global company
would come into the market and underprice us.
JUAN PABLO SAN AGUSTIN: In 1992, two years before
NAFTA went into effect, we made our rst international acquisitions, buying two cement companies in Spain.
At the time, the biggest cement companies were concentrated in Europe. We reasoned that we could achieve
some balance by being on their home turf.

strategy+business issue 79

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62

responsiveness. It delivers cement within 20 minutes


of receiving an order in many locales. Its international
business strategy enabled CEMEX to grow rapidly during the 1990s and early 2000s, when it became one of
the biggest cement companies in the world.
It did this while maintaining, as New York University and IESE professor Pankaj Ghemawat has noted,
consistently high protability levels. (In 2014, the company reported US$2.7 billion EBITDA on revenues of
$15.7 billion.) CEMEXs growing global presence allowed it to raise capital at low rates and to gain leverage
through its overseas presence and relationships. As it
moved more aggressively into mergers and acquisitions
rst in Mexico, then Spain, then Latin America, and
then more broadly its leaders discovered the leverage of postmerger integration. Incoming companies
were inducted into the CEMEX Way (the companys
name for its distinctive practices), and in parallel CEMEX took unusual pains to capture and make use of
acquired companies knowledge. (See The Very Model
of an Emerging Market Multinational, by Pankaj Ghemawat, page 68.)
In the 2000s, to take full advantage of its emerging global nature, CEMEX entered new businesses in
ready-mix concrete and aggregates materials whose
supply chain and nancial dynamics were very different from those of cement. CEMEX also developed a
sophisticated trading arm that has protected it against
much of the volatility that threatens cyclical commodity businesses. At the same time, to evolve into a more
premium business, CEMEX began providing guidance
in construction methods not just to individuals and
private-sector customers such as building companies,
but also to municipalities and national governments.
Over time, CEMEXs leaders developed a capability for
promoting environmental sustainability: decreasing the
companys own fuel use, removing or mitigating pollutants in materials, and looking for ways its products and
services could lead to sustainable practices for all the industries CEMEX serves.
CEMEX was hit hard during the nancial cri-

INTERACTIVE FEATURE
The Foundation of CEMEXs SuccessIn Pictures
How the Mexican company developed the global capabilities needed to support its international business strategy.

ELIZONDO:

We became quite adept at that. We would do


an acquisition, optimize it, take value out of it, and then
go do another one. Having that speed and efciency allowed us to be an acquirer as opposed to being one of
the companies that got acquired.

SAN AGUSTIN:

To get good at postmerger integration


[PMI], we did a lot of postmortems. After each transaction, we would ask ourselves, What was successful?
Where did we fail? That helped us gure out what
to replicate and what not to replicate. Early on, for instance, we realized we should use the same team of people, from planning, accounting, IT, and operations, for
each acquisition. PMI became second nature to them.
An acquisition is inherently very motivating.
Theres this feeling of lets prove it to ourselves, our
competitors, and the whole world that we can really
extract more value out of those assets than the former
owners. But you typically need the people of the acquired company to behave differently, and they dont do
that automatically the day an acquisition goes through.
You have to train them. With most acquisitions, we
found that for at least the rst two years, we needed
to have 20 or 25 CEMEX people working in different
parts of the acquired company, making sure the new
people understood our systems.
This intensive collaboration is one of the key ingredients of a successful integration. The rst three months

CEMEXs Coherence Prole


Headquartered in Monterrey, Mexico, CEMEX is a global leader in the
building materials industry.
Way to Play
CEMEX is a global solutions provider, drawing on strengths in customer
knowledge and innovation and on resources generated by its industryleading efciency.
Capabilities System
CEMEX delivers its way to play by excelling at ve differentiating
capabilities:
Industry-leading operational effectiveness, continuously improving
its manufacturing, logistics, and nancial effectiveness a critical
capability in managing and moving building materials.
Sophisticated knowledge sharing and tracking across a wellestablished, well-used information technology network. This capability gives CEMEX the information it needs to bring acquired companies
on board rapidly and continue increasing its knowledge base.
Long-term customer and community relationship development
through in-depth consultation, giving CEMEX unique insights into
customer needs and the capacity to erect entry barriers for
competitors.
Construction-oriented innovation in products and services
that address the evolving needs of builders, homeowners, and
municipalities.
The development of sustainability initiatives that create new uses for
environmentally conscious building materials and lower the costs of
producing them.
Portfolio of Products and Services
CEMEX provides cement, aggregates, ready-mix concrete, specialty
concrete products, and building and infrastructure solutions to individual customers, institutions, governments, and communities worldwide.

are key. Thats when you have your best chance and
I mean this in the most positive sense of getting into
peoples heads. Thats your window to make them realize they should change how they think.

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In the early 1990s, Mexico had very high ination.


The peso crisis had hit, and Mexican companies had a
hard time accessing the nancial markets. Because we had
such a high cost of capital, the only way to keep on growing through M&A was to extract a lot of value quickly.

63

The CEMEX Way Emerges: 20002005


SAN AGUSTIN:

By 1999, having done acquisitions in Asia,


Latin America, Europe, and the U.S., we had become
very decentralized. That was making us less efcient.
Mr. Zambrano said, basically, that going forward,
CEMEX would have company-wide common processes
for basic activities. These included the closing of the
books, accounts payable, and most technology-related
activities. We could then transfer people without their
having to learn entirely new systems. And our common
technology platform would make us more productive.

LUIS HERNANDEZ:

The CEMEX Way, which we developed to address all this, was a collaborative effort. It was
all about nding what worked best and then enforcing
those standards.
Enforcing is really the right word. A good
example is the emphasis we put on closing the books on
the rst or second day of every month. A lot of managers initially wondered why it was so important to do
this. They thought nothing would be lost if they did
their closings on the seventh or eighth day. But we believed that having that information readily available
would increase the likelihood that managers would
make the right decisions. And the practice had a very
high-level overseer: Mr. Zambrano himself, into whose
email inbox all of these reports owed. This was not
subject to negotiation.

HERNANDEZ:

64

At the same time, the CEMEX Way has


always been retrotted to include the best practices of
companies we acquired. We would identify people in
their eld operations who had exceptionally smart approaches to doing things. The role of an acquisitions
leader included incorporating those practices back into
the CEMEX Way. That was the beginning of recognition on CEMEXs part of the importance of global collaboration and knowledge sharing.

Solutions and Service: 2001present

Until the 1990s, we offered a single product:


cement. Thanks to our operational efciency and to the
discipline we were starting to drive with the CEMEX
Way, we still had some headroom. But [any] product
has a disadvantage in that a customer can nd a substitute for it. A solution, by contrast, cannot be that easily
replaced. So we started to develop offerings that more
closely resembled solutions.

ELIZONDO:

Construrama, our retail distribution brand,


was another solution-oriented approach. When we introduced it in 2001, about 70 percent of CEMEXs
bagged cement sales in Mexico went through individual distributors. With other competitors coming into
the country, we had to do something to strengthen our
distribution channel. In addition to bagged cement, we
sold them rebar [steel reinforcing bars used to frame
concrete structures] and other products. We set up
Construrama as a franchise, and then helped the distributors with their business practices. Although the initial goal of Construrama was to hold on to the loyalty
of our distributors, in the end it became a vehicle for
providing them with solutions to their problems.

ELIZONDO:

HERNANDEZ:

In developed markets [such as France and


the U.S.], our opportunities to differentiate CEMEX
relied more on product innovation. For example, we introduced Insularis in 2012: It is a ready-mix brand that
improves the energy efciency of buildings. Another
example is Fortium ICF, a concrete product that is especially useful in putting up vertical walls.

strategy+business issue 79

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SAN AGUSTIN:

IGNACIO MADRIDEJOS: Patrimonio Hoy, which we started in Mexico in 1998, was one of our rst moves in
this direction. It was a program we set up to help lowincome families overcome the obstacles that made it difcult for them to build their homes. We provided them
with access to building materials such as cement, concrete blocks, and steel; we also provided access to credit
through micronance; and we offered technical and architectural guidance. This was a way for us to grow the
pie and create more value for CEMEX at the same time
that we were doing something benecial for society.

The CEMEX Way has always


been retrotted to include
the best practices of
companies we acquired.

ELIZONDO:

We redened our vision for CEMEX Mexico. We would create innovative solutions for the construction industry that improve the well-being of the
people. We began to say we want a country with the
kind of infrastructure that makes it competitive: highways, ports, airports, anything that reduces the costs of
transport and production. We had a lot of experience
transporting materials over long distances in trucks,
railroads, and ships, so we knew the problems of having poor infrastructure, and we had years of experience
helping to build ready-mix concrete roads. We knew
that, compared with building asphalt roads, the initial
investment was almost the same and the cost of maintenance was much lower.
For CEMEX to play that kind of role, the company
needed new capabilities. We needed a new kind of executive, connected with the environment, who understood the real needs of any given locality. We changed
old habits; for instance, in the past our people were not
prepared to interact with our communities or with the
media. We had become an efcient company with an
inward-looking culture. But our operational guys realized that they needed to be able to talk to the media,

and to local communities and their leaders. The operational guys had to recognize that it wasnt enough to
lower costs; they also had to connect with local people
and address their concerns for example, about the
dust generated by trucks picking up materials. The
sales guys had to learn not to wait for people to come
in with orders; if markets were soft, they had to go out
and propose solutions to problems that had not yet been
brought to public attention. We dont just mend holes
in your street we can prevent those holes from recurring for the next 30 years.
Partly its a matter of how we talk about these
things with customers. Were not just selling cement or
ready-mix; were helping you build a street. Were helping you build a home. We arent selling a product to
you; were working with you on a solution.
A World of Shared Knowledge: 2005present
MADRIDEJOS:

By the end of 2004, we were an $8 billion company. To keep growing, we needed some larger transactions. Thus, in 2005, we bought the RMC
Group [a British company; RMC originally stood for
ready-mix concrete]. In 2007, we bought the Rinker
Group, an Australian building-materials company.

SAN AGUSTIN:

RMC was one of our rst acquisitions


of a company with businesses in multiple countries.
It required far greater PMI resources 200 to 300
CEMEX managers were involved, about 10 times the
number needed for our single-country acquisitions.
Naturally, we had to come up with new ways of managing the process and new coordinating mechanisms,
including designating individuals as country leaders.
That led to weekly updates on issues and problems, and

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In developing markets [such as Mexico, South


America, and the Caribbean], we have a bigger opportunity. Our capabilities can help us orchestrate infrastructural offerings in a way that others cannot. For
example, you might have a municipality with good
tax revenue, but [leaders] dont know how to structure
a project, get the permits, or make a good decision about
where to put in a road, a bridge, or a public housing project. If we can help orchestrate all this, we can also provide value beyond supplying any of the main products.

65

Were shifting now from global


standards to global principles,
out of the realm of a recipe and
into the realm of a playbook.

feature global perspective


a steady effort to learn from them. This was especially
important because RMC was in 18 countries, and its
people didnt talk to each other. The French managers
didnt talk to the German managers, who didnt talk to
the British managers, and so on, down the line.
MADRIDEJOS:

These acquisitions also brought us into


new territory in our product portfolio. Ready-mix and
aggregates might seem like they are natural extensions
of cement, but there are some signicant differences.

Cement is a powder made from limestone and other ingredients, used in the production of
concrete and masonry. It is produced in enormous, cap-

ital-intensive plants involving sophisticated technology.


Ready-mix concrete is a downstream product. You dont
need capital-intensive plants or sophisticated facilities;
the plant is like a blending station, and the main production work is done away from it, in a truck with a
rotating cylinder that mixes the product as it carries it
to work sites. The magic is thus in the market, not in
the production. How do you interact with customers?
If volumes decrease, how do you maintain your price?
If volumes level off, how do you gain share? If volumes
pick up, how do you extract value?

KARL WATSON JR.:

MADRIDEJOS:

Cement is a global business there are


standards you can apply everywhere. It lends itself to

strategy+business issue 79

66

BELOW LEFT: The Amazon Arena soccer

stadium was completed in time for


the 2014 FIFA World Cup. Located
in Manaus, in southern Brazil, the
stadium was built with ecological
construction methods.
BELOW MIDDLE : Another view of the

restored Centennial Hall in Wroclaw,


Poland.
BELOW RIGHT: Terminal 2 (the Queens

Terminal) at Heathrow Airport in


London, was built in 2014 with a lowheat ready-mix concrete developed by
CEMEX to prevent premature thermal
cracking.

