~ DECEMBER 2011
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63 Spotlight
Reinventing Retail 104 organization
Who Really Makes The Big Decisions? Bob Frisch 34 Vision Statement
The Charts That Changed the World 125 Managing Yourself
Prepare for Your Promotion
ana Gary Hamel
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December 2011
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Cover Artist Elie Henein
64 The Future of Shopping If traditional firms hope to survive, they must embrace omnichannel retailing-an approach that melds the advantages of physical stores with the information-rich experience of online shopping. Darrell Rigby 78 Retail Isn't Broken. Stores Are The new head of one of America's most venerable department stores on his plans to reimagine everything An intetView with J.C. Penney CEO Ron Johnson, by Gardiner Morse
84 Know What Your Customers Want Before They Do Advances in IT, data gathering, and analytics make it possible to create highly customized offers-sometimes in milliseconds. Thomas H. Davenport, Leandro Daile Mule, and John Lucker
ABOVE Rachel Perry Welty, Lost in Hy Life (fruit stickers), detail 2010, pigment print
HBR .ORG Reinvent ing Retail continues at hbr.orgf spotlight/retail.
December 2011 Harvard Business Review s
HBR.ORG
Features December 2011 THIBIGIDIA
First, Let's Fire All the Managers Is it possible to create an organization that combines the discipline of a corporate hierarchy and the flexibility of market-centrism-without bosses, titles, or promotions? Morning Star, a global leader in food processing, proves that it is. Gary Hamel
The Power of Collective Ambition Articulating the seven elements of collective ambition can give employees a better sense of a company's purpose and how they can contribute to it. Douglas A . Ready and Emily Truelove
Who Really Makes the Big Decisions in Your Company? The CEO, of course, often along with an unnamed group of advisers. That's a good thing, as long as t he CEO constructs the group's role deliberately. Bob Frisch
Don't Let Your Supply Chain Control Your Business
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By delegating too much responsibility for managing their supply chains to their top-tier suppliers, manufacturers are putting themselves at risk. Thomas Choi and Tom Linton
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HBR.ORG How to manage a perfectionist blogs.hbr.org{ best-practices
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43 HOW I DID IT
HSN's CEO on Fixing the Shopping Network's Culture
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After seven CEOs in 10 years, Home Shopping Network needed a total makeover. Mindy Grossman 119 THE GLOBE
The Ordinary Heroes OftheTaj The valor displayed by employees of the Taj Mumbai hotel in the face of a 2008 terrorist attack was not merely a crisis response. It was a manifestation of deep-rooted HR practices that other companies can adopt. Rohit Deshpande and Anjali Raina 104
6 Harvard Business Review December 2011
A staff displays grace in a crisis.
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Departments December 2011 KE NNETH COLE
Read the extended interview at hbr.orgjcole.
14
From the Editor 20 Interaction
MORE FROM OUR COLUMNIST
Rosabeth Moss Kanter at blogs.hbr.orgj kanter
Idea Watch
VIDEO
25 FIRSt"
34 VISION S'MTEM£NT
When Rivals Merge, Think Before You Follow Suit
The Charts That Changed the World
A less direct response may be a smarter move. PLUS Why early prototypes can kill creativity, and how lengthy travel time from headquarters hurts a subsidiary's profits
Management's most iconic graphics revisited 36 ITitATEGJC HUMOR
COWMill 32 DEfEND YOUR RIIEARat
Your Use of Pronouns Reveals Your Personality Tiny verbal clues speak volumes about someone's honesty. stability, and sense of self.
" I give myself the work." page 148
38 ROSABITH MOSS KANTER To act takes courage. To innovate takes even more. 40 SOHRAB VOSSOUGHI
Lobbying for social change is a waste of time. Instead, experiment with solutions-and then roll out the ones that work.
Designing and implementing solutions for society page40
Do you say " I think"? page 32
Experience 125 MANAGING YOURSELF
136 SYNTHESIS
Get Ready for Your Next Assignment
How marketers are rethinking demographics.
Insiders who move up have an advantage over external hires. Here's how to capitalize on it. Katie Smith Milway, Ann Goggins
Gregory, Jenny Davis-Peccoud, and Kathleen Yazbak 131 CASE STUDY
Can Nice Guys Fi nish First? Should a "perfect number two" insist on being made the CEO of a new venture? Jeffrey Pfeffer
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Harvard Business Review December 2011
142 EXECUTIVE SUMMARIES 148 LIFE'S WORK
Kenneth Cole On merging work, home, and community
Katie Smith Milway on how to make the most of an internal promotion at hbr. orgjmultimediaj video
BRITISH AIRWAYS Sometimes, gomg the extra m1le means gomg to the extra pet store (
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SPOTLIGHT Go deeper into Reinventing Retail with blog posts and multimedia at
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See who made this year's Thinkers so: the definitive list ofthe world's top business thinkers. hbr.orgf multimedia/
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BOOK You've heard of Michael Porter's seminal frameworks, now learn how t o use them. Download a free chapter from Understanding Michael Porter: The Essential Guide to Competition and Strategy at hbr.orgfchapters/
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WEBINAR Successful retailers must
reach customers in a hundred different ways, digital and physical alike. Learn how on Monday, December 12, at 12 PM EST. Register for free at hbr.orgfmultimedia/
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Harvard Business Review December
2011
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From the Editor
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Pos1t1ve Dev1ance he death ofSteve Jobs sure got people thinking. Here was a man who seemed to represent all the qualities people admire in a leader (plus a few things they dislike). His passing prompted fascinating debates, on hbr.org and elsewhere, about everything from the role of the CEO, to the art ofinnovation, to the perils ofsuccession, to the very purpose ofa corporation. Many commenters concluded that Jobs was the ideal CEO: He led by instinct and vision, built a strong team around him, was a powerful and effective public face of his company, and produced strong earnings. Ascientific ranking of the world's best CEOs based on total shareholder return over their tenures, by Morten Hansen, Herminia Ibarra, and Urs Peyer (HBR, January-February 2010), concluded that Jobs was, objectively speaking, the world's number one CEO. An October update from the authors on hbr.org showed that during Jobs's reign at Apple from 1997 until his death, he delivered an industry-adjusted TSR of 6,621% (and a country-adjusted return of 6,682%). Apple's market capitalization increased during that period by $341.5 billion. Amazing. The visionary CEO model is not, however, the only recipe for success. Gary Hamel returns to HBR's pages this month with a provocative piece on a company that has thrived despite having no managers at all. His "First, Let's Fire All the Managers" (page 48) describes how California-based Morning Star, the world's largest tomato-processing company, has, by essentially tossing out the org chart, avoided the problems that arise at management-heavy organizations. Everyone shares the work of management. There are no centraily defined roles. Employees at any level can take the initiative, and they're held accountable. Morning Star is a private company, and its financial results aren't publicly available. But it says that over the past 20 years its volumes, revenues, and profits have grown by double digits- in an industry where annual growth averages 1%. Hamel writes, "Morning Star is a 'positive deviant'; indeed, it's one of the most delightfully unusual companies I've come across!' There are many paths to success.
Adi Ignatius, Editor in Chief
14 Harvard Business Review December 2011
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Could 3D printing in the U.S. affect the aviation industry in Africa?
Will ethanol prices in Brazil affect the soft drink industry in Northern Europe?
I Will the rising middle class in China.affect the cost of fertilizer in Australia?
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Interaction The Sustainable Economy HBR article by Yvon Chouinard, Jib Ellison, and Rick Ridgeway, October 2011
Right now, n1any green businesses are • not consistently profitable. The authors, executives at Patagonia and Blu Skye, contend that the problen1lies here: "Higher .~ cost to planet does not translate to higher price to customer:' They posit that the "viability of business itself depends on the resources of healthy ecosystems" and that sustainable ways of doing business should simply become the norm. On the bright side, businesses are beginning to 1neasure the costs of environmental impact, consumers are investing in sustainable companies, and contributors to supply chains are converging on sustainability standards. According to the authors, sustainability is something that, "happily, most of us also care about directly." Really? Where is the research to back up this claim? Given the current world economic situation, sustain· ability has taken a backseat to socioeconomic survival. I doubt the 14 million Americans without jobs care much about anything other than finding gainful employment. And to suggest that sustainability has evolved over three eras is taking a complex concept and whittling it down
to something akin to simple mechanics. I have no doubt that the authors care deeply about the environment. However, it seems they insist on creating the illusion that everyone is like them. Kristin Anderson, principal, Occams Energy Consulting
The authors respond: Sustainabi/ity is survival. Today, global business is using up
resources at a rate nearly 1.5 times as fast as nature can replace them. These
The Relationship You Need to Get Right HBR article by Sylvia Ann Hewlett, Melinda Marshall, and Laura Sherbin, October 2011
The authors' research shows that the best sponsors go beyond mentoring and the best proteges reciprocate by contributing 110% . There are real responsibilities for the sponsor and the protege. Too often, the direction within mentorship programs is for the proteges to lead 20
Harvard Business Review December
2011
and the mentors to respond only when asked. That practice ignores the basic truth that a protege may not want to push or request
essential "services," such as clean water, clean air, arable land, and a stable climate, are what all businesses depend on to survive. If you extrapolate projected population growth and affluence, we will exceed 500o/o capacity by 2050. You don't need an MBA to know what that means- socioeconomic collapse on a massive scale. As the owner of a small business, I find
it difficult to make sustainable choices because I do not have the budget of a large corporation. However, making a commitment to sustainability is still key. Ken c. Schmitt, president and founder, TurningPoint Executive Search
Capitalism will provide an incentive for business to invent more clean technology. However, that time is not right now. Hoang Tran, financial analyst, Thoron Development
I know Patagonia, and this message is right
from their heart and their books. They live this message in everything they do. I attended a conference where Patagonia was one ofthe moderators. One executive said, "Sustainability is not a tomorrow problem. Where else have you ever seen every link in the chain in one room at one time talking about one problem? This is not an initiative; it's a movement." Mike Todaro, president, American Garment Council
additional time from the busy, successful mentor. If we take on the role of a mentor, we need to commit to what that means: helping someone else grow and succeed and, in some cases, not waiting for her to ask. Dar cy Eikenberg, founder and chief creative officer, Red Cape Revolution
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Interact with Us
Making Yourself Indispensable HBR article by John H. Zenger, Joseph R. Folkman, and Scott K. Edinger, October 2011
If an individual works in a company with multiple products, he has to interweave his knowledge of these products or services
It's straightforward to improve on a personal weakness by learning and practicing basic techniques, but developing your strengths can be surprisingly difficult. To substantially improve your skills, the authors suggest the leadership equivalent of athletic cross-training.
with the primary product he represents. This will help him become more viable and
The missing ingredient here is the need
I'm a big fan of the strengths approach, and I'm particularly interested in how this can be used by independent contractors. In the freelance scenario, organizational needs are replaced by market needs, and the freelancer must clearly define core
to focus on the needs of your internal customers, your boss, and a few other senior players. Deciding in a vacuum what strengths to develop amounts to having a manufacturing mind-set- deciding what your customers should want. You make yourself indispensable by delivering what people need. Even if you don't report to
informative to customers. Cross-training teaches him more about the goods and services his company might represent and makes him much more successful. It's obviously up to the individual to make the choice to cross-train and learn. Dennis Grubb, VP of Business Development, Powerline Services
strengths and complementary strengths, which help build his uniquely valuable business offering.
some key players, seize every opportunity to learn about their pet projects and what's keeping them awake at night. Just showing interest in their needs can stimulate some
And rew Munro, owner and director, Burning Pine
fresh thinking on their part and make you a
ways to improve myself. But not having a boss requires me to pursue information
valuable sounding board.
As a contractor, I am always looking for
Mitch McCrimmon, managing partner, Self Renewal Group
regarding my performance through selfevaluation or by asking for feedback from others.
one has to have balance. White focus on strengths is necessary to build and lever-
Eric G. Silverman, HR contractor, Talent Bridge Partners
age them further, a leader must be aware of his weaknesses and try to overcome them. Leaders who do not acknowledge their own weaknesses can become egoistic and dictatorial (as they are only focused on strengths). Sachin Joshi, principal, CEF Consulting
If you make yourself indispensable, you will never be promoted. I've seen engineers who have cross-trained and have the ability to progress but are trapped by their mission-critical expertise. Rob ert Blanford, strategic innovator. Xansia
The best way to comment on any article is on HBR.ORG. You can also reach us via E-MAIL:
[email protected] FACEBOOK: facebook.comfHBR TWITTER: twitter.com/HarvardBiz Correspondence may be edited for space and style.
Lean Knowledge Work HBR article by Bradley R. Staats and David M. Upton, October 2011
Applying lean manufacturing techniques to knowledge work can be difficult, but it will make a world of difference in productivity. To truly achieve lean transformation, you have to embrace something much more profound than developing expertise in the application of technical skills. When people are freed from unpredictable work patterns, feast-or-famine business plans, sink-orswim command-and-control management styles, uncertainty and worry over the direction executives are taking the com pany in, end-of-month and end-of-quarter panics to make numbers, long hours of overtime, and the other "normal" ills ofthe workplace- they become capable of focusing on the creation of value. Lean principles are not about operations but are a philosophy. 1have talked with lean practitioners who have applied it to every aspect of both their professional and personal lives. David M. Kasprzak , senior program planning and control analyst, Elbit Systems of America
One important factor is your organization's goats. You need to achieve what your organization has determined to be the most important objective, whether that is financial results or employee engagement. This doesn't mean that you drop everything else. Whoever d istinguishes themselves will get to the next level. This may sound
The use of lean tools in knowledge work differs from its use in factory settings due to (1) the nature of the work is highly variable and data-intensive, rather than material-intensive; (2) knowledge workers juggle multiple projects, rather than being dedicated to one at a t ime the way plant
very basic, even obvious. I'm surprised how often failure is not due to a lack of
operators often are; and (3) knowledge workers may not believe their jobs can be
talent but to a lack of focus on the right thing.
standardized and may be inexperienced with process measurement.
Oscar Marroquin, manager, major insurance company
Karen Martin, principal, Karen Martin and Associates December 2011 Harvard Business Review
21
HBR.ORG
Interaction Customer Loyalty Isn't Enough. Grow Your Share Of Wallet HBR article by Timothy L. Keiningham, Lerzan Aksoy, Alexander Buoye, and Br uce Cooil, October 2011
CEOs Need a New Set of Beliefs HBR blog post by Raymond v. Gilmartin, September 2011
If the capitalist system is broken, what is the CEO's role in fixing it? Former Merck CEO Gilmartin answers this question by suggesting CEOs change their values. He believes leaders should share value with society, invest in projects with long-term payoffs, motivate people not only with money but also with meaningful work, integrate corporate social responsibility with strategy, and develop CEOs inside the company who manage to retain an outside perspective. Gilmartin argues that this new set of beliefs "can renew and restore faith in corporations and capitalism."
When we open up the debate, we often find that leaders are fighting their true instincts and really wish that they could run their organizations in a more enlightened way and in a manner that fits with the new set of beliefs that you recommend . Make no mistake: The short-term ism, stress, tension, employee distrust, family, and health issues caused by this dissonance are very damaging to high-potential stars. Not being authentic leaves you a shell of a person. John Anfield, owner and senior consultant, Beech Tree Associates
The CEO is only at a company for six years, on average, so " long term" becomes the term of the CEO. If a CEO can make a fortune by manipulation rather than management, he is going to do it. Neil G. Reay, managing director, CNCA, Cancer Treatment Centers of America
Great companies have three sets of stakeholders: customers, employees, and shareholders- in order of importance. If the needs of customers are met by motivated and caring employees, I can promise you, shareholders will be happy as well. The board should communicate that formula 22
Harvard Business Review December 2011
to shareholders so they understand the greater good that the company represents. Most people today want to make a difference and will work much harder for an organization that shares the essential human values of honesty, integrity, and commitment to the common good. If shareholders would see the company through this prism, they might be pleasantly surprised at what a good investment they made.
Customers are loyal to more than one company, the authors' new research shows: "It's not just how many points you score that matters-you need to score more than your competitors." They suggest a new metric, the Wallet Allocation Rule, to improve your brand's rank. Implementation of the authors' Wallet Allocation Ru le (WAR) demands persistent listening to what customers value. Like all good metrics, the WAR isn't about the numbers alone. Its implementation shifts perceptions, behaviors, and strategies to continuously create value for customers. Shyam Kum ar, senior consultant, UP! Your Service
The WAR is about really understanding why customers use which brands, and what in particular distinguishes one brand from another. It also requires that we move away from asking customers, "How are we doing at what Guy Horst, business adviser we want to be doing?" and start asking, "How are we doing at meeting all ofyour The notion that we need to upend human needs in the category?'' Only by thinking evolution - with its focus on self-interestholistically about customers' needs will and replace it with some kind of socialmanagers be able to understand what it industrial compact where our primary conreally takes to move brands up in customcern is a vague idea of "the greater good" ers' relative ranking of competing is sort of silly and dangerously messianic. brands and thereby improve Chris Lockhart, president, their share of wallet. Working Title Consultants If shareholders actually wielded their authority in exercising voting r ights and stayed on top of issues such as execu t ive compensation, the present situation of executive banditry would be far less common. Mitchell Furlong, owner, Planet of the Crepes
The authors respond:
Harlan Erskine is the photographer for the images "Burst," "Piece of an Infinite Whole," and "How to Become a Millionaire in 100 Days." The images appeared in the September issue on the cover, the table of contents, and on pages 68 and 69, respectively. HBR regrets the omission of these artist credits. Correction:
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New Thinking, Research in Progress hbr.org
FIRST
When Rivals Merge, Think Before You Follow Suit Many companies react to competitors' acquisition sprees reflexively, by launching bids of their own. Smart managers should consider other moves. by Thomas Keil and Tomi Laamanen
n October 25, 2005, the Swedish telecommunications equipment maker Ericsson announced the acquisition of key parts of Marconi's telecom business- thus starting a wave of deals that would reshape the global industry. Many competitors responded to the news by initiating similar moves. Alcatel and Lucent merged in 2006; Nokia and Siemens combined their telecom equipment units the following year. Today Ericsson remains the
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undisputed market leader. The companies that tried to keep pace by launching mergers of their own not only failed to usurp Ericsson but also found themselves under assault by the only player that abstained from the M&A frenzy: the Chinese com· pany Huawei. The M&A domino effect occurs in industry after industry. It has played out over the past decade in pharmaceuticals, automotive manufacturing, and financial services. When a major rival executes a headlinemaking merger, companies often feel under attack. These events can be so ernotionalJy charged that it's hard not to get drawn into a competitive acquisitions game. But December 2011 Harvard Business Review 25
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is countering with your own M&A always the smartest move? Our research, which spans a number of high-tech industries, shows that- contrary to the established wisdom about competi· tive dynamics- companies that react to a rival's merger with a head-on merger of their own frequently exhibit poorer performance than companies that carefully develop a less direct response. We' ve identified three interrelated reasons. First, managers under pressure to act quickly are more apt to come up with flawed plans. Second, after a company has made an acquisitive move, others in the industry may engage in a bidding war for the remaining targets, which often results in overvalued transactions that may not be good fits. Fi· nally, the firm making the initial acquisition gets the first pick, leaving rivals to settle for less-optimal targets.
Alternative Responses For many companies contending with the challenge of a competitor's merger, the fol· lowing strategies may prove more effective than an in-kind response:
A strategic retreat. If the merger attack isn't in your main market, consider retreating to your core market rather than diverting valuable resources to protect a peripheral one. For example, faced with increasing consolidation in the businessservices industry, Siemens divested itself of its business-services unit and concentrated on its core industrial businesses instead. An oblique maneuver. Sometimes you can obtain more advantage by turn· ing to ilmovation and organic growth. For instance, during the many telecom mergers of the rnid -2ooos, Huawei opted for indirect counterattacks, in the form of innovation and focused investments, rather than the more direct assault of bidding for competitors. From 2005 to 2010 it gradually increased its R&D budget from just over $800 million to more than $2.5 billion. It leveraged this investment to become one of the top patent holders in the emerging wireless standard called LTE and sirnulta· neously gained share in developed mar· kets once dominated by competitors that had joined the merger fray and were now distracted by postmerger issues. Similarly,
..,
WINNING THE BATTLE••• In 2007, with the market for personal navigation devices close to its peak, industry leaders TomTom and Garmin, along with Nokia, started a bidding war for the two main suppliers of digital maps. Garmin soon withdrew and struck a content deal with one supplier. TomTom and Nokia completed their acquisitions.
from 2004 to 2010 Oracle attacked SAP through acquisitions valued at more than $40 billion. With the exception of its 2008 acquisition of Business Objects, SAP re· sponded not by counterattacking directly but by renewing its focus on product devel· opment and improving its capabilities for helping big companies manage complex technologies. Consider what happened in the per· sonal navigation device (PND) market. In 2007 the dominant manufacturers were TomTom and Garmin. Along with Nokia, which was looking to expand its naviga· tion device business, they began bidding for Tele Atlas and Navteq-the main suppliers of digital maps. When the attacks and counterattacks were over, TomTom owned Tele Atlas, Nokia owned Navteq, and Garmin-which had withdrawn from the bidding-had a long-term content deal with Navteq. While all this was going on, however, a much bigger threat was looming: compe· tition from Apple's iPhone and Google's Android operating system. Both use maps developed by Google, which chose not to
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26 Harvard Business Review December 2011
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participate in the bidding war, innovated its own technology, and eventually ate into the PND market. A string-of-pearls acquisition strategy. Instead of trying to match a rival's deal with an acquisition of comparable size, many successful companies, including the SAS Institute, Novartis, and Microsoft, have used small acquisitions to gradually build a counterposition. With its size and financial resources, Microsoft, for instance, could have easily put together a large deal to challenge Oracle's acquisitions in the ERP software business. Instead it chose the relatively small acquisitions of Great Plains Software and Navision. This approach allowed it to fill gaps in its portfolio and fo· cus on developing the products it acquired, resulting in a tighter integration of its new and existing products than would have been possible with a single large acquisition.
Choosing the Right Response Different situations call for different strategies. Four questions can help you decide which one makes the most sense for your company:
••• BUT LOSING THE WAR Meanwhile, new rivals were emerging: the iPhone and the Android operating system, which use maps created by Google. Within four years the newcomers captured much of the market that had once belonged to TomTom and Garmin. By 2011, 33% of u.s. consumers were using smartphones for navigation, and the share prices of TomTom and Garmin had cratered.