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67

recipes like the CEMEX Way, which can be disseminated by a corporate center. By contrast, ready-mix and
aggregates are hyperlocal businesses, and a best practice
in one place might not be a best practice in another. We
needed to gure out what the best practices were in different regions, see how broadly they applied, document
them, and implement them where appropriate.
WATSON:

Were shifting now from global standards


to global principles. Were moving out of the realm
of a recipe into the realm of a playbook or guide. In
other words, we are building the capability of sharing
knowledge. Ill give you an example involving the readymix business. Like everyone else in ready-mix, RMC in-

cluded transportation as part of the unit price. A truck


with a capacity of 10 units, priced at $60 a unit, if full,
would generate $600. But if we sent out the same truck
to ll an order of six units, wed only generate $360.
Obviously, that doesnt make a lot of business sense.
Ready-mix is probably the only transport sector in the
world that charges the same per-unit price whether a
truck is full or half full.
Then we learned that France wasnt doing this.
They decoupled charging freight from charging for the
product. To use the same example, they would sell the
product for $60 but charge freight of $250 per load (this
would increase based on distance from the originating
plant) no matter how full the truck was.

fostering and maintaining the CEMEX

other Latin American countries and

culture. Lorenzo Zambrano, for

into Europe.

example, checked kiln statistics and

CEMEX accomplished all of this

sales data on a daily basis. This type

while maintaining consistently high

of direct engagement translated

protability levels and fending off

into an intensive, highly motivated,

hostile takeover attempts from its

extremely competitive work ethic for

leading global competitors, Holcim

the entire company. Another example

hen a company moves from

and Lafarge. (Those two companies

is CEMEXs postmerger integra-

a national to a global role,

announced their intentions to merge

tion (PMI) practice. Many companies

success is not guaranteed. Many

in 2014 and are, as of this writing, still

make acquisitions and quite a few are

companies expand into areas where

proceeding with that deal.) CEMEX

serial acquirers. But very few have

they are unlikely to thrive, because

also survived through the immense

the laserlike focus on making acquisi-

they lack the capabilities needed in

pressures of the Great Recession.

tions work and work quickly that

feature global perspective


68

tionals, and it had also expanded into

their new locales and because the

The companys ability to sustain

CEMEX has. A PMI manual covering

parameters of their home country

its business around the world is

only human resources is as thick

constrain them. The CEMEX story

closely tied to the capabilities that it

as a dictionary, reecting a level of

offers lessons about how to grow in a

has built over time. How did CEMEX

detailed attention one might expect

coherent, effective way.

develop and manage that prowess?

from an investment banking rm, but

When Lorenzo Zambrano took over

not from a cement manufacturer.

I rst came to know CEMEX in


2000, when I wrote a Harvard Busi-

CEMEX as CEO in 1985, it was a rela-

ness School case study on it. I have

tively diversied group of companies.

a large portion of its prots from its

continued to track the company and

Zambrano deliberately sought to

operations in Mexico. But given the

its progress ever since. CEMEX, un-

have the entire enterprise create val-

companys high market share there,

like its top competitors, was an early

ue. He narrowed the horizontal scope

the expansion possibilities within

example of a multinational from an

of business (the lines of products

Mexico are clearly limited. As a

emerging market. Mexico, like many

and services) to focus on broadening

result, CEMEX continues to add

other developing economies, still

geographic scope. Over the years,

value by investing heavily in and

hadnt generated much outbound for-

CEMEXs management has demon-

then revamping operations in

eign direct investment. And the bulk

strated continuous commitment to its

foreign markets.

of its investment was concentrated in

identity as a high-value, knowledge-

the United States the destination

intensive solutions provider, even as

for more than 80 percent of Mexican

it shifted to meet changing market

exports. But CEMEX bucked this pat-

demands and conditions.

tern: By the 2000s, it derived more of

A critical factor is the CEMEX

its sales from its foreign operations

Way. The senior leaders of the

than (the few) other Mexican multina-

company dedicate themselves to

That is a global best practice. Admittedly, to introduce it in a market unaccustomed to it is difcult because we stand out. So we have said each business must
recapture transport dollars. We wont dictate how you
do it, but we require that you recapture all your freight
somehow.

CEMEX continues to generate

Pankaj Ghemawat
pghemawa@stern.nyu.edu
is a professor at New York Universitys
Stern School of Business and the Anselmo
Rubiralta Professor of Global Strategy at
IESE Business School.

HERNANDEZ: Knowledge sharing wasnt new at CEMEX;

it had been in place for years. But when the nancial


crisis struck, and our expenses proved too high, it forced
us to become much more focused on knowledge sharing
to remain effective. This response to the crisis enabled
us to continue to evolve.

strategy+business issue 79

The Very
Model of an
Emerging Market
Multinational

WATSON:

Sustainability and Alternative Fuels: 2005present


LUIS FARIAS:

We had been thinking about the potential


of alternative energy sources since 1990 or so. At the
time, we were burning fuel oil and natural gas two
of the most volatile commodities in terms of price. Since
about 40 percent of the direct cost of cement is wrapped
up in [energy use], you need to watch the expense of
fuel and electricity carefully.
We acquired a Spanish cement company that had
begun to use petroleum coke (or pet coke), a by-prod-

uct of rening petroleum that ordinarily emits a lot of


carbon dioxide. There were not many companies that
could use pet coke. But we could, since cement kilns
burn at such a high temperature 1,600 degrees Celsius [3,000 degrees Fahrenheit] that they mitigate
most of the negative atmospheric effects. That gave us
some big advantages. We have become experts in using
pet coke. Today, it accounts for about 45 percent of the
fuel we use around the world.
SAN AGUSTIN:

Knowledge sharing also helped us with


another alternative-fuel innovation that came to us
through the RMC acquisition: the use of fuel derived
from household waste as a substitute for fossil fuels in
our cement manufacturing facilities. Today, CEMEX is
one of the leaders in this technology.

MADRIDEJOS: We didnt buy RMC because of its understanding of alternative fuels and waste-to-energy
systems. But we quickly saw RMCs energy strategy
as a capability we could adopt. The part of RMC that
was in Germany was particularly advanced; approximately 50 percent of its fuel use came from alternative sources. Despite the experience with pet coke,
CEMEX was far behind.
As a rst step, we extended what RMC was doing in Germany to the rest of Europe. That took some
doing. The German part of RMC was using refusederived fuel a fraction of municipal waste which
is not widely understood. There is often a not in my
backyard mentality on the part of government ofcials. It takes time for people to become comfortable
with the idea. In addition, using refuse-derived fuel is
pretty complicated technically because of variations in
caloric power and other factors. Finally, we wanted to
move quickly to structure long-term contracts for the
energy sources. We knew from our experience with pet
coke that it was only a matter of time before waste-recycling companies would start to peg the price of this
energy source to the price of oil, eroding our advantage.
Today, were at over 28 percent alternative energy use,
the highest among our competitors.

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In 2009, we launched an internal social network called Shift, like a walled-off version of Facebook.
It allows people in different communities of interest at
CEMEX to see detailed information about operations
around the world.
For example, within ready-mix, Shift has a track
for value-added products. You can see how much we sell
in value-added products every month, and how much
more revenue they generate versus standard products.
Each month, we do an hour-long presentation on the
countries that have advanced this sort of product: what
they did, why they did it, how much money they made,
and why others might follow the example. We call it
Concrete Talks.
For most of our products, Shift shows the specications and a video of what the product does. Theres a tutorial in Spanish, German, French, Polish, English, and
Chinese about how its sold, how its positioned, what its
value proposition is, where it should be used, and then
maybe one or two customer testimonials. You could do
all that stuff manually, with an email to a colleague. But
that would require generating a separate internal campaign for each new product.
Mr. Zambrano talked about going from being an
elephant to being a greyhound. Left to their own devices, big companies will continue to act big. Theyll
put in more rules, procedures, and standardization.
When youre running a hyperlocal business like readymix concrete and aggregates, you cant allow that to
happen. You have to ght all the time to be small. Shift
allows us to make the company feel small.

69

Capabilities dont exist in a


vacuum. Theyre the result
of things that you do either
consciously or unconsciously.

feature global perspective


70

FARIAS:

Fifty years from now, the world will be lowcarbon. This will require a lot of cement. Windmills are
a good example. You dont see them, but offshore windmills have huge cement pilings underneath. High-speed
railway systems also require a lot of cement. We also

know that concrete pavements, compared with asphalt


roads, are far more energy efcient; they reduce vehicle
fuel consumption and carbon dioxide emissions.
WATSON:

For now, the environmental regulations are far


more advanced in the U.S. and Europe than they are
in, say, South America. But in the long run, were headed for the same global standards. That will not just
create a requirement for CEMEX; it will also create
opportunities.

How to Build Capabilities


HERNANDEZ:

Capabilities dont exist in a vacuum.


Theyre the result of things that you do either con-

strategy+business issue 79

When we treat sustainability as a capability, it


changes what we do about it. It is not just a license to
operate in countries where regulations are becoming
stricter, or just a way to reduce cost. We can make a difference for our customers in terms of green buildings,
greener roads, and environmentally friendly housing.
We are developing new products that will help in the
reduction of emissions in buildings.

BELOW LEFT: CEMEX has donated funds

to support the excavation, restoration,


conservation, and site management of
this ancient Egyptian site, the Mortuary
Temple of Thutmosis III in Luxor.
BELOW RIGHT: The unusual paving sur-

face used in the renovation of this town


center in Gardanne, France, in 2012,
was created with disabled concrete, a
special technique developed by CEMEX
with the projects architect. CEMEX
won an industry innovation award for
the project.

SAN AGUSTIN:

When we acquire a company, we listen.


We say, We want to learn from you. But we also
teach. We invest in training new people, talking them
through our practices, and helping them assimilate.
In the old days, it was: This is it. New name, lets
move on.
Today, one of the major differences is all the time
and effort we dedicate to change management. Its critical that we retain the talent and the way they think.
Because in the end, thats what will make CEMEX,

CEMEX. This company is much better because of


how we have integrated people and companies from Colombia, Germany, the U.S., and France, among other
geographies, into the way we think.
FARIAS: In a lot of ways, capabilities development follows a natural evolution. Its just what happens when
you have the right people in the right positions. Our
pursuit of efciency is a good example. It has followed
a different arc at different times, but weve never sat still
or been complacent about it. And we never will. Were
constantly moving, constantly looking to be better. +

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sciously or unconsciously. In human resources, for example, the rst thing we design is the organizational
structure. How is work organized? Who has decision
rights over what, and how is the work done? The second thing has to do with people individual skills,
individual balance, and individual knowledge. And the
third one is incentives: what you measure, what you pay,
and so forth. Over time, together, those things build a
culture that produces the behaviors that reinforce the
capabilities that will make you successful.
You can change organizational structures relatively
easily. You just send out an email that says, Joe, you
now report to Regina, and here are the new guidelines
on decision rights. Likewise, incentives are relatively
easy to deal with. Tomorrow were going to start using
cash value added as a measure of performance, and if
you achieve this level of cash value added, you get this
bonus, and that will set you up to be promoted.
The middle one, which is people, is the most difcult. Especially when youre shifting to a distributed
organization, and asking people to make decisions
material ones that they havent been asked to make
before, it can take a while to get that right.

Reprint No. 00325

71

Resources
Donald R. Lessard and Cate Reavis, CEMEX: Globalization The
Cemex Way, Case Study 09-039, Mar. 5, 2009, MIT Sloan
Learning Edge: Describes the capabilities improvement encompassed
by the CEMEX Way.
Pankaj Ghemawat, Redening Global Strategy: Crossing Borders in a World
Where Differences Still Matter (Harvard Business Review Press, 2007):
Describes CEMEXs protable expansion in a semiglobal economy.
Cesare Mainardi and Paul Leinwand, Soundbite: The Secret to Strategy
That Works, Strategy& video series, 2015: Concepts underlying the
Capable Company research project.
More thought leadership on this topic:
strategy-business.com/global_perspective

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72

Photographs by Peter Gregoire

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by Sally Helgesen

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73

Sally Helgesen
sally@sallyhelgesen.com
is an author, speaker, and
leadership development
consultant, whose most
recent book is The Female
Vision: Womens Real Power
at Work (with Julie Johnson;
Berrett-Koehler, 2010). Shes
@SallyHelgesen on Twitter.

One of the most signicant encounters in the his-

feature organizations & people


74

tory of not-for-prot enterprise could well have been


the rst meeting between Frances Hesselbein and Peter
Drucker. It took place at New York Citys Union Club
in 1981. Hesselbein was in her fth year as CEO of the
Girl Scouts of the USA, a national organization with
more than 3 million members and volunteers. Founded
in 1912, it was a venerable but relatively staid institution in which girls drawn almost entirely from the white
middle class aspired to win homemaker and storytelling badges. Hesselbein had become CEO at a difcult
time for the organization; it had had a declining membership, a dearth of volunteers, a growing reputation
for irrelevance, and a governance system that allowed
many of the 335 councils to operate as separate efs.
But she had begun to lead the organization through a
turnaround. Under her guidance, it was becoming a cohesive and growing enterprise, focused on helping girls
from diverse backgrounds achieve their highest potential, through a contemporary program that emphasized
leadership, science, technology, and math.
Hesselbeins strenuous commitment to making
operations more professional and updating the educational side of the Girl Scouts had been inspired in part
by Druckers writing. Although he had mostly written
about business organizations, she believed his advocacy
of clear mission focus, active board governance, and
demographics-driven customer service had great resonance for nonprots. So she eagerly accepted an invitation to hear Drucker, who was Viennese, speak at the
Union Club. I arrived at exactly 5:30, she recalls, because that was the time on the invitation. I grew up in
Johnstown, Pennsylvania, where 5:30 means 5:30. But
when I walked in, it was just me and two bartenders.

Then I heard a deep voice behind me saying, I am Peter


Drucker. Apparently 5:30 means 5:30 in Vienna too.
We were the only ones there.
She was so surprised, she recalled recently, that I
forgot my manners and just blurted out, Do you know
how important you are to the Girl Scouts? I said that if
he read any of our planning or strategy papers or looked
at our management structure, he would nd we reected his philosophy.
And tell me, does my philosophy work for the Girl
Scouts? Drucker asked. Hesselbein invited him to see
for himself, whereupon he volunteered to spend a day at
Girl Scout headquarters on his next trip to New York.
She also invited the entire national board and staff to a
luncheon that day to hear him speak. From his opening
remarks, it was clear Drucker had studied the organization thoroughly; he began by observing that the Girl
Scouts were doing wonderful things. However, you
have one big problem, he said. You do not see yourselves as life-sized. You do not fully appreciate the importance of the work you do. For we live in a society
that pretends to care about its children, and it does not.
In essence, he was telling the almost entirely female gathering that every member of the board and
staff and by extension every one of the organizations
775,000 volunteers was contributing something so
vital to the larger society and to the future that they
should view themselves as having the same worth, aspiration, and level of professionalism as the most highprole corporate leader. For us, says Hesselbein,
those words were transformative.
That was the beginning of a conversation that
lasted 24 years, until Druckers death in 2005 years
during which Drucker turned his attention and intel-

strategy+business issue 79

Hesselbein with Girl Scouts, 1980

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Hesselbeins high-prole advocacy of the need to judge


efcacy by results rather than good intentions was a
radical shift. Her longtime approach has been a major
factor in the sectors managerial capabilities and its
good reputation.
In 1990, Hesselbein retired, just a month before
General Motors CEO Roger Smith did the same. Peter Drucker told Businessweek that if asked to choose a
successor at GM, I would pick Frances. But she did
not become the carmakers CEO. Instead, she became
the founding president of the Peter F. Drucker Foundation for Nonprot Management. This small foundation is dedicated to fostering innovation and excellence
among nonprots by exposing their leaders to worldclass thinkers, educators, and consultants from around
the globe, and helping them strengthen connections
with their business, public, and military counterparts.
(It was renamed the Leader to Leader Institute after
Druckers death in 2005 and became the Frances Hesselbein Leadership Institute in 2012.) The complexities
of global society have made these links between business, government, and nonprots essential. Leaders, in
particular, have a lot to learn from their counterparts in
other sectors: For example, nonprots can get help in
being more innovative in response to shifting technology and demographics, and businesses can get better at
engaging the passions of people seeking to make a difference in the world.
Hesselbein has continued to lead her institute for
the past 25 years, drawing upon an extraordinary global
network of supporters, admirers, and students. Noting
the outsized inuence of the tiny organization, author
Jim Collins notes, I have never met a single person who
has had a larger multiplicative effect than Frances.

feature organizations & people

lectual passion from corporations to the social sector,


his preferred name for nonprots, while Hesselbein
made her mark as a leader and innovator. Fired up by
a vision of world-class excellence, the Girl Scouts over
the next decade would become widely recognized as an
early adopter of nonhierarchical leadership. Hesselbein
urged afliates and regional councils, along with volunteers and girls, to see the total organization as one
great movement, mobilized around mission and around
changing lives. She encouraged the development of
a contemporary scouting curriculum that gave girls
hands-on experience in addressing challenges in their
communities. A passionate advocate for inclusion, she
tripled the number of racial and ethnic minorities in the
Girl Scouts. Her innovations make up a legacy that the
organization has carried into the new century. A typical
troop project today might be helping a remote Mexican
village gain access to pasteurized milk a far cry from
the woven potholders and roller skates that were staples
of 1960s-era scouting.
As she brought visibility and management innovation to the Girl Scouts, Hesselbein garnered acceptance
for the idea that because nonprots play an essential
and powerful role in shaping society and culture, they
require the utmost professionalism in their leaders.
Management skill is particularly vital for nonprots, as
Drucker has noted, because leaders who rely primarily
on volunteers have a tougher job than for-prot executives, who can use nancial incentives to attract talent
and drive performance. In the social sector at this time,
when degrees in nonprot management were nonexistent, management training rare, assessments sporadic,
nances often addressed in crisis mode, and passion for
the cause viewed as the prime qualication for leaders,

75

Hesselbein must have taken Druckers words at that Girl


Scout luncheon to heart; she sees her impact as more
than life-sized. Always petite physically, she has grown
tiny with the passing years. But her polished elegance,
along with her spritely humor, give her an outsized presence in any gathering. Like Jacqueline Kennedy Onassis, she tends to speak softly and deliberately, her eyes
never straying from the person she is speaking with,
which creates an effect of intimacy. Her air of unrufed
self-respect and her skill at developing projects with impact have gained her the regard of leaders of major corporate, education, and military organizations as well as
those in the social sector.

New York about a year ago and I called Frances and


said, Im free at the end of the day; lets meet for coffee.
And she said, Id love to meet you, but I think champagne and caviar at Peacock Alley at the Waldorf would
be appropriate to the occasion. Thats Frances. Where
you meet needs to reect what you aspire to.
Inuence and impact have historically been difcult for nonprots, which often labor on shoestring
budgets for narrowly focused causes. The role of an
inuencer can be particularly challenging for women,
who tend to manage smaller and less well funded enterprises in the sector and may struggle to make themselves heard among male colleagues.
Hesselbein has no such problems, despite having

You dont meet Frances; you encounter her, says


John Alexander, former president of the Center for Creative Leadership (CCL), a training and development
nonprot that runs executive courses and conducts
research around the world. You have to step up to be
with her; you have to act the part, be a grown-up. You
have to commit to things that make a difference and
then you have to follow through. She has the highest
expectations of the people around her, so being in her
presence requires you to lift your game.
Her longtime friend and professional collaborator
Regina Herzlinger, who holds a chair at Harvard Business School (HBS), observes that Hesselbeins high expectations are manifest even in small details. I was in

made her initial mark in an almost entirely female organization whose mission is to serve girls. Through her
work on leadership, she has formed close associations
with major military and corporate leaders, such as Alan
Mulally, the former CEO of Ford Motor Company,
and General Eric Shinseki. Her emphasis on purpose,
values, and ethics; her pioneering advocacy of diversity
and inclusion; and her focus on serving the changing
needs of the customer are core principles that she has
expressed and embodied for many decades.
Hesselbein does not discuss her age, but it is
known to be around 100 years. Yet she shows up at her
Park Avenue ofce every morning, and until 2013 kept
up a punishing schedule of world travel. More im-

Encountering Frances Hesselbein

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strategy+business issue 79

76

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The Road from Johnstown

In her autobiography, My Life in Leadership: The Journey


and Lessons Learned Along the Way (Jossey-Bass, 2011),
Hesselbein attributes her self-assurance to growing up in
Johnstown, Penn., a steelmaking town about 60 miles
east of Pittsburgh. The town was known for its role in
establishing one of the earliest modern nonprots, the
American Red Cross, which brought doctors and set up
tent hospitals across the region following the disastrous
1889 Johnstown Flood. Hard work and patriotism were
valued, immigrant communities formed an integral
part of the social fabric, and Hesselbein, whose original
name was Frances Willard Richards, grew up in a family with a long tradition of military and public service
and independent thinking.
Her father, Burgess Harmon Richards, after a long
stint in the army, became one of Pennsylvanias rst
state troopers. Her grandmother was a gifted storyteller,
and Hesselbein grew up hearing stories of family members who fought for the Union in the Civil War. She
was particularly partial to her Aunt Carrie, a regent of
the Daughters of the American Revolution, with whom
she used to pay yearly visits to England. Her mothers
Cornish ancestors were Methodist preachers, and sitting
in the chapel they helped found in the 18th century,
Hesselbein would say to herself, Im the sixth generation of dissidents to sit in this pew, and Im not going to
change. Hesselbein notes in her autobiography that her
aunt died at 96, stillbright, charming, impeccably
groomed, tastefully dressed clearly an inspiration.
Hesselbeins father died when she was 17 and, as
the oldest in her family, she had to go to work. After
holding a variety of jobs and attending the University
of Pittsburgh part time, she married John Hesselbein,

feature organizations & people

portantly, she sets an example and serves as a mentor


for people who are seeking to play a larger role in the
world. As Marshall Goldsmith, author and executive
coach, and a member of the institute board since its
founding, observes, Frances understands how power
works. Shes adept at trading favors. If you do something for her, you will benet in terms of the people
and the circles of inuence you get exposed to. This is
something women often struggle with, even women at
higher levels.
Hesselbein models her approach to power by continually drawing her associates into activities and associations that they would otherwise miss. Collins,
who has accompanied her on trips and joined her for
reside chats at the United States Military Academy
at West Point, in New York, notes in his foreword to
Hesselbein on Leadership, a collection of her essays, that
she is not shy about asking people to donate time or intellectual resources to her projects. The phone rings, I
pick up, and I hear Frances on the other end of the line.
Jim, I was hoping that you might consider. And
before I even hear the end of the sentence, I know that
I will very likely say yes. I also know that Im going to
like it.
Alexander (the former CCL president) echoes Collins, noting that Hesselbein has taught him to say yes
before she even asks a question. Its become kind of a
joke with us yes is the answer, now what is the question? but she also means it. She is always inviting
you to help her do something: plan a conference, bring
people together, visit a country, publish a book. And
you say yes because you know it will be worth doing,
you will meet great people, it will be an adventure
and because its Frances who asked you.

77

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REVHUYHV+DYH\RXHYHUPHW
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ZDLWWREHDVXERUGLQDWH"

The scope of Hesselbeins ambition was apparent from the start. On the rst day of her board job,
she brought a copy of Druckers The Effective Executive
(Harper & Row, 1967) for each staff member, having decided that his philosophy was exactly what we
needed for our governance and management. She rapidly introduced herself to business leaders throughout
the region. She persuaded the president of the areas
biggest bank to personally sponsor her rst fund drive,
doubling the previous years result. She also engaged the
support of union leaders in the area and enlisted local
congressman John Murtha to chair her rst fundraising dinner; he continued to do so for the next 35 years.
Invited as the rst woman to chair the regional United Way campaign, she recruited a leading executive of
Bethlehem Steel to host the kickoff luncheon and the
United Steelworkers to host the dinner. Bringing leaders
with contrasting interests together in pursuit of a common cause was the kind of audacious, inclusive, resultsoriented networking that would become her hallmark.
Only the Best

Her innovations in Pennsylvania attracted attention


from the national board, and in 1976 she applied for
the position of national executive director of the Girl
Scouts of the USA. Because this position had never
been lled by an internal candidate, she did not expect
to be selected. I gured they only [interviewed] me
because they wanted to prove they were casting a wide
net, she recalls. So I was completely relaxed during
my interviews. When they asked what I would like to
achieve if I were chosen, I described a revolution. This
was a time of great social change people werent sure
how scouting could be relevant to girls lives, especially

strategy+business issue 79

feature organizations & people


78

whose family owned the Johnstown Tribune. He also


served on the governors Civil Rights Commission, and
worked as a photographer and lmmaker. As a young
wife, Hesselbein helped him run the studio, later noting
that doing so helped her build the marketing, communications, and customer relationship skills that would
serve her well as an organizational leader. They had
one son, also named John. She lived on base with her
husband when he served in the armed services in the
1930s and became active in the community when they
returned to Johnstown.
When Hesselbeins son was young, she was asked
to assume leadership of a local Girl Scout troop whose
leader was leaving to become a missionary. She had
no daughters, but there were no other candidates, so
she agreed to take the troop for six months. She prepared herself by reading Girl Scout history and found
inspiration in founder Juliette Lowe, who told girls
in 1912 that they could be anything they wanted to
be, including an aviator. Because Hesselbein had been
mocked as a child at school for declaring her desire to
become a pilot, the statement inspired her. Imagine a
woman saying that in 1912!
Upon meeting her troop of 10-year-olds, she introduced herself as their leader the rst and last time I
ever announced myself that way. As an inexperienced
newcomer, she let the girls choose what projects to pursue, what badges to work on, even how to handle the
proceeds from their cookie sale. While the more experienced scouts led others in small groups, Hesselbein
positioned herself as a resource and source of support.
The troop ourished, and she stayed with them until
they graduated from high school. She then accepted an
appointment to chair the board of the regional council.