What is the nature of t he attack? Not all acquisitions present competitive threats. In fact, a rival's merger can pro· vide an opportunity for other players to strengthen their positions at the expense of the attacker (and of other rivals who react by making acquisitions themselves). The first step is to determine the merger's potential for industry disruption. How mahue is the market, and how important is it to your firm? Is the attacker exploring a new market or shoring up its position in an established one? If the former, does it have a history ofsuccessfully entering new markets through acquisitions? Finally, can the attacker leverage complementary resources or market positions? Which strategies are best suited to our part icular company? Once the nature of the attack is clear, systematically evaluate your possible responses, weighing the wisdom of a direct counterattack against various alternatives, including the three described above. Are there targets that lend themselves to a string-of-pearls strategy? Will other companies in the in· dustry, or companies in adjacent industries, be available to form an alliance against the attacker? Could you use new-product introductions to retaliate, or could you find other ways to go after your rival's customers? Although it's important to consider all options initially, you may find that only some are realistic in a given situation. What resources and capabilities would we need for each strategy? Once you've narrowed down your choices, determine whether your company has the capabilities to execute them. In addition to financial resources, complementary resources such as your existing customer base, ecosystem, and technological and market assets are crucial. If you're facing resource gaps or disadvantages of scale, think about whether you could access what you'd need from outside the company. One benefit of an indirect response is that it may demand fewer resources than would be required for a blockbuster deal. What critical execution challenges would we face? Before finalizing your
Not all acquisitions present threats. A rival's merger can provide an opportunity to strengthen your position at the expense of the attacker. decision, you need to look at the factors that would be central to each strategy and consider your ability to manage them. How important is the speed ofexecution? What are the main risks, and could you mini· rnize them? How well could you maintain your focus on your core business while mounting your response? Could you avoid overstretching managerial and financial resources? Resisting the impulse to respond to a rival's merger or acquisition by striking back with a sizable deal of your own requires real fortitude on the part of top managers. When industries consolidate, time pressure and the concerns of external stake· holders, such as customers and investors, can make executives feel compelled to of· fer a quick, bold counterattack. But recent business history shows that carefully considering a broader set of strategies-and, when appropriate, implementing one of them instead-often helps to avert a catastrophic mistake. 0 HBR Reprint Fl112A ~
Thomas Keil is a professor at Aalto University, in Finland. Tomi Laamanen is a professor at the University of St. Gallen, in Switzerland. Decemb er 2011 Harvard Business Review
27
HBR.ORG
IDEA WATCH
IN NOVATION by Paul M. Leonardi
Early Prototypes Can Hurt ATeam'sC n product development, a popular tool is the quick-and-dirty prototype. Because simple prototypes make the abstract concrete, they can guide innovators' conversations and focus their attention, helping them to move forward. But many companies rapidly follow them with polished prototypes-and the trouble begins. Research I've conducted in the auto industry shows that when people see a detailed prototype, something odd happens: They concentrate on the prototype's form and function, forgetting to attend to any remaining ambiguities about the problem the product is meant to solve or the obstacles in the way. Instead of clarifying the path ahead, the prototype puts a halt to useful brainstorming. This occurs because when a complex technological product is under development, the groups involved often try to proceed in unison without realizing that they don't agree about what prompted the project in the first place or what is blocking its completion. This "innovation blindness" causes conflict and delays and may sink a project altogether. How can organizations avoid this pitfall? In the early phases of development, they should retain the ambiguity inherent in any technological challenge, moving on only after everyone is clear on what problems the product should tackle and how. 28
Harvard Business Review December 2011
At one U.S. automaker I studied, a prod· uct that had been shelved because of in· novation blindness was resurrected by a return to ambiguity. All the people I met with, from managers to engineers, agreed that crash-simulation analysis-slamming computer representations of vehicles into virtual walls-should play a greater role in product development, in order to improve safety and reduce costs. Many departments, working together, had come up with an idea for a computer-based tool that would increase the accuracy of analyses and help decision makers evaluate designs. But despite apparent agreement on the broad goal, basic disagreements remained.
For example, one set of developers thought that what was needed to reach the goal was faster engineering. Another thought it was more-accurate data. When a detailed prototype was built, the discussion rapidly devolved into arguments. "Everyone kept saying, 'Why doesn't it have this feature or that feature?"' one par· ticipant told me. The haggling went on for years. "It was a brutal time;• another said. It took the arrival of a new managersomeone with a fresh perspective-to res· urrect the tool. Because the manager saw a problem completely different from what the others had seen, he unwittingly rein· jected ambiguity into the thinking. Wres· tling with this ambiguity forced people to stop simply defending the prototype's fea· tures. The prototype was abandoned, the groups clearly defined what they needed to solve, and the tool was built. It's now help· ing engineers design safer cars and trucks. Although prototypes often make it easier for developers to translate their knowledge for one another, they can stymie progress if they become too detailed too early. Organizations need to retain some ambi· guity until groups have agreed not only on goals but also on the fundamental difficulties at hand. Early on, a manager's mantra should be:"! don't want to hear solutions. I want to hear about the problems that our product needs to solve." o HBR Reprint Fl112B "
Paul M. Leonardi is the Allen K. and ~ Johnnie Cordell Breed Junior Chair of Design in the departments of communication studies and industrial engineering and management sciences at Northwestern University.
Smarter business for a Smarter Planet:
Introducing the largest CMO study of its kind. In the age of the empowered customer, nearly 70% of CMOs believe customers interact with a brand through social media to receive information or express opinions. In reality, that's only what a third of today's customers are seeking. What is it that they're really after, and how can organizations better serve socially active customers? Find out in From Stretched to Strengthened, the first CMO entry in the ongoing IBM C-suite Studies series. Built on face-to-face interviews with over 1,700 CMOs, this insightful study is more than just the largest of its kind, it's a roadmap tor using technology-driven marketing to help bring a greater return on marketing investments. A smarter business needs smarter thinking. Let's build a smarter planet.
Get From Stretched to Strengthened, the 20111BM Global CM O Study. ibm.com/ C M0study3
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IDEA WATCH
RESEARCH Follow HBR's coverage of the latest academic research at http://blogs.hbr.org/.
Research Watch
BUSIN.ESS TRAVEL
by Kevin K. Boeh and Paul W. Beamish
Connecting Flights: The Time Sink That Kills Profits usiness travel can be a hassle- and connecting flights create the greatest hassle of all. Connections result in more than just headaches, though: Our research shows that longer travel times can significantly hurt the bottom line. We studied some 1,200 companies over a 13-year period, focusing on Japanese businesses and their U.S. subsidiaries. The mean travel time between headquarters and subsidiaries, including ground transport, was 16 hours-as we'll discuss, a tipping point of sorts. We found that the longer it takes to travel between the two, the less likely the subsidiary is to be profitable. If all else is equal, a unit that's an hour farther from headquarters than another unit has a 7% lower chance of making a profit. Note that the important factor is time, not distance. For example, after controlling for local economic and industry differences, we found that a subsidiary in Lexington, Kentucky, was about2S% less likely to be profitable in a given year than a subsidiary in Houston, even though the two cities are essentially equidistant from Tokyo. The reason: Flying to Lexington takes more than two hours longer than flying to Houston, because the former trip requires a connection. Factor in ground travel, and the time is well above the mean. Why is extra travel time such a profit killer? Interviews with dozens of execu-
B
30 Harvard Business Review December :r.on
tives, along with the findings of other researchers, suggest several contributing factors. Added time in transit, and the resulting fatigue, hamper executives' ability to share knowledge and learn from the local operation. They can lead to poorer oversight of people, projects, and operations; result in slower strategy execution; and reduce opportunities to develop relationships, teamwork, and trust. Over the course ofl3 years, we saw 23% more turnover among general managers of units that were farther than 16 hours from headquarters. Indeed, increased travel time from headquarters
is linked to lower employee satisfaction and retention at the staff level as well. And traveling impairs executives' performance in general: Managers reported productivity losses of about 90% while in transit and SO% while at the remote location. Longer travel times can only exacerbate this effect. Successful multinationals recognize the downsides of having hard-to-reach subsidiaries and tend to expand geographically in ways that minimize executives' transit time-choosing cities that can be reached by direct flights and finding sites close to the airport. Companies with less experience abroad often choose far-flung locations, unaware of the costs of interacting at a distance. Many of them change their minds, however: Subsidiaries farther than 16 hours from headquarters are more likely than other subsidiaries to be relocated. One additional hour of travel above the mean increased the likelihood of relocation by 11% during the course of our study. Managers often fret over the impact of rising jet-fuel prices on travel budgets, but airfares pale beside the damage that extended travel time can ca use. Smart companies will keep this in mind when choosing locations for their subs idiaries. Although mobile technology has increased managers' ability to be productive on the road, time wasted in airports-and the host of cascading consequences-can take a big financial toll. o HBR Reprint Fl112C •
Kevin K. Boeh is an assistant professor at Pacific Lutheran University School of Business, in Tacoma, washington. Paul w. Beamish is a.t"Ofessor at tt>-~ university of Western Ont.-.,;:r o\"! 1 ~:...o\ o.' ·J:.u..;'"'"~- .
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IDEA WATCH
Defend Your Research James w. PeMebabr
HBR puts some surprising findings to the test
Is the chair of psychology at the University of Texas at Austin and the author of
The Secret Life of Pronouns: What our Words say About us (Bloomsbury Press. 2011).
• • The finding: A person's use of function words-the pronouns, articles, prepositions, conjunctions, and auxiliary verbs that are the connective tissue of language- offers deep insights into his or her honesty, stability, and sense of self.
The research: In the 1990s, James Pennebaker helped develop a computer program that counted and categorized words in texts, differentiating content words, which convey meaning, from function words. After analyzing 40o,ooo texts-including essays by college students, instant messages between lovers, chat room discussions, and press conference transcripts- he concluded that function words are important keys to someone's psychological state and reveal much more than content words do.