own decisions. People ourish when they take responsibility, Hesselbein observes. Have you ever met a
young person who couldnt wait to be a subordinate?
Convinced that high-level training was required
to sustain the kind of transformation she was putting
in place, she approached learning and development as
if the Girl Scouts were IBM or General Electric, often
persuading people at the top of their eld to donate
their services to her cause. She recruited the president of
MetLife to raise funds for a state-of-the-art conference
center in upstate New York, where she engaged thinkers
such as John Gardner, an education and leadership pioneer; leadership scholar Warren Bennis; and, of course,
Drucker to speak to and work with Girl Scout leaders.
She asked Herzlinger, the rst female tenured professor
at HBS, to create an asset management seminar to improve nancial management in the Girl Scout councils.
The Girl Scouts was a franchise organization,
recalls Herzlinger. As CEO, Frances did not have the
power to choose, re, or promote council leaders. She
had to make the most of what she had, so she asked me
to bring together a group of HBS faculty to develop a
corporate management seminar for local council CEOs
and national staff. It covered everything: strategic planning, nance, negotiation, professional management
skills. We wrote case studies of various councils one
near bankruptcy, one with too much money and
used the case method to teach the program, which we
ran for the Girl Scouts for many years.
Herzlinger sees the ambitious scope of Hesselbeins
development programs as an example of her general
commitment to high-level aspiration for the organization and the girls it served. Its the same reason she got
Bill Blass to redesign the Girl Scout uniform [in 1984]
and then unveiled them at a runway luncheon at the
Four Seasons with all the press invited not the kind
of thing the Girl Scouts had been known for doing in
the past. Or as Hesselbein herself put it: Only the best
is good enough for those who serve girls.
Amid all this change, she also faced personal loss.
Two years into her tenure, her husband died suddenly
after being diagnosed with a brain tumor. At work,
Hesselbein viewed her most essential role as recogniz-

feature organizations & people

girls from the inner city. We needed to change with


the times by questioning everything except the mission of serving girls by helping them reach their highest potential. And we needed a less siloed structure to
achieve our goals.
Hesselbein took the job on July 4, 1976, when the
organization was losing membership and struggling
with how to attract volunteers now that stay-at-home
mothers were no longer the norm. She started with
what Peter Drucker called the ve fundamental questions for an enterprise: What is our mission? Who is our
customer? What does the customer value? What are our
results? What is our plan? She commissioned research
from top universities on trends affecting girls, to identify the kinds of programs that might help them grow
up as independent thinkers and self-reliant, successful
individuals. She replaced the iconic Girl Scout handbook with four handbooks aimed at girls of different
ages, and switched programs and badges to focus less
on domestic skills and more on elds like science, technology, and math. She enlisted Vernon Jordan, then
president of the National Urban League, and Robert
Hill, the foremost researcher on the black family, to
help identify ways to appeal to minority girls at a time
when scouting was almost entirely white and middle
class. She commissioned promotional materials specically targeted to diverse communities, quickly tripling
minority representation.
Just as important were her efforts to dismantle a
fairly entrenched hierarchy; like many other youth
organizations, the Girl Scouts had adopted a military
structure. The brass in the national organization was
mostly insulated from the realities in the eld, authority owed only from the top, and there was still an industrial-era divide between those who made decisions
and those who executed them.
Hesselbein began a comprehensive restructuring,
drawing new org charts using concentric circles to, as
she put it, free people from being stuck in little boxes.
This new web of inclusion, as it would later be described, fostered communication across levels and divisions, enabling teams to come together from across
the organization, and giving people scope to make their

79

The Big Inuence of Little Things

Retiring from a demanding job in her mid-70s, Hesselbein claimed her only plans were to write a memoir
and continue serving on a couple of boards. But on her
rst day of unemployment, insurance company Mutual
of America presented her with an ofce on Park Avenue and the half-time use of an administrative assistant
in the expectation that she would do something of
value. Six weeks later, she and two friends Bob
Buford, a television executive, and Dick Schubert, head
of the Points of Light Foundation and former president of the American Red Cross ew to Claremont,
Calif., in order to discuss with Drucker, then in his
90th year but very active, how they might combine
forces to spread his work and philosophy more broadly.
Thus the Peter F. Drucker Foundation for Nonprot
Management was born.
The basic idea was to foster excellence by providing
management and leadership resources to public-service
organizations struggling soup kitchens, domestic
abuse shelters, after-school programs, immigrant assistance centers, and so on connecting them with top
educators, consultants, and thinkers. The organization
would remain tiny, and its currency would be intellec-

tual capital rather than money. Having for nine years


witnessed Hesselbeins talent for persuading the powerful to donate time and services on behalf of her causes,
Drucker insisted she assume leadership of the foundation. Otherwise it wont work, he said bluntly.
At their joint press conference announcing the
foundation, Drucker surprised Hesselbein by describing
their rst initiative: an assessment tool to help nonprot
boards and staff evaluate what they had achieved and
determine where to make improvements. Developed
in 18 months, and since then updated periodically, the
tool provides a series of exercises that guide nonprot
leaders through Druckers ve key questions, leading
them to articulate their mission, customer prole, value
proposition, results, and plan. This process helps nonprots move beyond good intentions to meet what Hesselbein calls the bottom line for social-sector organizations: changed lives.
The foundation also began publishing a journal
called Leader to Leader, and a series of books that included the best-selling anthology The Leader of the
Future, which is now in its second edition. Today the
institute that evolved from the foundation holds conferences and forums around the world and offers yearlong executive development programs to fellows from
small, often underfunded nonprots. An article in the
New York Times in 2000 noted that in contrast to the
Ford Foundation once described by essayist Dwight
MacDonald as a large body of money surrounded by
people who want some the Drucker Foundation,
with little money, is a pool of management wisdom for
all who choose to dip their cup.
In recent years, Hesselbeins institute has been
particularly active in bringing private and social-sector
leaders together with their counterparts in the military.
Hesselbein, intensely proud of her familys military service (her son, husband, father, and uncles all served in
the army), seems to nd a particular energy in this endeavor. In 2009, she was named Class of 1951 Leadership Chair for the Study of Leadership at the U.S.
Military Academy the rst woman and the rst
nonWest Point graduate to hold such a position. She
travels regularly to West Point, bringing friends like
Collins and Mulally to participate in the reside chats
she holds for cadets.
Colonel Bernard Banks, head of the academys department of behavioral sciences and leadership, says,
Her relationship with West Point runs very deep. I still
hear cadets who met her years ago comment on the in-

strategy+business issue 79

feature organizations & people


80

ing what should not be changed: the organizations


bedrock identity and mission. Despite the wholesale
transformation in systems, structures, and service delivery, the Girl Scout Promise and Law, its values and
soul, remained untouched.
Nevertheless, her efforts stirred pushback, which
she diffused by leaving local councils free to reject most
innovations. When traditionalists objected to the redesigned Girl Scout pin, they were told the old one would
remain in production and could be ordered if they preferred it. When a number of regional ofces were consolidated in New York, the move took place in multiyear stages so people would have time to adjust, even if
that made the process less efcient. Her concern was to
give people maximum scope to make their own choices
as well as a way to save the face and dignity of people
who opposeinitiatives.
Doing this is a key principle in managing change
and mobilizing people around it, she explains. If you
act in a dismissive way with those who oppose you, they
will never support you, but if you give them time and
your respect they will usually come around. Leading
this way creates tremendous goodwill. And you need
goodwill in a transformation.

notes, to feel good about it is not just something that


comes naturally to Hesselbein. It is something she has
studied, modeled, and taught, which is why so many
leaders see her as inspiration, mentor, and even muse.
That passion for service is also what keeps her going decade after decade. This was made vividly evident
at a book party for Goldsmith, held at the Four Seasons restaurant in 2011. A reporter fell into conversation
with an executive who had just left the top position at a
large international nonprot.
You sound as if youve retired, said the reporter.
Shhhh! the man cautioned, glancing over his
shoulder with an almost fearful expression. Dont let
Frances hear you say that!
Why, whats the problem?
When I called to tell her, I said, Frances, Im
going to re but she cut me off in the middle of the
word. You and I do not retire, she told me. You and I
are called to serve, and we will serve until the pine box
lid is closed upon us. +
Reprint No. 00332

feature organizations & people

uence she had on them [and] how she exemplies the


leadership qualities we value here, like passion, intellect,
character, and vision. When shes here, youll see her
surrounded by cadets. This very small woman speaks
so softly that you have to lean in to hear. But she exudes
this huge emotional presence that the cadets nd fascinating. When they are listening to her, they exude joy.
Banks adds, The cadets are inspired by her because, despite their great difference in age and experience, they recognize that she respects them. She has a
genuine appreciation of anyone called to service her
own life exemplies it.
In late 2013, after a fall sent her crashing facedown
on a marble oor, Hesselbein was told by her physician
that she could continue to do everything but travel; the
previous year, she had own to Russia and New Zealand and completed a nine-city tour of China as well
as twice-monthly trips within the United States. Most
of her travels were to speak or to receive honors, always
wearing the Congressional Medal of Honor she received
from President Bill Clinton in 1998. John Alexander,
who accompanied her on a number of trips, notes her
indefatigability, as well as her ability to immediately
engage people from widely diverse cultures. She looks
straight at them and listens so intently people can
read that kind of engagement across cultures.
Hesselbein recently noted that technology and
society change, but what people want in their hearts
doesnt change. Her success and the breadth and robustness of her legacy have to a large extent been built
on this understanding. She has always been comfortable speaking the language of the heart, of passion
and purpose, even in the toughest environments. The
fundamental lesson she learned from her rst troop of
10-year-olds that people want to be engaged, want
to contribute, want, in the much overused phrase, to
be empowered has remained central to her vision of
building a society in which people collaborate in changing lives.
Today, the full engagement of employee hearts
and minds, which money alone can never buy, is the
fulcrum upon which organizational excellence seems
to turn. Persuading people to serve and as Collins

81

Resources
Sally Helgesen, The Female Advantage: Womens Ways of Leadership
(Doubleday/Currency, 1990): Portrays Hesselbein at work, as both an
example and an advocate of inclusive, highly engaged organizational
leadership.
Frances Hesselbein, foreword by Jim Collins, Hesselbein on Leadership
(Jossey-Bass, 2002): Compendium of essays focused on how and why to
develop quality, character, mind-set, values, principles and courage.
Frances Hesselbein and Marshall Goldsmith, eds., The Leader of the
Future 2: Visions, Strategies, and Practices for the New Era (Jossey-Bass,
2006): Incisive anthology of essays on leadership.
Frances Hesselbein, foreword by Jim Collins, My Life in Leadership: The
Journey and Lessons Learned Along the Way (Jossey-Bass, 2011): Autobiography in which Hesselbein recounts her experiences and explains the
sources of her approach.
More thought leadership on this topic:
strategy-business.com/organizations_and_people

81

THOUGHT LEADER

The Thought Leader Interview:


Mark Bertolini
For Aetnas CEO, the lauded move to raise employee wages is just one
part of a broader strategy to adapt to changes in healthcare.

thought leader
82

ince January 12, 2015,


Aetna chairman and CEO
Mark Bertolini has been applauded by the likes of the New
Yorker and the Wall Street Journal as
an uncommonly forward-thinking
and compassionate chief executive
or perhaps just a quixotic one.
On that day, he announced a raise in
Aetnas minimum wage to US$16
per hour. For the 5,700 employees
who stood to benet, this meant an
average pay increase of 11 percent;
some saw an increase of 33 percent.
It was arguably the most visible wage

hike by a chief executive since 1914,


when Henry Ford doubled his assembly line workers pay to $5 a day.
The Aetna pay hike was a multifaceted and strategic move and
one that stemmed from personal
motivations as well. It also showed
Bertolini to be a culturally astute
leader with a real stake in improving
the well-being of people who rely on
Aetna, be they customers, employees, or long-term shareholders. He is
also keenly aware of the changing
nature of the healthcare industry in
the U.S. and elsewhere. Even with-

out the 2010 Affordable Care Act,


health insurance companies would
have been forced to revise their business models. Consumers have far
more choices now than they had
even a few years ago, and they approach them in a more conscious,
more participative way.
Aetna, which as of 2014 was the
third-largest health insurance company in the United States (after
UnitedHealth and WellPoint), has
been shifting its strategic focus, and
its cultural orientation, for several
decades. It has evolved from its role
as a primarily nancially oriented
payor to a role as a healthcare solutions provider, helping medical organizations, insurance carriers, and
consumers operate in harmony at
lower cost. This has resulted in signicant changes in the companys
prevalent attitudes and behaviors,
with more change to come.
Bertolini is the third Aetna chief
executive in a row who has moved
the company in this direction. The
rst was Jack Rowe, chairman and
CEO from 2000 through 2006, who
turned Aetna around from a declining bureaucracy (with a hidebound
culture known to employees as
Mother Aetna) to a protable enterprise. Rowes successor, Ron Wil-

Photograph 2015 Derek Dudek

BY JON R. KATZENBACH, GRETCHEN ANDERSON, AND ART KLEINER

to mix formal and informal leadership; his advocacy of preventive


medicine (after using yoga to recover
from a debilitating ski accident in
2004, he introduced it to Aetna employees and ultimately to customers); and his penchant for speaking
candidly and off the cuff. In this interview, conducted in two sessions in
his Hartford, Conn., ofces the
rst in August 2014 and the second
in January 2015, just after the wage
announcement he spells out the
reasons for the pay and benets
change, the reaction it evoked in the
companys culture, and the connection to Aetnas audacious strategic
goal of becoming one of the few
payor companies with a protable
and inuential leadership position in
the emerging healthcare industry.
S+B: How did you come to the wage
hike decision?
BERTOLINI: When I took this job as

CEO, I had three objectives. One


was to set Aetna on a course for the
next 160 years. Our purpose should
be to become a consumer company.
The second was to make healthcare
reform actually work. The third was
to reestablish the credibility of corporate leadership in the eyes of the
American public.