The challenge: Can insignificant words really provide a "window to the soul" ? Professor Pennebaker, defend your research. Pennebaker: When we began analyzing people's writing and speech, we didn't expect results like this. For instance, when we analyzed poems by writers who committed suicide versus poems by those who didn't, we thought we'd find more dark and negative content words in the suicides' poetry. We didn't-but we did discover significant differences in the frequency of words like ''I:' In study after study, we kept finding the same thing. When we analyzed military transcripts, we could tell people's relative ranks based on their speech patterns-and again, it was the pronouns, articles, conjunctions, and other function words that made a difference, not the content words. HBR: Why are function words so important? 32 Harvard Business Review December 2011
In English there are about 500 function
words, and about 150 are really common. Content words- nouns, verbs, adjectives, and most adverbs-convey the guts of communication. They're how we express ideas. Function words help shape and shortcut language. People require social skills to use and understand function words, and they're processed in the brain differently. They are the key to understanding relationships between speakers, objects, and other people. When we analyze people's use offunction words, we can get a sense of their emotional state and personality, and their age and social class. Here's a simple, pronoun-heavy sentence: I don't think I buy it. Ooh. You just revealed something about yourselfin that statement. Why did you
say "I don't think I buy it" instead of"I don't buy it" or even "That's ridiculous"? Pronouns tell us where people focus their attention. Ifsomeone uses the pronoun "I:' it's a sign ofself-focus. Say someone asks "What's the weather outside?" You could answer "It's hot" or "I think it's hot?' The "I think" may seem insignificant, but it's quite meaningful. It shows you're more focused on yourself. Depressed people use the word "I" much more often than emotionally stable people. People who are lower in status use "I" much more frequently. Can you tell if someone's lying by their use of function words? Yes. A person who's lying tends to use "we" more or use sentences without a firstperson pronoun at all. Instead of saying "I didn't take your book:' a liar might say "That's not the kind of thing that anyone with integrity would do!' People who are lying also use exclusive words like "but" and "without" and negations such as "no:' "none:' and "never" much more frequently. We've analyzed transcripts of court testimony, and the differences in speech patterns are really clear. Function words sound like two-by-fours: They're important but not meaningful in creating the overall architecture. You might even think of function words as the nails. It seems natural to pay them little regard. If you type a sentence into Google, its algorithms disregard function words, because it's interested in content. But these words convey important subtleties-"a ring" versus "that ring?' In foreign languages, function words often convey people's status relative to one another.
HBR.ORG
HARVARD BUSINESS SCHOOL EXECUT I VE E D UCAT I ON
How do people react to your analyses of their speech?
everything I wrote-even e-mails. I also developed a recorder that people could wear. It would turn on for 30 seconds every 12 minutes to capture bits of everyday speech. I wore it myself. When I analyzed my speech, it struck me how differently I spoke to my son, who was then 12 years old. With my daughter and my wife, my language was much more informal and personal. With my son it was more cool and detached. I realized I was drawing back from him-! wasn't being psychologically present. This was during a period of some tension in OUT relationship. He was a typical adolescent and was acting out a bit, and I was responding by being cool and detached, which males stupidly do when we're annoyed. When I realized this, I tried to become more human, emotional, and honest with him.
I did it using my own speech and was really surprised. I used the software on
Are there gender differences in how we use function words?
If you listened to a job interview, what would the use of function words tell you?
It's almost impossible to hear the differences naturally, which is why we use transcripts and computer analysis. Take a person who's depressed. "I" might make up 6.s'Yo of his words, versus 4% for a nondepressed person. That's a huge difference statistically, but oUT ears can't pick it up. But hypothetically, ifi were to listen to an interview, I might consider how the candidate talks about their coworkers at their last job. Do they refer to them as "we" or "they"? That gives you a sense of their relationship to the group. And if you want someone who's really decisive in a position, a person who says "It's hot" rather than "I think it's hot" may be a better fit.
THE 20 MOST COMMONLY USED WORDS
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Most people think men use "I" more, because men are more narcissistic and self-congratulatory. But across studies and cultures, we found that women use "I:' "me:' and "mine" more. Women are more self-attentive and aware of their internal state. Men use more articles: "a," "an:' and "the." That means men talk about objects and things more. You use articles when you're referring to concrete objects, because articles precede concrete nouns. Women also use more third-person pronouns-"he:' "she:' and "they"-because women talk more about people and relationships, and they're better at managing them. And in many ways, relationships are more complex. 0 HBR Reprint Fl112D
Learn more at www.exed.hbs.edu/pgm/hbr/
IDEA WATCH
Vision Statement The Charts That Changed the World
MARKIT SHARI
Data compiled by Andrea OVans
This issue of HBR contains about 20 charts, graphs, and other exhibits-all aimed at visually communicating the ideas of our contributors. We hope t hey augment readers' understandingbut we realize that many of t hem are useful only in their original context. Once in a w hile, however, a chart so deftly captures an important strategic insight that it becomes an iconic part of management thinking-and a t ool that shows up in MBA classrooms and corporate board rooms for years to come. As HBR prepares for its goth anniversary, in 2012, our editors have combed the magazine archives and other sources to select some charts t hat changed the shape of strategy. o HBR Reprint Fl112Z
THE EXPERIENCE CURVE
Created by the Boston Consulting Group in 1966, this diagram may look simple, but it captured the notion that companies develop competitive advantage through economies of scale: Over time, they learn to lower costs, gain efficiencies, and improve products by redesigning and utilizing better technology. SOURCE WALUR KJECHEI., THE LORDS OF STRATEGY (HARVARD BUSINESS PRESS. 2010)
STARS
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THE GROWTH SHARE MATRIX SOURCE WALTER KIECHEL, THE LORDS OF STRATEGY (HARVARD BUSINESS PRESS. 2010)
THE FIVE Prior to Michael Porter's breakthrough 1979 HBR article, "competition" referred to rivalry between companies. Few people considered whether or why some industries were inherently more or less profitable than others or how persistent their profits were over time. Porter's diagram changed that-and students, strategists, consultants, and entrepreneurs now assess a company's competitive position according to the strength of the five forces. SOURCE • HOW COMPETITIVE FORCES SHAPE
SlRAUGY." HBR MARCH-APRIL 1979
34 Harvard Business Review December 2011
This grid, devised at Boston Consulting Group in 1968, crystallized the relationship between market growth and market share to help determine the overall prospects for various business units. It is used to teach managers to milk cash cows, divest dogs, invest in stars, and weigh the risks and rewards of question marks.
BARGAINING POWER OF SUPPLIERS
HBR.ORG
Choosing the "best" of anything is admittedly a subjective exercise. What iconic management diagram do you think should be on these pages but isn't? Talk back to us at www.hbr.org/charts.
SUSTAINING UC:HNOLOGY BRINGING A BETTER PRODUCT INTO AN ESTABLISHED MARKET
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COMPETE AGAINST NONCONSUMPTION
When Clayton M. Christensen and Joseph L. Bower introduced this idea, in a 1995 HBR article, their simple chart illustrated a key insight: Established players can be threatened by lower-quality offerings that fulfill the needs of "overserved" customers-and those offerings tend to improve over time. SOURCE '"OlSRUPTIVE TECHNOLOGIES: CATCHING THE WAVE.• HBR JANUARY· FEBRUARY 1995
THREAT OF NEW ENTRANTS
THE MARKET PYRAMID
Today managers take for granted that the biggest growth opportunities lie in emerging markets-and that viable businesses can be built to serve people near "the bottom ofthe pyramid." That can be traced to this chart, introduced by C.K. Prahalad and Kenneth Lieberthal in HBR in 1998. People living on $5,000 to $10,ooo a year may not sound like lucrative consumers, but they constitute a demographic of immense purchasing power for companies selling food, housing, or energy. SOURCE ' THE END OF CORPORATE IMPERIAUSM." HBR JULY-AUGUST1998
RIVALRY AMONG EXISTING COMPETITORS
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$10,000 T0$20,000 $5,000 TO $10,000 <$5,000
POPULATION (IN MILLIONS, 1998) CHINA 2
INDIA 7
BRAZIL 9
60
63
15
330
125
27
800
700
105
Decemb er 2011 Harvard Business Review 35
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IDEA WATCH
~Ira
egic Humor
bob
CAPTION CONTEST
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"I'm here to discuss your severance package!' This month's winning caption was submitted by Dan Lynch of St. Thomas,
36 Harvard Business Review December 2011
u.s. Virgin Islands.
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COLUMN
Kanter
Rosabeth Moss Kanter holds Harvard Business School's Arbuckle Professorship and specializes in strategy, innovation, and leadership. Her latest book is Supercorp (Crown, 2009).
Courage in The C-Suite hat you don't do can hurt you. Missed opportunities lead to later regrets. Nokia could have innovated its way to dominance in smartphones. The SEC could have acted on early whistle-blower tips about Bernard Madoff's scam. Yahoo could have sold to Microsoft. But they didn't. Doing nothing seems easy. It's often an invisible mistake-a sin of omission rather than commission. To act requires courage. To innovate requires even more courage. Today, courage seems in short supply. What are leaders waiting for? Without bold action and innovation, how can troubled economies escape decline? Courage makes change possible. Intellectual courage is necessary to challenge conventional wisdom and imagine new possibilities. Leaders must refuse to accept limits or stop at industry boundaries. Jeff Bezos has courageously led Amazon from an e-commerce bookseller to a content publisher to a device producer. Verizon's leaders saw growth limits in traditional telecorn, so they invested billions in fiber optics to speed up land lines and partnered with Google to deploy Android smartphones, requiring substantial changes in the fum's practices. Moral courage enables people to stand up for a principle rather than stand on the sidelines. Agree with him or not, Starbucks's CEO, Howard Schultz, showed courage in calling for a moratorium on political contributions until U.S. politicians solve the government funding crisis. Former Deloitte & Touche chairman Michael Cook courageously resigned from a males-only club 38 Harvard Business Review Decemb er 2011
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I offer a call for leadership
courage: No problem left to fester. No idea left behind. frequented by his customers when he made a public commitment to the advancement of women. Other firms later emulated Deloitte's women's initiative. Lack of courage stymies positive change at all levels. Consider ineffective politicians who shift positions on the basis of polling data, not conviction. Consider all the times people know something is wrong-and suspect others do, too-but don't speak up. Consider personal sins of omission: Not offering thanks, praise, or feedback that could strengthen relationships. In troubled companies, I've observed a familiar pattern. Managers equivocate in response to a new initiative, observe struggles without helping, and withhold resomces. If
the project works, they claim to have been for it aU along; if it doesn't, they say "I told you so." Individual decisions to hedge bets, hoard information, or go passive reinforce the decline ofsystems. In my book Confidence I call such behavior the timidity of mediocrity. Courage doesn't imply absence of fear. Heroes are scared to death but act anyway. Innovators know that they're taking risks. At the same time, courage doesn't mean being foolhardy. Safety nets support daring. Rapid prototypingis tech-speak for testing and refining. Before ffiM announces large social impact initiatives such as World Community Grid, leaders do due diligence about whether they can deliver. But they also don't dither and delay. Practice, passion, and colleagueship support courage. When military commanders precede their troops into combat, or StreetSafe Boston's workers break up gang fights and steer kids into school, you can bet they've rehearsed thoroughly. Courage also comes from caring deeply about achieving a shared goal. When others are counting on you and backing you, and when you're acting in the service of others rather than for personal glory, courageous deeds are easier. Courage has a collective component, even if manifested in individual actions. Sticking with the status quo is tempting. Once a course is set, it becomes the path of least resistance. But other paths must be explored, lest we regret the one not taken. That's why I offer a call for leadership courage: No problem left to fester. No opportunity unexamined. No idea left behind. 0 HBR Reprint Fl112E
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COLUMN
Vossou hi
Sohrab vossoughi is the founder and president of Ziba Design, a design and innovation consultancy based in Portland, Oregon, and the recipient of more than 200 design awards.
Is the Social Sector
Thinking Small Enough? ot long ago a designer from a UK studio called Participle visited my firm, Ziba, to describe an unusual approach to creating social change. Rather than lobbying the government for new policies, Participle designs and implements its own solutions and then helps the successful ones spread. Its Circles program, for example, connects elderly and disabled residents with people who live nearby and are happy to help them, sometimes for modest pay and sometimes just to be neighborly. Participle worked with the local council of Southwark, in south London, to set the first Circle up in 2009 and helped launch two more Circles the next year. Now that the model is proven, larger public agencies are taking notice: Nine more Circles and a national service are in the planning stages. Around the same time, we watched with concern the aftermath of the Japanese earthquakes and tsunami, which created an urgent need to shelter thousands of evacuees. Government and private agencies quickly carne up with creative solu-
tions ranging from prefab houses erected in fields to instant villages in gymnasiums. Some worked well, and some failed entirely, but together they offered a unjque opportunity to learn what makes shortterm-housing efforts effective. In both cases, we realized, we were seeing prototyping applied to the social realm. And it made perfect sense. As innovationoriented businesses have long known, prototyping not only speeds up the design of solutions but helps you solicit valuable input and get buy-in from diverse constituencies. Ifa problem calls for a truly novel solution, it's the best way to get the ball rolling. In the public sector, however, this isn't usually how thlngs work. While the idea of sweeping reform is behlnd many inspiring
When designers want to explore a new strategy, we don't describe it to a dozen groups. We test it with small sets of users.
messages delivered by politicians, government agencies are geared for stability, not change. Their processes are designed to ensure thoroughness, fairness, and certainty. Somethjng as simple as adding bike lanes in a neighborhood can go through over 40 reviews and committees before the first stripe is painted. The process can take years and probably costs several times more than it would to just install the infrastructure and remove it if it didn't work. In an era of scarcity, the public can't afford that expenditure oftime and resources. Paradoxically, the more thorough process is also riskier, because the certainty it seeks is an illusion. Decades ago, when change was slower, populations more homogeneous, and politics less inflammatory, it rrught have been possible to envision some bold and better way, work out the details, and gain the consensus needed to launch it full-scale. Today, by the time that happens, the idea has been crippled by review and analysis, and the world has moved on. This is where designers have something to offer the public sector. If we want to explore a new strategy, product, or service, we don't describe it to a dozen groups in hopes they'll adopt it wholesale. We make prototypes and test them, internally at first, then with the client, and then with small sets of users. We modify and make new prototypes depending on how the previous batch worked. We might even roll out a new offering in a lirillted market to see how it does. We do tills because people are wary of new ideas, no matter how much they claim to want them. Research led by Wharton's Jennjfer Mueller demonstrates that under conditions of uncertainty, people show a decidedly negative bias toward creativity relative to practicality. Prototyping is a fast, effective way to get past that bias. lt lets us walk into a room not with an idea to be believed but with results to be examined. Prototyping itself is nothing new in the design profession, but for social and public policy it's still in its infancy. Maybe it's time to take it to scale. 0 HBR Reprint F1112F
40 Harvard Business Review December 2011
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How I Did lt ...
by fvfindy Grossman THE IDEA
When Mindy Grossman became HSN's eighth CEO in 10 years, she e ncountered dirty offices and downtrodden e mployees. Her solution? White paint, new chairs, and a strategy to reinvent the brand and re-e ngage the workforce.
n 2006 I'd been working at Nike for six years, and I loved it. I worshipped that brand. Nike's CEO, Phil Knight, was an inspiration. But I'd been commuting between my family in New York and my job in Portland, Oregon. I was traveling outside the U.S. 25% of the time. I was in my late forties, I wanted to be a CEO someday, and Nike had recently appointed a so-year-old CEO and a 49-year-old president. They deserved the jobs, but I was left without the best succession opportunities. I'd had a lot of recruiters come at me, but nothing felt compelling. Eventually I gave the recruiters a laundry list of what I was looking for: I wanted to run a direct-to-consumer
brand. I wanted a company that was poised to take advantage of technological changes and the shifting ways in which people shop. [See "Reinventing Retail:' the Spotlight beginning on page 63.] I wanted an entrepreneurial atmosphere but not a start-up. I wanted a company that I could transform and grow. And they said, "Oh, really? Is that all?" Six months later I got a call from a recruiter who was looking for a CEO of lAC Retailing. I said, "That's great. What t he hell is it?" It wasn't even on my radar. It turned out to be Barry Diller's retail portfolio, which was composed of Home Shopping Network (the core of the business), December 2011 Harvard Business Review 43
HOW I DID IT
Grossman's Resume in Brief 2006- PRESENT
CEO a shopping channel in Germany, a small it. The place was dirty, the people seemed and struggling auction business in the downtrodden, and I had the sense that the UK, and a portfolio of e·comrnerce catalog organization was frozen in time. When a brands called Cornerstone. I asked there· company goes through so many CEOs that cruiter to give me a week to study the busi· quickly, all people are doing is waiting for ness. I'd never watched a home shopping the next one to come in. channel, and if I was going to have lunch wi th Barry Diller, I wanted to know what I Finding the Right Talent Before I went down to Florida, the head was talking about. So I started channel surfing. HSN of HR called and asked if I had a first-day wasn't easy to watch. It was very hard-sell. agenda in mind. "What do other employ· The aesthetics were dated. The products ees do on their first day?" I asked. She said weren't aspirational and didn't seem very that ordinarily they went to new-employee relevant. I could see from the numbers that orientation. "Then I'll go to new-employee HSN wasn't growing and was a very distant orientation;• I said. "Are you kidding?" she number two to QVC. At the time, I was an replied. I wasn't. aficionado of Food Network and HGTV. So The next morning I flew down, got I'd flip back and forth between HSN, QVC, my little ID badge, and went into t his big HGTV, and Food Network, trying to get room. They made us go around the circle ideas. The only thing I liked on HSN was and introduce ourselves. First there was a merchandising assistant, then a TV producWolfgang Puck selling cookware. He was funny and engaging. He gave you recipes. tion person, then a quality-control person. Even if you didn't want to buy anything, "Hi:' I said. "I'm Mindy. I'm the new CEO?' you could watch Wolfgang for an hour. And Can you imagine? But it ended up being I had this "aha" moment: I realized that the best way to spend a first day. Like every HSN really needed to become more of a other new employee, I was shown the pro· lifestyle network that would inspire people duction set. I listened to customers in the through products. call center. The next day I held a town hall So I had lunch with Barry, and I gave meeting. Going through orientation had him that pitch. I had no television experi· introduced me to every part of the com· ence, no direct-to-consumer experience, pany very quickly, and it gave me some and no experience in most of the prod· credibility. uct categories HSN sold. But I got the job. As I grew to understand the business, When the announcement was made, my it became clear that it was fundamentally friends couldn't believe it. They thought I'd broken. To fix it, l needed to dramatically lost my mind. I was moving from one of the alter the company's culture. I also needed world's most aspirational brands to a com· to understand and reposition the brand pany many people associated with selling and then devise a product strategy that ThighMasters. But if I was ever going to made sense. Not only did I have to do all take a big risk, this was the time to do it. those things at the same time, but we had ln retrospect, I didn't really know what I to change the tires while the car was run· was getting myself into. HSN had had seven ning. This was a 24/7 TV operation, so we CEOs in the previous 10 years. I didn't real· couldn't close the store while we prepared ize how troubled the culture was or how to relaunch. great the scope of the retention problems. In order to focus on HSN, I had to elirni· lAC had recently acquired the Cornerstone nate some of the distractions. We closed brands, and the integration with HSN was the failing UK auction business. We sold an unmitigated disaster. I'd never been to the German shopping channel. We had HSN's headquarters, which was in Saint Pe· a small U.S.·based shopping channel on tersburg, Florida. If I'd visited there before DIRECTV that was very down-market, sell· I accepted the job, I might not have taken ing mostly clearance merchandise, so we 44 Harvard Business Review December 2011
HSN, Inc. Relaunched the brand, took HSN public in 2008, and now oversees its $3 billion-plus retail portfolio and multimedia • expans1on. 2000-2006
VP, Global Apparel Nike, Inc. Grew Nike's global apparel business by $1 billion; advanced its innovation agenda; created and chaired Nike's Global Women's Leadership Council. 1995- 2000
President & CEO Polo Jeans Co. Launched Polo Jeans and grew t he business to $450 million. 1994 - 1995
•
VP, New Busmess Development Ralp h Lauren Corp. Developed new brand concepts, including Polo Jeans. 1991-1994
President Chaps Ral ph Lauren
Senior VP, Menswear Warnaco Group, Inc. Turned around the Chaps division and grew it to $250 million.
closed it. I put another executive in charge of the Cornerstone brands. The next step was to assemble the right talent around me. Too many people who come in as CEO of a poorly performing company assume that none of the incum· bent executives are worth retaining. That's not always the case. Sometimes the talent
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is there but it's not being led well. I was fortunate: Some ofHSN's executives were great. The CFO had kept the company together through sheer force of will because she really believed in it, and I knew she'd make a great partner. The head of operations was terrific. The people in charge of HR and cable and satellite operations were solid. But other groups were uninspired. Companies lose some of their best employees when people are beaten down; then they overpromote junior people because they can't persuade outsiders to sign on. That had happened at HSN. We had weak teams in television, marketing, merchandising, programming- the lifeblood of the business. I knew I needed people with television experience who understood both storytelling and women, our primary customers. I needed somebody on the digital side who understood that HSN couldn't be just a television shopping channel anymore- it had to be a shopping destination across multiple screens. So I set out to find the right people. I found one worldng for lAC in the UK, where his creative talents weren't being utilized. Another was running a little business we owned called Gifts. com, and I put him in charge of digital. To head up programming, I hired someone who'd worked at Lifetime and VH1- he understood women and he understood storytelling. I knew we needed to increase engagement for all employees below the executive level as well. I wanted people to be proud of where they worked. I hired a consultant to conduct employee engagement surveys; suffice it to say the scores were subpar. I decided that within the next year I wanted to raise them by five points. The consultant said that wasn't realistic, but I was committed. I did a lot of town hall meetings at all our locations, and I started to divide the employees into three groups: the "evangelists:' who knew that HSN could be a great business and just needed the right leadership to make it happen; the "blockers:' who were perpetually negative-the only solution was to get rid of them; and the "wait-and-sees:' who were in the middle
My friends thought I'd lost my mind, moving from Nike to a company many people associated with selling Thigh Masters. and would either jump on the bandwagon or not. I had to make some quick d ecisions: embrace the evangelists, get rid of the blockers, and let the rest of the people know they had a finite amount of time to get on the wagon.