S+B: Not just for Aetna, but for


every company?
BERTOLINI: Yes. But at Aetna, this

meant having a style of leadership


that was approachable, real, and tangible. One of my goals was cultural
impact. I told the PR team, You
cannot protect me; you must prepare
me. So get ready. Im going to go out
there and speak truthfully, and talk
about how to move forward. That
approach has served me well.
I became active on social media.
We have an internal network called
Aetna Connect, and Im constantly
talking to the employees on it. They
also talk to each other. More and
more often, I saw people online saying, I cant afford my benets. My
healthcare coverage is too expensive.
I heard the same thing in site
visits. When I visit an Aetna ofce,
after the town meeting where I
speak, I try to go to every cubicle in
the building and shake everybodys
hand. I ask them what theyre up to
and how they feel about it here. The
same message came through.
At the same time, I could see
that the economic recovery was unequal. People were suffering, but
capital was cheap and corporations
were hoarding cash and not investing. Business leaders were saying,

thought leader

liams, CEO and chairman from


2006 to 2010, restructured the company and paved the way for its return to growth at a time of dramatic
industry change. Bertolini, a 58year-old Detroit native who holds
an MBA from Cornell University,
joined Aetna as head of specialty
products in 2003, and became president in 2007. In this post and as
CEO, he has overseen Aetnas business response to the Affordable Care
Act, which helped attune him to
Aetnas complex cultural legacy as
well as its potential for change.
Interestingly, the wage raise
stemmed directly from Bertolinis efforts to engage the Aetna company
culture, through social media and
personal interactions. It was also
driven by a wish to be considered
among the ethical leaders of American companies. Bertolini explicitly
linked the decision to the broader
debate about inequality, wrote New
Yorker columnist James Surowiecki.
He said that it was not fair for employees of a [Fortune 100] company
to be struggling to make ends meet.
Even Mother Aetna found it hard to
undermine the emotional appeal of
this rationale.
Bertolini is known for his nononsense, energetic style; his ability

83

Gretchen Anderson
gretchen.anderson@
strategyand.pwc.com
is a principal with Strategy&
and a director of the
Katzenbach Center.

thought leader

When the government gets its act


together, well move forward [with
helping low-income wage earners].
Then Thomas Pikettys Capital
in the Twenty-First Century [Belknap
Press, 2014] came out. I know a
number of well-known economists,
and they all leaned the same way.
There is pressure to x this [income
inequality] problem through the law
of the land. That was a scary prospect: massive wealth redistribution
through the federal government. We
needed to prevent that.
Another inuence was Clayton
Christensen. He and I have been
working together since 2011. Clays
basic idea is that companies should
husband scarce resources and put
plentiful resources at risk. In our
current environment, the scarcest resource is talent: human capital, not
nancial capital. Companies have
cash sitting on balance sheets around
the world. It makes more sense to
spend the money on people than on
acquisitions.
S+B: What did the business leaders
within Aetna think?
BERTOLINI: They were also starting

84

to agitate about the income inequality problem. Some of them were


worried about turnover, and being

Art Kleiner
kleiner_art@
strategy-business.com
is editor-in-chief of
strategy+business.

able to keep people motivated on


the front line. After we had looked
at a number of options to help our
lowest-paid employees, I nally
said, How about we just pay
them more?
[Aetna chief of staff ] Steve Kelmar is my sounding board. When he
said the organization was ready to
make this kind of change, we got a
team together. First, we needed more

So I asked for data on the business


impact. Our accepted gure for
turnover costs was $27 million per
year, but that was only voluntary
turnover. I asked for total turnover
costs. How many people leave involuntarily? How much does it cost to
hire their replacements? How long
does it take to train the new recruits?
We looked at absenteeism, rework,
productivity, dissatised employees,

After we had looked at a number


of options to help our lowest-paid
employees, I nally said, How about
we just pay them more?
data. I asked the HR team to build a
prole: How much did the lowestpaid people at Aetna make? What
did their healthcare coverage look
like? What were their out-of-pocket
costs? How hard was it for them to
get by?
It took months to get this information. The organization really
wasnt ready to talk about it, but I
kept pushing. Ultimately, we determined that a raise to $16 per hour
would cost us $10.5 million per year.

and our net promoter scores [a measure of survey respondents enthusiasm] in recruiting new employees.
Incidentally, our industrys general
net promoter scores are below those
of airlines and cable TV companies.
We gured out that our total
turnover costs were $120 million per
year. By that measure, $10.5 million
looked like a low-risk investment.
We [had] also recently hired a new
head of human resources to partner
with me on doing the right thing.

strategy+business issue 79

Jon R. Katzenbach
jon.katzenbach@
strategyand.pwc.com
is a senior executive
advisor with Strategy& based
in New York, and co-leads the
Katzenbach Centers cultural
initiatives.

S+B: How many employees were


affected by this policy?
BERTOLINI: About 5,700 employees

S+B: This wasnt a cascading measure where youd also raise other
wages through the company.
BERTOLINI: There was a huge gap

between the people making $13


to $14 per hour and the rest of
the company. People at the next
higher salary level didnt have the
same issues.
When we made the change,
some people saw a 33 percent increase in wages and a 45 percent in-

get to $16 per hour and here you are


handing it to them. What are you
going to do for me? It was disappointing to hear this.

A Proud Moment

S+B: How did you deal with cultural


resistance?
BERTOLINI: I kept control of [the

S+B: What was the announcement


like?
BERTOLINI: I went down to our

initiative]. I brought the senior team


into it because everyone would have
to implement it, but I stayed closely
involved myself.

largest call service center in Jacksonville, Fla., to announce it on January


12. We had to get a hotel ballroom
to t everyone in. Everybody was
wondering why I was there. Hes retiring. The companys been sold.
Very few people knew in advance. I had given the Wall Street
Journal an exclusive interview the
week before but embargoed the story
until that evening. I wanted the employees to hear about it from me directly. We had also given our top 300
managers a heads-up the day before;
we got them on the phone. They
said things like This is the proudest
moment Ive had in 42 years at the
company.
Then I made the announcement, and the place exploded. I had
known people would be happy, but I
wasnt ready for the raw emotion.
There were people crying. People
saying, Praise the Lord. My prayers
have been answered. The frontline
managers were thrilled.
S+B: Were there negative reactions?
BERTOLINI: Some employees said,

Wait a minute. I worked six years to

S+B: What was the reaction from


the shareholders?
BERTOLINI: Theyve been largely

supportive, with many going out of


their way to ask about the move and
voice their approval. Many of those
who were concerned about the potential nancial impact quickly became supportive when they came to
understand the total magnitude of
the enterprise impact, versus the
benets in employee satisfaction and
retention.
Of course, all along Ive been
trying to move our shareholder base
to long-term investors who will be
more supportive of the changes we
need to make to succeed in the new
healthcare environment.
As Clayton Christensen points
out, the shareholder formula in most
companies is much too tightly connected to earnings per share. And
you know what? Shareholders do not
directly benet from earnings per
share increases. They get the difference in the value they bought at versus the value they sell at. What drives
that stock price? Its Wall Streets be-

thought leader

got wage increases to $16 per hour.


Most of them were call center employees; some were single mothers or
fathers, and others had children on
Medicaid because they couldnt afford our dependent coverage.
It wasnt enough to just increase
their wages; we also had to do something about their medical benets. I
talked to economists at the Peterson
Institute for International Economics, where Im on the board, and they
pointed out that wage increases can
affect benets negatively [by reducing subsidies]. So we reduced the
cost sharing on their benets. This
gave many of them our richest benet plan at the price of our least rich
plan a zero premium cost for
many of our frontline employees.
Our objective was to raise the personal disposable income [PDI, or
income after taxes, benets, and
other withholdings] of this population as high as we could without
breaking the bank.

crease in PDI. We also added another element to our social compact by


offering certain employees enhanced
medical benets based on household
income and their commitment to
engage in certain wellness programs.

85

S+B: Not many company leaders


have that kind of condence.
BERTOLINI: In the summer of 2009,

thought leader
86

we missed our plan by $450 million.


I was president. I asked [CEO] Ron
Williams, Why havent you put a
bullet in me?
He said there were three reasons.
One, youre running the place, and
I cant get rid of you. Two, youve
hopped on the problem, and the
plans look great. And three, nobodys
ever going to really be successful as a
Fortune 100 CEO until he or she
faces one of these crises and actually
xes it. So, nish it up and youll be
the next CEO.
You always have the opportunity to lead, no matter what your title. I never let the lack of a title get in
my way; when I found a leadership
vacuum, Id jump in. When I talk to
my direct reports and they say they

dont have the authority to do something, I say, Heres a secret: Do it


anyway. Theyll say, Well, thats
not my job. I say, Yeah, it is.
Culture and Behavior
S+B: Youre the third CEO in a row
trying to create a culture of
productivity and accountability at
Aetna. How do you see those
efforts?
BERTOLINI: I dont think you can

create a culture. A culture emerges


and evolves slowly over time. Its a
bit like a Petri dish. You hope the
conditions are good for the right culture to grow. You try to get as much
help as possible from the current cultural situation. Fortunately, it is seldom all good or all bad. At the end
of the day, my biggest challenge has
been to show the organization that it
is necessary to take something apart
while its successful, in order to make
it even better. That is one of the theories of creative destruction.
S+B: Whats an example of the
behaviors youre trying to change?
BERTOLINI: A lot of it has to do

with improving accountability. This


is a real issue when shifting from a
command-and-control organization
to an organization where people
make important decisions at all levels. But you cannot change that all at
once, so you work on a few key behaviors at a time.
One example is the way we
manage meetings. In 2008, I added
up the number of days I had to

spend in major internal meetings. It


was 180 out of about 200. We had a
staff of 250 people who did nothing
but put PowerPoints together for
such meetings. So we set a goal of 70
percent less paper, 10 percent fewer
meetings, and 50 percent fewer people attending. You should attend
only meetings where youre needed
to make a decision, not to learn
about [the topics].
At rst, people were upset:
Why am I no longer invited?
Well, you were grousing about
having to sit in the back row doing
emails. Go see a customer instead.
We just had our monthly results
meeting; there were 15 people in the
room. Prior to this change, it would
have been 80.
S+B: How do these changes affect
customers?
BERTOLINI: The healthcare industry

is going through yet another major


change. It will be a retail business before too long. By 2020, more than
75 million people will be purchasing
insurance directly. Thats why Aetna
became one of the largest players
in Affordable Care Act exchanges
a move that surprised everybody.
Those markets are blossoming for
us, because people really want safety.
Theyre not saying, I cant wait to
get insurance so I can run off to the
doctor and spend somebody elses
money. Theyre solid working people trying to take care of their families. I want us to really care about
those people.
When I was growing up, my

strategy+business issue 79

lief about whether we have a sustainable product that our customers


consistently buy. This is reected in
the P/E ratio.
Aetnas earnings per share have
grown at 15.5 percent for the last
ve years. But our total shareholder
return grew 207 percent [during
the same period]. What changed?
The P/E. The magic question is: Are
your business fundamentals sound
enough that you can consistently deliver a product that customers will
continue to buy over time? If people
believe our business fundamentals
are sustainable, it will move the stock
price higher. This should be the way
we think about it.