Cleaning House I also tried to change the physical environment to help drive the cultural change. I didn't have much money for renovations, but I was detemtined to do something. One of the first weeks I was there, I brought in Dumpsters and told everyone to take a day off from their regular work and just throw
things away- we had all this furniture and stuff that was broken or dirty or just clutter. Then I had all the buildings pressurewashed and painted white. I'd been living in New York City when Rudy Giuliani became mayor, and the first thing he'd done was get rid of all the graffiti. This was my way of getting rid of graffiti. Next I looked around and realized that we had 40 different ldnds of office chairs, many of which were in disrepair. So I bought several thousand Herman Miller Aeron chairs. Office chairs are an easy way to let people know you care about them. I must have received 100 e-mails about the
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HOW I DID IT
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chairs the first day they were there. People Stefani Greenfield, who'd worked at DKNY down to $1.43 a share, and our market cap really want a nice environment to work and Esprit before founding Scoop, a hot was lower than our receivables balance. My in, and things like that make a difference. chain of fashion boutiques. Stefani per- toughest job was keeping the organization When the consultants surveyed employees suaded Theory, J.Crew, Stuart Weitzman, focused and motivated. a year later, our engagement scores had in· and other brands to participate. Veteran We've grown every year since then-at creased to 73- almost 10 points higher than HSN employees thought this was crazy, this writing, our stock price is about $35, the industry norm and higher than the con· because they thought it was too high-end. and our market cap is close to $2 billionsulting fum had ever imagined possible. "We're never going to be able to sell this and I believe we've proved the fundamenWhile all this was going on, I was also stuff,'' they said. I said, "You don't under- tal resilience of our business model. HSN worlctng to reposition HSN as a brand. I stand. We are never going to ignite our is one of the few networks that can be a brought in brand strategy consultants to fashion business if we don't have fashion." complete consumer destination-for shoplearn about consumer perceptions of the The shows turned out to be very success- ping, for sharing, for gaming, for informanetwork. I started at HSN in May of2006, ful, and Stefani now runs Curations, which tion, for entertainment. I want to be where and by October we had rolled out a new sells exclusively through HSN. our shoppers go as soon as they wake upbrand image, a new tagline, a new vision By the middle of 2007 we had re- whatever they're looking for. Overall, the company has been perstatement, a new customer manifesto, and launched the channel, relaunched the new advertising. I made it clear that I had website, embarked on a complete campus formingwell. We've exceeded expectations. zero intention of chasing QVC and that we renovation, and redesigned everything, We've gained tremendous credibility as a were going to set a completely new path down to the fonts on our business cards. By business for the future-not just a mature for HSN- one that would create a new life· then it was clear that we were starting to business with no growth opportunities style experience for consumers. When I tum the business around. and no excitement, which is what HSN was look back, I still don't know how we got it Then, one Sunday night in November, when I arrived. Five years ago people never all done so quickly. my husband answered the phone and said would have dreamed that we'd have the Once we had decided on a new posi· it was Barry Diller. I thought, "Barry is call- greatest chefs in the world on HSN, or that tioning for the brand, we had to adjust the ing me at home on a Sunday night? Uh-oh." we'd have Jennifer Lopez or Queen Latifah product mix. In my first year we stopped Barry said he'd decided to split lAC into five or Mariah Carey or Iman on our channel, selling $150 million worth of brands that separate companies. Four of them-includ- or that we'd be in the front row at Fashion clidn't fit the new strategy. At the same time, ing HSN- would be spun off and become Week. If the turnaround hadn't worked, we worked hard to Jure new brands and publicly traded. "You're going to make a I'd have been another in the long li.n e of new personalities to sell products. I went spectacular public-company CEO;' he said. CEOs who failed at HSN- and I'd probably I spent the next few months raising fi- be remembered as the one who bought all to the Consumer Electronics Show, which I'd never attended before, and personally nancingjust as the markets were imploding. those fancy office chairs. But more than worked to get higher-end brands to sell on Picture me with my CFO, walking into alJ five years later our culture is fixed, and I HSN. I signed a two-year deal with Sephora these banks and telling them we're in tum- know there's much more growth potential in the beauty category. We expanded our around mode and trying to sell them on the to be unlocked here. Every day I'm making culinary lineup by adding Emeril Lagasse concept of home shopping. They thought changes to try to achieve that. 0 and Todd English. I was crazy, too. We went public in August HBR Reprint Rll12A In the spring of2007 we put on a two- of2oo8, a few weeks before Lehman Broth- ~ Mindy Grossman is the hour fashion show that was organized by ers collapsed. By December our stock was .:.J CEO of HSN, Inc. 4 6 Harvard Business Review December 2.011
We focus on customizing Target's direct mail program. So they don't have to. Xerox software allows Target to deliver specially personalized offers to each and every mailbox. Which in turn allows Target to focus on delighting all their guests, each and every time they visit.
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The Big Idea
48 Harvard Business Review December 2011
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Gary Hamel is a visiting professor at London Busi· ness School and the director of the Management Innova· tion eXchange. a web-based research initiative focused on management innovation. He is the author of six books, including What Matters Now (forthcoming from Jossey-Bass).
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Morning Star, a leading food processor, demonstrates how to create an organization that combines managerial discipline and market-centric flexibilitywithout bosses, titles, or promotions.
by Gary Hamel
December 2011 Harvard Business Review 49
THE BIG IDEA FIH:;T, LET'S FIRE All THE MANAGERS
E ENTISTHE FFICIENT ACTIVITY ORGANIZATION. Think of the countless hours that team leaders, department heads, and vice presidents devote to supervising the work of others. Most managers are hardworking; the problem doesn't lie with them. The inefficiency stems from a top-heavy management model that is both cumbersome and costly. A hierarchy of managers exacts a hefty tax on any organization. This levy comes in several forms. First, managers add overhead, and as an organization grows, the costs of management rise in both absolute and relative terms. A small organization may have one manager and 10 employees; one with 100,000 employees and the same 1:10 span of control will have 11,111 managers. That's because an additional1,111 managers will be needed to manage the managers. In addition, there will be hundreds of employees in management-related functions, such as finance, human resources, and planning. Their job is to keep the organization from collapsing under the weight ofits own complexity. Assuming that each manager earns three times the average salary of a first-level employee, direct management costs would account for 33% of the payroll. Any way you cut it, management is expensive. Second, the typical management hierarchy increases the risk oflarge, calamitous decisions. As decisions get bigger, the ranks of those able to challenge the decision maker get smaller. Hubris, myopia, and na:ivete can lead to bad judgment at any level, but the danger is greatest when the decision maker's power is, for all purposes, uncontestable. Give someone monarchlike authority, and sooner or later there will be a royal screwup. A related problem is that the most powerful managers are the ones furthest
so
Harvard Business Review December 2011
from frontline realities. All too often, decisions made on an Olympian peak prove to be unworkable on the ground. Third, a multitiered management structure means more approval layers and slower responses. ln their eagerness to exercise authority, managers often impede, rather than expedite, decision making. Bias is another sort of tax. In a hierarchy the power to kill or modify a new idea is often vested in a single person, whose parochial interests may skew decisions. Finally, there's the cost of tyranny. The problem isn't the occasional control freak; it's the hierarchical structure that systematically disempowers lower-level employees. For example, as a consumer you have the freedom to spend $20,000 or more on a new car, but as an employee you probably don't have the authority to requisition a $500 office chair. Narrow an individual's scope of authority, and you shrink the incentive to dream, imagine, and contribute.
Hierarchies Versus Markets No wonder economists have long celebrated the ability of markets to coordinate human activity with little or no top-down control. Markets have limits, though. As economists like Ronald Cease and Oliver Williamson have noted, markets work well when the needs of each party are simple, stable, and easy to specify, but they're less effective when interactions are complex. It's hard to imagine, for instance, how a market could precisely coordinate the kaleidoscopic array of activities at the heart of a large, processintensive manufacturing operation.
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How essential is it to have layers of executives supervising workers? Managers are expensive, increase the risk of bad judgment, slow decision making, and often disenfranchise employees. Yet most business activities require greater coordination than markets can provide. Is there a way to combine the freedom and flexibility
That's why we need corporations and managers. Managers do what markets cannot; they amalgamate thousands of disparate contributions into a single product or service. They constitute what business historian Alfred D. Chandler Jr. called the visible hand. The downside, though, is that the visible hand is inefficient and often ham-fisted. Wouldn't it be great if we could achieve high levels of coordination without a supervisory superstructure? Wouldn't it be terrific if we could get the freedom and flexibility of an open market with the control and coordination of a tightly knit hierarchy? Ifonly we could manage without managers. Peer inside an open-source software project, and you might think you've glin1psed that organiza· tional nirvana. You'll find hundreds of progranJIDers and few, if any, managers. In an open-source project, however, tasks are modular, volunteers work independently, interfaces are clearly defined, and scientific breakthroughs aren't expected. Coordination is plug-and-play. Contrast this witll the challenge Boeing faces in building an all-new airliner. Here, a vast army ofspecialists must work shoulder-to-shoulder in tackling thousands of leading-edge design and manufacturing issues. As Boeing has learned, outsourcing chunks of development doesn't make coordination any less perplexing. A market can't build a Dreamliner. Are we then stuck with these trade-offs? Is there no way to buy coordination and control tax-free? It might seem so, since most us have never come across a company that's both highly decentralized and precisely syncluonized.
Beyond Management as Usual We are all prisoners of tlle familiar. Many thingsthe first iPhone, J.K. Rowling's wizardly world, Lady Gaga's sirloin gown-were difficult to envision until we encountered them. So it is with organizations. It's tough to imagine a company where...
of markets with the control of a management hierarchy? Economists will tell you it's impossible, but the Morning Star Company proves otherwise. It has been managing without managers for more than two decades. At Morning Star, whose revenues were over $700 million in 2010, no one has a boss, employees negotiate respon-
sibilities with their peers, everyone can spend the company's money, and each individual is responsible for procuring the tools needed to do his or her work. By making the mission the boss and truly empowering people, the company creates an environment where people can manage themselves.
• No one has a boss. • Employees negotiate responsibilities witll their peers. · Everyone can spend the company's money. • Each individual is responsible for acquiring the tools needed to do his or her work. • There are no titles and no promotions. • Compensation decisions are peer-based. Sound impossible? It's not. These are the signature characteristics of a large, capital-intensive corporation whose sprawling plants devour hundreds of tons of raw materials every hour, where dozens of processes have to be kept within tight tolerances, and where 400 full -time employees produce over $700 million a year in revenues. And by the way, this unique company is a global market leader. This probably stretches your credulity; it sure stretched mine. That's why, when I heard about the Morning Star Company, I jumped at the chance to visit one of its plants in California's San Joaquin Valley. If you've ever eaten a pizza, dumped ketchup on a hamburger, or poured sauce on a bowlful of spaghetti, you've probably consumed the company's products. Headquartered in Woodland, California, near Sacramento, Morning Star is the world's largest tomato processor, handling between 25% and 30% of the tomatoes processed each year in the United States. The company was founded in 1970 as a tomato trucking operation by Chris Rufer, then an MBA stu· dent at UCLA, who is still its president. Today Morning Star has three large plants that process the fruit according to hundreds ofslightly different customer recipes. In addition to bulk products, the company produces canned tomatoes that go to supermarkets and food service businesses. It also comprises a trucking company that moves over two million tons of tomatoes annually and a business that handles the harvesting. December 2011 Harvard Business Review 51
THE BIG IDEA FIRST, LET'S FIRE All THE MANAGERS
Over the past 20 years, Morning Star's volumes, revenues, and profits have grown at a double-digit clip, claims Rufer. Industry growth, by contrast, has averaged 1% a year. As a private company, Morning Star doesn't share its financial results, but I was told that the company has funded virtually all its growth from internal sources, which suggests it is robustly profitable. On the basis ofits own benchmarking data, Morning Star believes it is the world's most efficient tomato processor. Morning Star is a "positive deviant"; indeed, it's one of the most delightfully unusual companies I've come across. Employees ("colleagues" in Morn· ing Star argot) are ridiculously empowered yet work together like members of a carefully choreographed dance troupe. By digging into the principles and practices that underpin this company's unique management model, we can Jearn how it might be possible to escape-or at least reduce-the manage· menttax.
Unpacking the Morning Star Model Morning Star's goal, according to its organizational vision, is to create a company in which all team members "will be self-managing professionals, initi· ating communications and the coordination of their activities with fellow colleagues, customers, suppli· ers, and fellow industry participants, absent directives from others?' Did you stumble on those last four words? How the heck do you run a company where nobody gives orders and nobody takes them? Here's how Morning Star does it: Make t he mission the boss. Every employee at Morning Star is responsible for drawing up a per· sonal mission statement that outlines how he or she will contribute to the company's goal of "producing tomato products and services which consistently achieve the quality and service expectations of our customers." Take Rodney Regert, who works in the company's Los Banos plant. His mission is to turn to· matoes into juice in a way that is highly efficient and environmentally responsible. Personal mission statements are the cornerstone of Morning Star's management model. "You are responsible for the accomplishment of your mission and for acquiring the training, resources, and cooperation that you need to fulfill your mission," explains Rufer. Adds Paul Green Sr., an experienced plant technician, "I'm driven by my mission and my commitments, not by a manager?' S:t Harvard Business Review December :to11
Let e mployees forge agreements. Every year, each Morning Star employee negotiates a Colleague Letter of Understanding (CLOU) with the associates who are most affected by his or her work. A CLOU (pronounced "clue") is, in essence, an operating plan for fulfilling one's mission. An employee may talk to 10 or more colleagues during the negotiations, with each discussion lasting 20 to 60 minutes. A CLOU can cover as many as 30 activity areas and spells out all the relevant performance metrics. All together, CLOUs delineate roughly 3,000 formal relationships among Morning Star's full-time employees. CLOUs morph from year to year to reflect chang· ing competencies and shifting interests. Over time experienced colleagues take on more-complex assignments and off-load basic tasks to recently hired colleagues. In explaining the logic behind the CLOUs, Rufer emphasizes the idea that voluntary agree· ments among independent agents can produce highly effective coordination. "The CLOUs create structure:' he says. "As a colleague, I agree to pro· vide this report to you, or load these containers into a truck, or operate a piece of equipment in a certain
Your organization probably wasn't built around the principles of self-management. It's most likely a bureaucracy- with a thicket of policy rules, a multilayered hierarchy, and a host of management processes- built to ensure conformity and predictability. Control is the philosophical cornerstone of bureaucracy, as Max Weber pointed out nearly a century ago. In a bureaucracy managers are enforcers who ensure that employees follow rules, adhere t o standards, and meet budgets.
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fashion. This is spontaneous order, and it gives you a business development specialist, draws a stark more fluictity. Relationships can change form more comparison between Morning Star and his previeasily than ifwe tried to fix them from above :• ous employer: "I used to work in a company where Strikingly, Rufer doesn't see freedom as the en- I reported to a VP, who reported to a senior VP, who emy of coordination; he sees it as its ally. Every per- reported to an executive VP. Here, you have to drive son at Morning Star is a contractor in a web of multi- the bus. You can't tell someone, 'Get this done: You lateral commitments. As one team member told me, have to do whatever needs to be done!' "Around here, nobody's your boss and everybody's That includes obtaining the tools and equipment you need to do your job. At Morning Star, there's no your boss?' Morning Star's 23 business units also negotiate central purchasing department or senior executive customer-supplier agreements with one another who has to sign off on expenditures; anyone can annually, in a CLOU·like process. Since each unit issue a purchase order. If a maintenance engineer has a profit and loss account, the bargaining can be needs an $8,000 welder, he orders one. When the fierce. The farming unit and the processing plants, invoice arrives he confirms that he has received the for example, will haggle over volumes, pricing, and equipment and sends the bill to accounting for paydelivery schedules. The philosophy is the same as ment. Although purchasing is decentralized, it's not with the employee CLOUs: Agreements reached by uncoordinated. Morning Star colleagues who buy independent entities are better at aligning incentives similar items in large quantities or from the same and reflecting realities than centrally mandated ar· vendors meet periodically to ensure that they are rangements are. maximizing their buying power. Empower everyone-truly. In most compaRufer explains the thinking behind the process: nies the reality of empowerment falls far short ofthe "I was signing checks one day and I recalled the rhetoric. Not at Morning Star, though. Nick Kastle, saying, 'The buck stops here: I thought to myself,
doesn't mean no management Bureaucracy and self· management are ideological and that radical decentralizaopposites, like totalitarianism tion isn't anarchy. Here's how to get started. and democracy. To build a self-managing organization, you FIRST, ask everyone on your can't just prune the brambles of team to write down a personal mission. Ask each person, bureaucracy-you have to up· root them. The founders of the "What's the value you want to United States didn't set out to create for your peers? What are temper the excesses of a monthe problems you want to solve archy; they sought to supplant for your colleagues?" Challenge it. In the same way, if you don't people to focus on benefits make an unequivocal comdelivered rather than activities mitment to self-management, performed. Once everyone has you'll content yourself with eas- developed a short sentence or ily reversed half measures when two, organize people into small you should press for more. groups and have them critique Nevertheless, no one is one another's mission stategoing to just give you perm isments. In the process you will sion to blow up the old strucstart shifting the focus from tures. You will have to demonrule-driven compliance to peerstrate that self-management negotiated accountability.
look for small ways to expand the scope of employee autonomy. Ask your colleagues, "What are the procedures that handicap you in achieving your mission?'' Once you've identified the most exasperating ones, roll them back partially and see what happens. It's possible to ratchet back control, and if you're serious about self-management, you'll do that notch by notch. THIRD, equip every team with its own P&L accou nt. To exercise freedom wisely, employees must be able to calculate the impact of their decisions. The road to self-management is paved with information. FINALLY, you must look for ways to erase the distinctions SECOND,
between those who manage and those who are managed. If you're a manager, you can start by enumerating your commitments to your team. Ask everyone who works for you to annotate the list. Getting leaders to be more accountable to the led is essential to building a web of reciprocal responsibilities. For traditional companies, the road to self-management will be long and steep, but the experiences of Morning Star and W.L. Gore, another champion of self-management, suggest that the journey is worth the effort. At the end you'll arrive at an organization that is highly effective and deeply human.
December 2011 Harvard Business Review 53
THE BIG IDEA FIRST, LET'S FIRE All THE MANAGERS
That isn't true. In front of me was a purchase order, a note that said the stuff had been shipped, we had received it, and that the price on the invoice matched the purchase order. A check had been prepared. Now, do I have the choice not to sign the check? Nope. So the question isn' t where the buck stops, but where it starts- and it starts with the person who needs the equipment. I shouldn't have to review the purchase order, and the individual shouldn't have to get a manager's approval!' Occasionally, there are more projects than cash, and when this happens, invest· ments will be postponed. Still, the role of Morning Star's finance staff is to find capital rather than to allocate it. Self-management extends to staffing decisions as well. Colleagues are responsible for initiating the hiring process when they find themselves over· loaded or spot a new role that needs filling. It's a rare company that shares the corporate checkbook with frontline employees and expects them to take the lead in recruiting. To Rufer, though, it's common sense: "I don't want anyone at Morning Star to feel they can't succeed because they don't have the right equipment or capable colleagues:• During my visit to Morning Star,l didn' t hear anyone use the term "empowerment." That's because the notion of empowerment assumes that authority trickles down-that power gets bestowed from above, as and when the powerful see fit. In an organization built on the principles of self-management, individuals aren't given power by the higher-ups; they simply have it. Don't force people into boxes. Morning Star has no centrally defined roles, so employees get the opportunity to take on bigger responsibilities as they develop their skills and gain experience. "We believe you should do what you're good at, so we don't try to fit people into a job:' says Paul Green Jr., who leads the company's training and development efforts. "As a result, our people have broader and more complicated roles than elsewhere:• Everyone has the right to suggest improvements in any area. While employees elsewhere often assume that change comes from above, at Morning Star, colleagues understand that it's their responsibility to take the lead. "Since we believe you have a right to get involved anywhere you think your skills can add 54 Harvard Business Review December 2011
value, people will often drive change outside their narrow area:' Green says. "We have a lot of sponta· neous innovation, and ideas for change come from unusual places:•
Encourage competition for impact , not for promotions. With no hierarchy and no titles, there's no career ladder to climb at Morning Star. That doesn't mean everyone is equal. In any area of expertise, some colleagues are recognized as more competent than others, and these differences are reflected in compensation levels. While there's inter· nal competition, the rivalry is focused on who can contribute the most rather than who gets a plum job. To get ahead an employee must master new skills or discover new ways of serving colleagues. "Around here, there's no such thing as a promotion;• says Ron Caoua, an IT specialist. "What strengthens my resume is more responsibility- not a bigger title:• Rufer offers a golfing analogy to explain how people advance at Morning Star: "When Jack Nick· laus was competing, was he concerned about becoming an executive senior vice president golfer? No. He knew that if he got good at it, he would achieve what everyone longs for: a sense of accom· plishment. He also knew accomplishment would give him an income to enjoy the life he wanted. Moving up is about competency and reputation, not the office you hold!'
Freedom to Succeed At the core of Morning Star's eccentric yet effective management model is a simple idea: freedom. "If people are free, they will be drawn to what they really like as opposed to being pushed toward what they have been told to like:' says Rufer. "So they will personally do better; they'll be more enthused to do things." Morning Star's employees echo this sentiment. "When people tell you what to do, you' re a machine:· says one operator. Therein lies the dilemma. To run a largescale operation you need people to occasionally behave like machines- to be reliable, precise, and hardworking. Typically, supervisors and managers ensure that noses stay on grindstones by setting quotas, monitoring variances, and disciplining slackers. But what happens when supervisors and managers don't exist? Morning Star's lattice of commitments may enable a high degree of coordination, but what about discipline?