dad worked as a pattern maker in the


auto industry. Since the models
changed every ve years, he only
worked six months every year. My
mother was a nurse in a pediatricians
ofce. Thats how we got our healthcare paid for. Our market is families
like that.
The Affordable Care Act will
commoditize this industry. That
gives companies two options. They
can put their thumb in their mouth,
cut their costs, and hope theyre the
last company standing. Or they can
focus on the two or three parts of the

ers, including hospitals. They think


highly of us, and they all want to get
in the insurance business, so why
dont we create a franchise kit for
them? We built Healthagen [a line of
health management, information
technology, and related services for
healthcare providers]. When we
started working on it in 2005, we
called it Health Plan in a Box.
We also built a clinical capacity
exchange called WellMatch, which
lets us resell excess capacity in the
healthcare system services like
imaging, lab tests, ofce visits, and

business that have the most value, let


the rest disappear, and repurpose
their businesses accordingly.
We chose the second option
to focus on a critical few elements.
So what could we leverage? Where
do we have an emotional as well as a
rational advantage? One was our
reputation with healthcare provid-

u shots. And were making investments in new technologies, like


iTriage [a health literacy and self-care
app] and Medicity [which has a network of more than 1,000 hospitals,
270,000 healthcare professionals,
and 20 regional and statewide health
information exchanges connected to
it]. Those two acquisitions were not

thought leader

You always have the opportunity


to lead. I never let the lack of a title
get in my way; when I found a
leadership vacuum, Id jump in.

on the market. We went and talked


to them and bought them, and
theyve been very successful. But neither acquisition would have been
made with a purely nancial or datadriven rationale. We did them because we believed in them.
To make this work, we need to
be willing to share our intellectual
property and our technology. We
can even let providers use it for free.
If Healthagen technology helps people buy healthcare more intelligently,
or gets them to the right doctor, or
stops them from having to go to the
emergency room, that helps our customers and it helps our business.
Aetnas medical costs in 2014 were
over $40 billion. If we can reduce the
annual rate of increase in medical
costs by 50 basis points, thats over
$200 million of potential incremental underwriting margin.
We have begun to build accountable care organizations (ACOs)
for providers. We are helping them
evolve from a revenue-based model
to margin-based insurance. We hired
executive vice president Dijuana
Lewis from Walmart, where she ran
the healthcare vertical, to create a
retail business for these organizations. The other two major parts of
the enterprise are Healthagen, the

87

Buying coalitions to lower the prices


of drugs, stents, and wheelchairs.
Giving them access to capital markets, debt and equity, to build their
capacity to meet the needs of the full
community. We want to make it
easy for them to do the right thing
for their customers.
I use Tesla as an analogy. Elon
Musk has a car that runs purely
on electricity, but its constrained
by a lithium ion battery that represents 65 percent of the cost, and
the car costs $85,000. So he builds

A Next-Generation Payor

The provider system represents


85 percent of our cost. Unless we
reinvent that system, we cant make
healthcare a retail proposition.

S+B: What do you need to do to go


down that road?
BERTOLINI: First and foremost, we

have to make provider relationships


work over the long term. For employers to give up their ability to put
health benets directly in employees
hands, they have to believe that the
costs will be sustainable and affordable over time.
The best shot is to get providers
engaged in population health. We
will need to work with them in a variety of ways: fee-for-service systems,
clinical efciency, avoiding readmissions, and supply chain efciency.

a factory to reinvent the battery. If


he can get to a $35,000 electric
car and if free charging is everywhere, he can turn the energy and
automotive industries upside down.
Similarly, the healthcare provider
system represents 85 percent of our
cost. Unless we reinvent that system,
we cant begin to make it a retail
proposition.

S+B: What does this change mean


for the people of the company?
BERTOLINI: There are three kinds of

people at Aetna. There are people


who want to operate under the old
model, and they probably have ve
or 10 years left before that model is
obsolete. But they are generating the
capital that will fund the transition.
A second group is focused on
the new stuff. Many of them work at
Healthagen, whose ofces are in Salt
Lake City, Silicon Valley, and Denver. They largely came out of venture

capital and private equity. When I go


see them, it feels very natural to wear
jeans and Birkenstocks or cowboy
boots. Its a completely different style
of enterprise and cultural situation.
The third group is people who
are involved in the old businesses,
and who need help making the transition to the new world. The new
model will need a lean operating in-

strategy+business issue 79

thought leader
88

provider-facing business, run by


senior executive vice president Joe
Zubretsky; and the core institutional
business, run by president Karen
Rohan, effective January 2015. From
the combination of these three units,
we are building, in essence, a fundamentally different value proposition
in the marketplace; it is a population
health model, in which providers get
rewarded for keeping people well.
Eventually, instead of primarily being a health insurance company,
well be like Intel Inside, providing
the common infrastructure.

frastructure, so we will need to prepare for that. But well also need new
kinds of roles. For example, well
need to nd roles for people in case
management, marketing, and other
elds where we havent needed many
people before. Our budget in 2018
for consumer advertising might be
10 times what it is today.
S+B: Does everybody at the
company understand the need for
change?
BERTOLINI: Were talking about a

S+B: How do you nd and cultivate


the people who are enthusiastic
about change?
BERTOLINI: Im working now with

the top 300 people, looking for a


group of about 120 who can be informal leaders people whose inuence does not just depend on their
position in the hierarchy. That will
probably get honed down to a smaller group. Eventually I would like to
have a kitchen cabinet of people who
are authentic informal leaders drawn
from all layers of the company.
Im also continuing to use social
media. I actually write my own
tweets [hes @mtbert]. My most
widely recognized exchange on social media was with @PoopStrong
[the Twitter handle and website of
Arijit Guha, a graduate student at
Arizona State University who was
diagnosed with stage IV colon cancer, and began fundraising online
when the costs of his care exceeded
the benets limit on his Aetna policy
Bertolini intervened directly in
his case]. Sadly, Mr. Guha passed
away, but we solved the benets
problem, and that was important to
a lot of people, inside and outside
the organization.
Most people think its hard to
nd the time to manage social media. But people talk to one another. I

dont even need to interject. I just


watch it go on. I know Im going to
get attacked at times; people will say
unfair things about me. But I think
its much more efcient than email. I
have 7,000 emails in my inbox, and
I respond to virtually none of them.
But with internal social media, we
can create real teams. Eventually Id
like to replace email altogether with
social media.
S+B: You have another project
called reinventing capitalism.
Whats involved in that?
BERTOLINI: I am connected with a

group of chief executives at Harvards


Center for Higher Ambition Leadership. [Harvard professor emeritus]
Michael Beer wrote a book about it.
We started ve years ago with ve
CEOs, and there are now 40 of us.
Were talking about how we can
combine social and nancial value
and what we need in the way of
metrics to create better companies.
At our last meeting, in January
2015, I talked about this wage initiative. There are now 30 other CEOs
who want to do something similar.
Some of them have started, and its
already clear they have the same hurdles to overcome. Even in companies
where they talk about values and culture all the time, when asked what
the lowest-paid group in their workforce looks like, [the staff will] tell
you they dont know and they dont
have the data. You have to learn
to persevere with or without data.
Thats how you have impact. +
Reprint No. 00324

thought leader

lot of change. Some people have


been with the company for a long
time, and their attitude is: What are
you doing?
At a leaders meeting, one manager said, Mark, why are we making
such signicant change? The company has had record earnings, revenue, membership, and stock price.
I was really surprised by that. I
said, Then all this talk about whats
going on in the marketplace, you believe all of thats just fake?
We had just done an employee
engagement survey and the lowest
scores were from people like those in
the room, two levels below me. As
you look at the survey results down
through the organization, the scores
rose again, and the frontline employees were among the most engaged.
So I said, 45 percent of the people
in this room really dont want to be
here. So why are you here? Why are
you wasting your time and mine?
The dialogue for the next hour
was amazing. People talked about
how hard it was to change, how they

just wanted to do their jobs. At the


end, I said, I really appreciate everyones honesty. But Im not going
away. This is going to happen. Look
to your left and right and decide. If
you want to be here, we want you.

89

The Ghost of Financial


Crises Past
by Marc Levinson
Hall of Mirrors: The Great
Depression, the Great Recession,
and the Uses and Misuses
of History, by Barry Eichengreen,
Oxford University Press, 2015

E
books in brief
90

verybody has an explanation for the crisis that began


quietly when Ownit Mortgage Solutions shut its doors in
December 2006 and has yet to end
(thanks to Greece). The list of culprits is endless: easy money, reckless
lending by Ownit and its many
peers, feckless rating agencies that
allowed banks to mint AAA securities from junky loans, banks leveraged to the hilt, clueless bank supervisors and regulators, investors blind
to risk, U.S. government policies
aimed at turning the working poor
into homeowners, defective risk
models, and more. And we cant forget the ultimate cause most frequently cited in the media: unscrupulous bankers.
Each alleged cause has its partisans, and most of the purported
causes have some truth. Yet none of
them, alone or in combination, ade-

quately connects subprime mortgage loans in Phoenix and Philadelphia with bank failures in Madrid
and Munich, the bankruptcies of
Chrysler and General Motors, and
Irelands sudden transformation
from beacon to basket case. When
Queen Elizabeth asked British economists in November 2008, Why
did nobody notice it? she was not
referring to the dodgy lending,
which had been noticed far and
wide. Rather, QE2 was referring to
the interconnections that transformed a provincial banking problem into a global economic crisis.
The best answer the experts could
come up with, after eight months of
debate, was that there had been a
failure of the collective imagination
of many bright people.
Of the scores of books that have
examined aspects of this neverending crisis, none may be better
than Barry Eichengreens Hall of
Mirrors. Eichengreen, who teaches
at the University of California at
Berkeley, is one of the most prolic
economic historians writing today.
He is also among the most astute.
The author of books on the gold
standard, European unication, and
the international monetary system,
Eichengreen approaches his subject

from a thoroughly international perspective, detailing how the crisis


spread and showing how containment efforts stumbled on the mismatch between a highly integrated
global nancial system and a regulatory system dominated by national
political concerns.
Hall of Mirrors is constructed as
comparative history, as Eichengreen
artfully alternates between discussions of the Great Depression of the
1930s and the near-depression of the
2000s. The 1920s, he recalls, was
a decade of nancial innovation in
the United States. Investment clubs
pulled small investors into the stock
market for the rst time, while banks
and insurance companies stuffed
their portfolios with newfangled
mortgage-backed securities. Weak
economic conditions in Europe sent
gold ooding into the United States,
where it drove stock prices into the
stratosphere. Longtime Federal Reserve governor Adolf Miller described the situation as optimism
gone wild and cupidity gone drunk.
The Fed, at the time an institution in its adolescent years, wanted
to pop the bubble without hobbling
the economy. Instead of raising interest rates, in 1929 it employed direct pressure, leaning on banks to

Illustration by Noma Bar

Books in Brief

stop lending to stockbrokers. The


modern Fed could have learned from
this, Eichengreen says, as an example
of regulators trying to shape an intervention that addressed the problem without crippling the economy.
They also could have learned that
interventions focused on the banking system may not be effective if
nonbank lenders such as insurance
companies, stockbrokers, and investment trusts, none of which were subjected to Fed control, step into the
breach. When that occurred in
1929, the Fed nally raised interest
rates to calm the frothy market
with devastating consequences.
The 2000s, of course, saw their
share of nancial innovations, with
mortgage brokers reprising the role of
the binder men who, in the 1920s,
signed up rubes to buy Florida real
estate sight unseen. Sophisticated investors, not least supposedly conservative European banks, willingly
purchased collateralized mortgage
obligations and CCC-rated bonds in
an almost desperate search for higher
returns. And, now as then, dodgy accounting made it seem that banks
were far better capitalized than they

really were, in both Europe and the


United States. This buildup of vulnerabilities bore more than a passing
resemblance to the 1920s, Eichengreen writes.
But few noticed the historical
echoes. Which is strange, considering several of the leading actors in
this modern drama are themselves
economic historians. Ben Bernanke,

banking system to its knees.


Eichengreen saves his most
pointed words for those obsessed
with another lesson of history
that ination lurks behind the nearest tree. Ination was certainly a
problem in Europe in the 1920s and
worldwide in the 1970s. But in the
21st century, in good times and bad,
it has been consistently low, and

The best answer the experts could


come up with was that there had
been a failure of the collective
imagination of many bright people.
sometimes negative, in North America, Europe, and Japan. Yet central
banks and leading politicians in
many countries hesitated to stimulate their crisis-racked economies,
either with rock-bottom interest
rates or with government spending,
lest doing so resurrect dreaded ination. Eichengreen argues passionately that economic policy should have
been far more aggressive. The implication is not that the disappointing recovery following the 200809
nancial crisis was inevitable, he
writes. The presence of unemployed
resources in the wake of a crisis
means there is space for the economy
to bounce back even more vigorously
than from the typical recession.
With any luck, policymakers
will be able to draw on that lesson
the next time a crisis rolls around.
They could do worse than asking
Eichengreen for advice. +
Marc Levinsons books include The Box:
How the Shipping Container Made the World
Smaller and the World Economy Bigger
(Princeton University Press, 2006). He is
working on a history of the 1970s.

books in brief

chairman of the Federal Reserve


Board from 2006 to 2014, and Christina Romer, chair of President Barack
Obamas Council of Economic Advisers in 2009 and 2010, both wrote
books on the Great Depression. Yet as
Eichengreen points out, these experts,
their colleagues in central banking,
and their political overseers took a
bad problem and made it much
worse, in large part by drawing the
wrong lessons from history.
For example, many experts, including Fed ofcials, worried openly
that foreign investors in China and
the Middle East might lose their
willingness to buy U.S. bonds, potentially causing chaos. This focus
on net capital ows was presumably
a relic of the days of the gold standard, when a country with a persistent balance-of-payments decit
might eventually run out of gold.
Meanwhile, nobody seemed to notice that European holdings in the
United States had shifted massively
into mortgage-backed securities
and it was that unnoticed shift that
ultimately brought the European

91

Whats Wrong with


the Internet?
by Edward H. Baker
The Internet Is Not the Answer,
by Andrew Keen, Atlantic Monthly
Press, 2015

Much of what the 54-year-old


Keen, who was born and raised in
the U.K. and trained as a historian
and political scientist, says will be

Creative destruction is all ne and


good, so long as once youve
destroyed something, something
else gets created in its place.
familiar both to readers of his two
previous books (Digital Vertigo, The
Cult of the Amateur) and to those interested in the impact of the Internet
positive and negative alike on
society. Despite the many claims by
technological optimists to the contrary, for example, Keen points out
that distributed technology doesnt
necessarily lead to distributed economics, and the cooperative nature
of [the Internets] technology isnt
reected in its impact on the economy. Instead, thanks in part to the
massive network effects inherent in

who points out that after one of


songwriter Ellen Shipleys hit songs
was streamed more than 3 million
times on Pandora, she received a
royalty check for $39.61.
The Internet Is Not the Answer
is full of similar gory details of
how the Internets massive consumer
surplus can also create artistic and
economic decits. He shows how
participation online seems to consistently undermine economic rmness. And hes at his best when he
buttresses his case with reporting.
The book begins with a description

strategy+business issue 79

books in brief
92

eres yet another in a


growing list of books attacking the brave new
Internet-centric world we live in. In
the rich vein mined by authors such
as Evgeny Morozov (The Net Delusion), Jaron Lanier (You Are Not a
Gadget), and Nicholas Carr (The
Glass Cage), Andrew Keen brings us
The Internet Is Not the Answer. Keen
argues that rather than democracy
and diversityall weve got from the
digital revolution so far is fewer jobs,
an overabundance of content, an
infestation of piracy, a coterie of Internet monopolists, and a radical
narrowing of our economic and cultural elite.
Those are pretty strong words,
and, indeed, Keens book is essentially a diatribe about the damage
the Internet has done to our economy, our culture, and our sense of
ourselves. And Keen speaks from
experience. He founded Audiocafe
.com a rst-generation Internet
company in 1995, and is currently the host of the Keen On
Techonomy chat show and a CNN
columnist. Unlike more philosophically grounded books such as those
of Morozov and Lanier, The Internet
Is Not the Answer takes a decidedly
empirical approach to the problem.
Keen deploys more than 40 pages of
footnotes (but no index) to back up
his argument. However, the citations
come mostly from frightening news
stories or other journalists who happen to agree with him.

the Internet, ours has become a


winner-take-all economy. This, of
course, reinforces more general concerns about the rise of the 1 percent
dominated economy.
Keens description of the Internets effect on culture is more incisive. Though here again he offers
little thats truly new, the examples
he cites are truly alarming. Its difcult not to agree with his heartfelt
rage at the prevalence of digital
piracy. By one estimate, in January
2013 alone432 million unique
Web users actively searched for
content that infringes copyright.
Meanwhile, global sales of music
had declined, he notes, from US$38
billion in the late 1990s to a little
over $16 billion by the end of the
2000s. Are streaming sites like Spotify and Pandora the solution for artists seeking to make a living from
their craft? Not according to Keen,

all too often deteriorates into mere


whining. Keen is at his worst when
rehashing the case against Uber or
describing, yet again, the rise of San
Franciscos exclusive tech buses. And
he takes great pleasure in bashing
Google: While lauding the companys genius, he returns time and
again to its sins its anti-privacy
stance, its role in the creation of a
surveillance society, its deleterious
effect on cultural production, its
monopolistic power. Some readers
will likely nd this familiar territory
tiresome.
Still, Keens overall point is an
important one: Creative destruction
is all ne and good, so long as once
youve destroyed something, something else besides massive wealth for
a very few founders and investors
gets created in its place. The Internet
has prospered greatly by pandering
to the consumer as the be-all and
end-all of its commercial existence
Free music! Free news! Seles! Instant gratication! Whats not to
like? while discounting the importance of the citizen, who, in
Keens account, has suffered greatly
over the past two decades through
the loss of jobs, privacy, and collective identity, and a declining sense of
the common good. And the notion

that all is OK because it is in the


very nature of the Internet to leave
the wreckage he describes behind is,
in his view, no excuse.
If the Internet is not the answer,
what is? In Keens view, the solution
to these problems lies in the hope
that the Internet will grow up. But
that wont happen unless governments and companies are willing to
counter the Internets most problematic effects through laws, regulations, and changes in how companies do business. Harking back to
the trust busters of the Progressive
Era, Keen surveys the many current
efforts to rein in the tech companies
monopolistic control, their massive
data collection programs, their infringements on copyright, and their
enabling of hate speech. He sees
progress, but not enough as yet.
Still, he puts his faith in history and
the sense that change is inevitable.
Ultimately, he believes, the disruptors will themselves be disrupted.
What that will lead to is anybodys
guess. +

books in brief

of the Battery, a recently established


private club in San Francisco whose
founders claim to be trying to recreate a village pub with a diverse
clientele of regulars, but who have
actually done little more than replicate the growing gap between the
rich and poor in the city as a whole.
Keen also takes a memorable
trip to Rochester, N.Y., where he
describes vividly how the collapse
of industrial-era stalwart Kodak has
ravaged the city. He notes that
Kodak, which once minted massive
prots manufacturing, processing,
and printing lm, laid off 47,000
workers in 2013, the same year Instagram sold itself to Facebook for
$1 billion. At the time, the photosharing company had only 13 fulltime employees. Keen is fully aware
of the irony implicit in seeing Kodak, which single-handedly brought
photography within reach of the
masses, being disintermediated by
Instagram, which is lling the same
role for free. In his view, however,
the billions of dollars in value created for consumers by Instagram, as
well as Skype, WhatsApp, and similar new technologies, do not compensate for whats lost in the process.
Like many other diatribes, however, The Internet Is Not the Answer

Edward H. Baker
baker@edwardhbaker.com
is a longtime business journalist and a
contributing editor at strategy+business.

93

by Daniel Gross
Act Like a Leader, Think Like a
Leader, by Herminia Ibarra,
Harvard Business Review, 2015

books in brief
94

ou can only learn what you


need to know about your
job and about yourself by
doing it not by just thinking about
it. That may be a strange way for
someone who thinks about (and
teaches and writes about) business
for a living to start a book. And it
certainly represents a fork from the
increasingly well-trod intellectual
path that celebrates mindfulness
and introversion. But to Herminia
Ibarra, it represents a truism: Simply put, change happens from the
outside in, not from the inside out.
Those are just two of the many
counterintuitive and easily digestible bits of wisdom in Act Like a
Leader, Think Like a Leader. Concise, direct, and possessing a certain
air, Ibarras new book (her second)
is a projection of her personality. A
native of Miami and veteran of Harvard Business School, Ibarra has
taught since 2002 at INSEAD in
Paris, where she chairs her department as the Cora Chaired Professor
of Leadership and Learning.
The books core message is simple and incisive. In an age of constant disruption, you had better redene yourself before the rapidly
shifting sands of corporate America

and technology redene you. You


have to act like a leader before youre
appointed to a leadership position,
and you have to manage your own
leadership path. The way to do it is
by intentionally making yourself
uncomfortable. Only by exiting
your comfort zone can you develop
outsight the term she coins to
describe the valuable perspective
gained through actions.
To do so, people must overcome
the gravitational pull of inertia.
Ibarra notes that psychology and
nancial incentives push us to do
more of what we are good at, and
to get still better at it. But, she
writes, when we allocate more time
to what we do best, we devote less

outsight and leadership capacities.


How? By creating slack in your
schedule so you can get involved in
projects outside your core area and
participate in extracurricular industry activities. By consciously making the effort to network with people who work in different industries
and have different competencies. By
nding a context or situation that
makes you uneasy giving a presentation, showing up at a conference for the rst time, speaking up
at an internal meeting. Act as radically different from your normal behavior as you can, she suggests.
Trying on a new identity at
work may seem anathema to the rising cult of authenticity. But Ibarra

Everybody wants to be true to themselves, but they can hit a wall as


they transition to more senior roles.
time to learning other things that
are also important. And pursuing
the comfort of our competencies
can set us up for failure when circumstances change. A professional
might spend decades thriving as a
newspaper editor, or as a manager of
a big-box electronics retail supply
chain, or as the head of coal-mining
operations only to nd that circumstances suddenly render his or
her expertise signicantly less valuable, even obsolete.
To avoid this competency trap,
Ibarra argues, you have to regard
your job as a platform for building

urges readers to recognize how adhering strictly to behaviors that feel


natural can inhibit career evolution.
Everybody wants to be true to themselves, but they can hit a wall as
they enter the transition to more senior leadership roles. Ibarra notes
that she has faced this dilemma in
her own career. Starting to teach
compelled her to make the adjustment from an academic researcher
to someone who had to directly engage MBA students. Years later,
when she was tapped to become a
department chair at INSEAD, she
felt the job was infringing on her ca-

strategy+business issue 79

Hey, Leaders: Stop


Thinking So Much and
Just Do It

pacity to do what she did best


writing and teaching. I wasnt stepping up to leadership, because I
didnt think that leading was real
work, she writes. To gain outsight,
Ibarra practiced some of what she
preaches. She began networking
outside her comfort zone, sought
out board positions, and became involved with outside groups like the
World Economic Forum.
Ibarras advice denitely cuts
against the grain. As she put it in
a recent interview with strategy+
business, her argument calls into
question the long tradition of social
psychology research that the way we
think follows what we do, and not
the other way around. And humans
tend not to focus on the need to
build capacities before they actually
need them.
There may be practical obsta-

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

Hear from the best


minds in business on
the brain science of
strategy, the digital
economy, what makes
brands go viral,
and more

books in brief

cles to acting like a leader in the way


Ibarra suggests. The actual advice
Ive given people is to try to carve
out 10 to 15 percent of their time for
side projects networking events,
connecting to people not in the immediate path of your operational
responsibilities, she said. But not
every company or organization is
designed to let employees have reliable slack in their schedules; if anything, the trend is in the opposite
direction.
Also, the prescriptions may not
work in every context. Ibarra concedes that the impulses that inform her book are characteristically
American the ability to network,
to invent (and then reinvent) ones
self. In the U.S., its a culture where
hierarchical differences are minimized, and you can walk up to anybody and introduce yourself, she
said. Its not something you do as
easily in France.
But that doesnt mean you
shouldnt try. And its never too early
to start. Becoming a leader, this valuable book reminds us, is a process,
not an event. And it requires building a set of skills rather than following a series of prescribed steps.
Stepping up to leadership is more
like becoming a great chef, Ibarra
writes, than following a recipe. +

s+b
thought
leaders

by Tom Brown
Return on Character: The
Real Reason Leaders and Their
Companies Win, by Fred Kiel,
Harvard Business Review Press,
2015

books in brief
96

ts rare to nd a business book,


let alone one on leadership,
that is well researched, well
documented, well written, convincing, credible, and imbued with a
voice that one grows to trust and admire. Fred Kiels 200-pager, Return
on Character: The Real Reason Leaders and Their Companies Win, is a
standout for at least three reasons.
First, theres the mission of the
book itself. Kiel cofounded a consulting rm called KRW International, which set out nine years ago
to nd the connection, if any, between the character of a leader
and an organizations performance
by interviewing 84 CEOs and their
executive teams in depth (while also
polling some 8,600 employees).
Though many other authors have
touched on the subject, the books
publisher (Harvard Business Review
Press) claims this is the rst major
study to show a measurable relationship between CEO character and
business success i.e., the return
on character (ROC).
Second, Kiel infuses his books
conclusions with enough data (nicely graphed) that even the most hardnosed reader would have to concede
they are substantiated, even if that
reader wanted to debate them.
Third, this is not an autobiography or a hard sell for the authors
consulting services, as many busi-

tuosos and those at the bottom as


self-focused. The simple naming
of those two CEO categories will
help you understand the core message of the book. For Kiel, its not
enough to lead an organization by
simply meeting goals or making a
prot. Virtuosos use both head and
heart to orchestrate a high-performance team that includes board
members, top executives, managers,
and employees. That team serves all
those who have an interest in the
company or who are affected by its
policies and practices. Self-focused
leaders, says Kiel, are mainly out for
themselves and few others.
Kiels proles of the CEOs high
on character as well as the characterchallenged are sufciently descriptive that its not hard to see how they

Virtuoso CEOs achieved a


9.35 percent return on assets while
those tagged as self-focused CEOs
scored a mere 1.93 percent.
performance data. The survey included Fortune 500, private, and
nonprot companies.
Character isnt a term that is as
precise and measurable as, say, return on assets (ROA). So Kiel discusses how the researchers came to
dene the word as being innately
tied to integrity, responsibility, forgiveness, and compassion. Those
four universal principles were then
rened into key behaviors (such as
telling the truth for integrity).
And it was those behaviors that the
researchers sought to measure.
After all the interviews and surveys, Kiels team designated the top
CEOs on the character scale as vir-

act in the ofce on a daily basis. The


book amply details the behaviors of
both extremes of CEOs, enough so
that you nd yourself unconsciously
coming up with real names of people you have worked for in place
of the anonymous names Kiel uses.
Though he lists the names of CEO
participants who gave their permission, he expands on only a few ROC
champions, such as former Costco
CEO Jim Sinegal, former REI chief
executive (and current secretary of
the Interior) Sally Jewell, and BarryWehmiller CEO Bob Chapman.
What sets this book apart from
its peers in the marketplace is the
handsome way it links research data

strategy+business issue 79

Everyone Prots
from the Return on
Character

ness books are today. Rather, its a


manual for 21st-century leadership.
And Kiel acknowledges from the
start that at the age of 75, he wrote
the book because he wants to
inspire a movement that forever
changes peoples expectations of
leadership and performance in organizational life. The book carries the
tone of someone who wants to share
both current research and seven
decades of personal experience.
Throughout, Kiel comes off as a
generous sage, not as a prot-seeking consultant.
Kiels team started with a metric for assessing the character-driven
behaviors of the 44 U.S.-based
companies from which they were
able to compile a complete set
of both interview and nancial

Tom Brown
tom@mgeneral.com
is a leadership development consultant
and coach, lecturer, and business writer.
He is a founding columnist for NPRs
Marketplace, and editor-at-large for
IndustryWeek. His books include The
Anatomy of Fire and Fiscal Fairy Tales.

Why Beanie Babies


Boomed Then
Busted Badly
by Mark Gimein
The Great Beanie Baby Bubble:
Mass Delusion and the Dark
Side of Cute, by Zac Bissonnette,
Penguin, 2015

or connoisseurs of madness
and madmen, Zac Bissonnettes The Great Beanie
Baby Bubble comes at an opportune
time. The Beanie Babies story is 20
years old, and might well have been
lost to history if Ty Warner, the billionaire creator of Beanie Babies,
had not been sentenced last year in
federal court for tax evasion.
The photos of Warner, his architect glasses highlighting a face
worn creepily smooth by decades
of plastic surgery, have to invite
some curiosity about how this reclusive, litigious man could have once
been the most successful toy seller
in history.
Its a question Bissonnette, a
journalist who has previously written two books about personal nance, answers with mixed success.
The Great Beanie Baby Bubble can
usefully be read in two separate
ways: as a book about how to create
a wildly successful product, and as a
book about what turns the successful product into a mania.
The rst of these may be the
more fully realized narrative. Its
tempting to see a product like the
Beanie Baby and approach it in a
gee, wish Id thought of it way because, well, how much experience in
the business does it really take to
come up with the idea of stufng
loose beans in plush animals? A lot,
it turns out. Warner, born in Illinois

books in brief

to behavioral descriptions. As Kiel


develops his argument, he weaves in
charts that illustrate how the two
kinds of leaders differ. For example,
more than twice as many virtuoso
CEOs said they had a supportive
mother or father.
The charts are even more revealing when showing how the two
kinds of CEOs rated themselves on
items such as strength of character
habits compared to how employees
rated them. Virtuosos gave themselves a score of 84; the self-focused
group, 83 virtually the same. Yet
employees gave the virtuosos an 87
rating while awarding a scant 68 to
the self-focused leaders.
As for quantifying the nancial
return on character, Kiel posts
an attention-grabbing chart that
shows that CEOs who qualied as
virtuosos achieved a 9.35 percent
ROA (dened as net operating income as a proportion of total assets),
while those tagged as self-focused
scored a mere 1.93 percent ROA,
over a two-year period. He says the
research showed that the virtuosos
at the top end of the curve per-

formed more than ve times as well


as the self-focused execs at the bottom end of the curve. For some, this
gap will be the denitive reason to
read this book.
But a stronger reason to read it
can be found in its third section.
Kiel argues that ones character can
be changed, and he details the six
steps others have taken to move
from self-focused myopia to a world
view that stresses unity of purpose,
harmony of teamwork, commitment to performance, and contribution to community.
One of the pleasures of Return
on Character is getting to know Fred
Kiel. In the introduction, Kiel concedes he was self-focused in his early
career: Im sure many of my colleagues in those days felt that I was
more than willing to throw them
under the bus if it meant more success for me. But by the time he lays
out an impassioned manifesto for a
new direction in leadership, we realize how much Kiel has evolved.
People are hungry, he writes, to
have a model of leadership that they
can believe in, one they can aspire
to, one that is founded on and nourished by a shared humanity.
Its rare to nd a business book
that, at the end, makes one want
to cheer both the author and the
cause he champions. Return on
Character is such a book, and it deserves our immediate and thoughtful attention. +

97

any student of the rich literature of


manias. Still very relevant now is the
story of the symbiosis between eBay
and the Beanie Babies mania. The
two grew up together, and the auction website was instrumental in creating the market for Beanie Babies.
EBay gave the market just enough
transparency for potential buyers to
see the mania bloom in a swirl of billowing prices a line of 1996 election-themed Beanies, retired at the
beginning of 1997, jumped in price
to US$50 in two months and to
$625 a year later and not quite
enough to let them see just what unstable soil it was planted in.
Just as relatively minor discoveries of gold had fueled the gold
rush of 1849, Bissonnette writes, it
only took $500,000 per month in
eBay sales to help drive, at Beanie
Babies height, $200 million per
month in retail sales.
There may not be a precise formula here, but there is clearly something to the combination of a market that puts rising prices in bright
lights and a dark sludge of hard-tosell inventory hidden somewhere

deep beneath it. Beanie Baby sellers


could check at any instant just what
the latest price was for a Royal Blue
Elephant ($5,000 at the height of
the craze). They had no way of
knowing how many unpopular
models were piling up in gift store
basements or when Warner would
gin up the market with a new batch
of Beanies much as, years later,
real estate speculators watched the
digits spin on housing prices without seeing the pileup of unsellable
condos backed by liars loans.
One area in which it may be
possible to write down a more or less
accurate formula is the ratio of speculators in a mania to actual users
of the object of desire. One reason
Bissonnette tries so hard to plumb
Ty Warners childhood is that Beanie Babies really were designed for
children. By the end of the craze,
kids had lost interest, and the market was being driven entirely by
speculators squirreling away Beanies
in sealed plastic.
A toy that everyone seems to be
trading and nobody is playing with
may be as close as we come to the
denition of an investment fad.
Beanie Babies caught on in suburbs
and trailer parks, but were scoffed at
by professional investors. And you
dont have to look far to see ostensibly more sophisticated investors
jumping on the next hot trend.
If youre trying to gure out
whether youre looking at an investment fad, the Is anybody playing
with it? test can be awfully handy.
Have you seen anyone buying much
with a stash of Bitcoins lately? +
Mark Gimein
markgimein@gmail.com
is a New Yorkbased journalist who
writes about nance and the economy.
Hes @markgimein on Twitter.

strategy+business issue 79

books in brief
98

in 1944, was a second-generation


plush toy salesman probably, as
Bissonnette details by going to colleagues from three decades before,
the best teddy bear salesman in the
United States.
It also takes a xation on detail
that could redene what you think
of as obsessive whether it was
sending toys that didnt precisely
match the sheen of a pearl earring
back to the factory in Korea or
personally plucking the fur around
the eyes of the stuffed animals at
trade shows. The stories of Warners
years in the stuffed toy wilderness
(an industry populated by a cutthroat mix of obsessive characters,
a surprising number of whom
seemed to have passed through orphanages) make for a scary lesson in
entrepreneurship.
The Beanie Babies mania, a period of about three years, roughly
from 1996 to 1999, takes up the second half of Bissonnettes book. On
this subject The Great Beanie Baby
Bubble may be less successful. Bissonnette nds out enough about
Warners childhood to hint at Gothic-level horrors, including a feral
childhood with absent and abusive
parents and the ugly rigors of military school. But its not clear that
the dark side of cute really explains
why this particular product generated the level of obsession it did.
Where Beanie Babies really
stood out was in appealing to the
collecting compulsion. Introduced
in 1994, Beanie Babies took off
slowly, swapped by collectors. It was
two years later that they turned
from a novelty item traded in the
Chicago suburbs to a national craze,
as Ty Inc. started retiring selected
characters, effectively egging on collectors to bid up prices.
There is useful material here to

MEET
THE NEXT
GENERATION
OF BUSINESS
THOUGHT
LEADERS

strategy-business.com/youngprofs

In New Product Design, Likes


Can Lead You Astray
Your next innovation breakthrough probably wont come from social media.
BY MATT PALMQUIST

end page
100

collaboration on budgets, design,


prototyping, and product testing,
which in turn demands the problemsolving skills of many departments,
the strategic commitment of R&D
resources, and external communication with distributors and suppliers.
In short, innovation entails using the
full range of IT capabilities and in
the hashtag era, this can also mean
keeping customers and clients
abreast of products on the assembly
line and inviting their participation
in design and marketing campaigns.
And yet, the authors found that
older technologies still worked best.
Teams that relied on email, computer-assisted design software, and desktop programs like Microsoft Ofce
reported higher levels of collaboration, churned out more concepts
and prototypes, and received better
evaluations from their managers.
Clearly, the tried-and-true nature of
these IT tools means employees are
comfortable with their functionality.
Internal wikis and cloud-based
le-sharing systems also contributed
positively to new product development especially among team
members who are separated by
countries or time zones.
Social networking sites such as

blogs, Facebook, and Twitter, however, proved a hindrance, allowing


customers and managers to weigh in
too frequently and steer projects
down blind alleys. We tried [using a
social network], but after several days
we stopped using it because it was
annoying, one project manager told
the authors. The constant alerts and
notications were a bit much.
Feedback via social media may
be able to help some projects, but at
this point, the authors note, a common frustration is the initial high
expectations given to these tools
only to be followed by strong dissatisfaction as the integrity of the system erodes, ultimately becoming a
cumbersome collection of outdated
information. +
Source: Do Social Media Tools Im-

pact the Development Phase? An


Exploratory Study, by Tucker J.
Marion, Gloria Barczak (both of
Northeastern University), and Erik
Jan Hultink (Delft University of
Technology), Journal of Product Innovation Management, Dec. 2014,
vol. 31, S1
More Recent Research at:
strategy-business.com/recent_research

Illustration by Elwood Smith

ts really hard to design products


by focus groups, Steve Jobs
once famously said. A lot of
times, people dont know what they
want until you show it to them.
Social media is the ultimate focus group Twitter and Facebook
users rarely hesitate to voice their
opinions. But although these sites
have reshaped the way people communicate, they have a long way to go
before they can help companies design and perfect new products. In
fact, a new study nds that input
from social media is more distracting
than benecial during the product
development process, reinforcing
the Jobsian perspective that companies probably shouldnt invite consumers to the drawing board.
The studys authors surveyed
executives and engineers at nearly
200 rms from various industries, including aerospace, IT, and consumer
electronics. The participants described which technologies they used
during the innovation process
such as fax machines, social media, or
cloud-hosted le-sharing platforms
and provided evidence about how
these tools affected the speed and
quality of their product rollouts.
The innovation cycle requires

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