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How does an organization exercise control when no one is in charge? Freedom without responsibility is anarchy. Yet, when you walk through one of Morning Star's enormous, intricate plants, what you see is the opposite of anarchy. What is it that channels all the freedom that people at Morning Star enjoy into operational effectiveness? Clear targets, transparent data. Visit a winter resort, and you will see hundreds of skiers schussing the steep slopes unaided. A blind skier, on the other hand, must be coached down by a guide who shouts out directions. People can't be self-managing without information. At Morning Star the goal is to provide staffers with all the information they need to monitor their work and make wise decisions. Every CLOU lays out a set of detailed "steppingstones?' These metrics allow employees to track their success in meeting their associates' needs. In addition, detailed financial accounts for each business unit are published twice a month and are available to every employee. Colleagues are encouraged to hold one another accountable for results, so an unexpected uptick in ell:penses is bound to get noticed. With this sort of transparency, folly and sloth are quickly exposed. Because Morning Star is integrated vertically and horizontally, employees need cross-company in for-
mation to calculate how their decisions will influence other areas. Rufer knows his people will think about the business holistically only if everyone has access to the same systemwide data. That's why there are no information silos and why no one questions anyone else's need to know. Calculation and consultation. While employees are free to spend the company's money, they must build a business case that includes return on investment and net present value calculations. They are also expected to consult their colleagues. An employee pushing for a $3 million investment, for example, might talk with as many as 30 coworkers before pulling the trigger. Similarly, someone who wants to expand a unit's payroll must sell the idea to his or her peers. Morning Star colleagues have a lot of authority but seldom make unilateral decisions. Conversely, no individual has the power to kill an idea. Rather than acting as judge, jury, and executioner, experienced team members serve as coaches. A young employee with a bold idea will be encouraged to seek the advice of a few veterans, who will often provide a brief tutorial: "Here's a model you can use to analyze your idea. Do some more homework, and when you're ready, let's talk again?' Conflict resolution and due process. What happens when someone abuses his or her freedom, consistently underperforms, or is simply at loggerheads with other colleagues? Morning Star has no managers to settle disputes, and no one has the authority to force a decision. Disagreements between contracting parties in the commercial world are often settled through mediation or in front of a jury, and so it is at Morning Star. Suppose you and I work in different business units, and you believe I've failed to meet my CLOU commitments. As a first step, we'd meet, and you'd argue your case. I might offer an excuse, agree to do better, or toss the blame back at you. If the two of us couldn't resolve the matter, we would pick an internal mediator whom we both trust and present our views. Let's say the mediator agreed with you, but I objected to the proposed remedy. At this juncture, a panel of six colleagues would assemble to help us settle our squabble. It might endorse the mediator's recommendation or propose another solution. If I demurred again, the president would bring the parties together, hear the arguments, and make a binding decision. It is highly unusual, though, for a dispute to land on Rufer's desk. December 2011 Harvard Business Review 55
THE BIG IDEA FIRST, LET'S FIRE All THE MANAGERS
LOWER COSTS
MORE COLLEGIALITY
GREATER INITIATIVE
HIGHER LOYALTY
Having no managers reduces head count and wage costs. The savings can be used to pay better salaries to everyone and to fuel growth.
Backstabbing, politicking, and sycophantic behaviors drop dramatically when employees stop competing for promotions.
Employees are proactive because they have the freedom to act. They are also willing to help colleagues because it increases their reputational capital.
Few employees leave to join rivals, and even temporary workers are dedicated to the organization.
DEEPER EXPERTISE
BETTER DECISIONS
INCREASED FLEXIBILITY
Because everyone is responsible for the quality of his or her work, employees are forced to invest in developing their skills.
By pushing expertise down to the front lines, rather than escalating decisions, self- management promotes smarter, faster decisions.
Employees respond rapidly, coming together in teams to tackle challenges and to experiment with new ideas.
When concerns about someone's performance are serious enough, the conflict resolution process can end with hls termination. Nevertheless, at Morning Star, an employee's fate never rests in the hands of a capricious boss. Rufer explains the benefits: "When a panel of peers gets convened, people can see that the process is fair and reasonable. Everyone knows they have recourse. We've taken away the power a boss has to treat an employee as a punchlng bag because, say, they have something else going on in their lives?' Peer review and the challenge process. Accountability is woven into Morning Star's DNA. New employees attend a seminar on the basics of selfmanagement, where they learn that responsibility is freedom's twin. Consult as widely as you like, they're told, but in the end you have to take responsibility for your decisions. No one gets the option of handing off a tough call. At the end of the year, every employee in the company receives feedback from his or her CLOU colleagues, and in January every business unit is required to defend its performance over the previous 12 months. Since the discussion about each unit can consume the better part of a day, the process extends over several weeks. Each unit presentation is, in effect, a report to shareholders. Team members have to justify their use of the company's resources, acknowledge shortfalls, and present plans for improvement. Business units are ranked by performance, and those near the bottom can expect an interrogation. "If a business unit has made investments that aren't paying off:' notes Rufer, "they'll be subject to a fair amount of ridicule. It will be more difficult for them to get their colleagues on board for future investments?' Agreed one team member: "There is a social risk in doing something your colleagues think is stupid?' 56 Harvard Business Review December 2011
In February of each year, a strategy meeting pro-
vides another opportunity for peer review. Each business unit gets 20 minutes to present its plan for the coming year before a companywide audience. Colleagues then have the opportunity to invest in the most promising strategies using a virtual currency. Any business unit that fails to attract its share of fantasy money knows it will be under intense scrutiny. Elected compensation committees. Morning Star's approach to compensation is more akin to that of a professional services firm than a manufacturing business. At the end of each year, every colleague develops a self-assessment document outlining how he or she performed against CLOU goals, ROI targets, and other metrics. Colleagues then elect a local compensation committee; about eight such bodies are created across the company each year. The committees work to validate self-assessments and uncover contributions that went unreported. After weighlng inputs, the committees set individual compensation levels, ensuring that pay aligns with value added.
The Advantages of Self-Management Many colleagues at Morning Star have worked for other employers. If you ask them about the advantages of self-management, they're passionate and eloquent. Here's what they say: More initiative. At Morning Star the recipe for initiative is simple: Define roles broadly, give individuals the authority to act, and make sure they get lots of recognition when they help others. "What is it:' I inquired of a plant mechanic, "that prompts tean1 members to be proactive in offering help to colleagues?" His answer: "Our organization is driven by reputational capital. When you have some advice to add to another part ofthe company, that increases your reputational capital?' More expertise. The self-management model encourages employees to develop their skills. At
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Morning Star, the experts aren't managers or senior staffers; they're the people doing the work. For example, the folks filling aseptic containers on the packaging line are also deeply knowledgeable about microbiology. "Everyone here is responsible for the quality of their work:' says Scott Marnoch, an internal quality expert. "There's a lot of pride. Besides, there's no boss to take the fall if things go wrong:' More flexibility. Morning Star's management model promotes speed and flexibility, a point Rufer makes with an analogy. "Clouds form and then go away because atmospheric conditions, temperatures, and humidity cause molecules of water to either condense or vaporize:' he says. "Organizations should be the same; structures need to appear and disappear based on the forces that are acting on the organization. When people are free to act, they're able to sense those forces and act in ways that fit best with reality." Paul Green Jr. notes that his colleagues come together to launch hundreds of change initiatives every year as they htmt for ways to serve their missions better. More collegiality. When you dismantle the pyramid, you drain much of the poison out of an organization. While competition for advancement can spur individual accomplishment, the zero-sum nature of the contest encourages politicking and accentuates rivalries. In a pancake-flat organization, there are no bosses to please and no adversaries to elbow aside. Paul Terpeluk, a Morning Star colleague who has done stints at two Fortune 500 companies, describes the benefits of a promotionless company: "There's less backstabbing, because we're not competing for
that scarce commodity called a promotion. All your energy goes into doing the best you can do and into helping your colleagues:' Better judgment. In most organizations key decisions are usually escalated to executives trained in the science ofbusiness analysis. They have a wealth of data and analytical sophistication, but what they lack is context-an understanding of the facts on the ground. That's why decisions that appear brilliant to top-level executives are often regarded as boneheaded by those on the front lines. Rather than pushing decisions up, Morning Star pushes expertise down. For example, roughly half the company's employees have completed courses on how to negotiate with suppliers. Many have also been trained in financial analysis. Since the doers and the thinkers are the same, decisions are wiser and more timely. More loyalty. Few colleagues leave Morning Star for a competitor, but the reverse frequently happens. What's more, even temporary employees are dedicated to the company. Each summer, as the tomatoes come off the vine, Morning Star's processing plants take on more than 800 seasonal workers. Ninety percent of them return each year, and the company has trained them in the principles of self-management. When a team of independent researchers recently measured this group's sense of empowerment and ownership, they found that the temporary workers had the sort ofengagement scores that are typical of senior executives in otl1er comparues. Finally, a manager-free payroll has cost advantages. Some of the savings go to Morning Star's fulltime employees, who earn 10% to 15% more than their counterparts at other companies do. By avoiding the management tax, the company can also invest more in growth.
A Cheap Lunch but Not a Free One While Morning Star's organization reduces management costs, it does have drawbacks. First, not everyone is stilted to Morning Star's model. This is less a matter of capability than of acculturation. An individual who has spent years working in a highly stratified organization often has difficulty adjusting. Rufer estimates that, on average, it takes a new associate a year or more December 2011 Harvard Business Review 57
THE BIG IDEA FIRST, LET'S FIRE All THE MANAGERS
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TOUGHER ADJUSTMENT
ACCOUNTABILITY CHALLENGES
Self-management doesn't suit everyone. Employees who've worked all their lives in hierarchical organizations may not be able to cope.
If employees fail to deliver a strong message to colleagues who don't meet expectations, self· management can become a conspiracy of mediocrity.
LONGER INDUCTION It takes time to fit in. New employees may need a year or more to become fully functional in the system.
to become fully functional in the self-management environment. That adds time and complexity to the hiring process. When the company was smaller, Rufer spent half a day interviewing every prospective employee, usually in the candidate's home. The bulk of the conversation focused on assessing the fit between Morning Star's philosophy and the applicant's expectations. Today every potential hire gets a twohour introduction to self-management and is interviewed by 10 to 12 Morning Star colleagues. Even then, mistakes happen. Paul Green Jr. estimates that as many as 50% of seasoned hires leave within two years because they have a hard time adapting to a system where they can't play god. Getting colleagues to hold one another accountable is a second challenge. In a hierarchical organization the boss deals with troublemakers and underperformers. At Morning Star everyone is responsible for safeguarding quality, efficiency, and teamwork by calling out colleagues who violate policies or norms. If employees shirk that duty and fail to deliver tough love when needed, self-management can quickly become a conspiracy of mediocrity. That risk is explicitly addressed in Morning Star's training programs, which stress the fact that peer regulation won't work without courageous colleagues. Growth is a third challenge. Though Morning Star continues to grow faster than the industry average, Rufer and his colleagues are wary of diluting the company's culture-a concern that makes them reluctant to acquire companies. Although Morning Star has been looking for ways to expand, it has so far resisted the urge to trade away its management advantage for even faster growth. Tracking personal development is also tough. In most companies the rungs of the corporate ladder serve as benchmarks. With no hierarchy, Morning Star colleagues can find it difficult to evaluate their 58 Harvard Business Review December
2011
GROWTH ISSUES Without a corporate ladder to climb, employees find it difficult to evaluate their progress relative to peers. That can become a handicap when someone wants to switch companies.
progress relative to industry peers. That can be a handicap for someone who wants to switch companies but can't claim to have attained a particular rank.
Managers Versus Managing When I suggested to Rufer that Morning Star had learned how to manage without managers, he immediately corrected me. "Everyone's a manager here:• he said. "We are manager rich. The job of managing includes planning, organizing, directing, staffing, and controlling, and everyone at Morning Star is expected to do all these things. Everyone is a manager of their own mission. They are managers of the agreements they make with colleagues, they are managers of the resources they need to get the job done, and they are managers who hold their colleagues accountable!' Nevertheless, Rufer knew what I was driving at. For decades the assumption has been that the work of managing is best performed by a superior caste of formally designated managers, but Morning Star's long-running experiment suggests it is both possible and profitable to syndicate the task to just about everyone. When individuals have the right infornlation, incentives, tools, and accountabilities, they can mostly manage themselves. Turns out we don't have to choose between the advantages of markets and hierarchies. Morning Star is neither a loose confederation of individual contractors nor a stultifying bureaucracy; it's a subtle blend ofboth market and hierarchy. On the one hand, you can think of Morning Star as a socially dense marketplace. Colleagues are free to negotiate marketlike contracts with their peers. While this might seem a contentious and complicated process, several factors mitigate those risks. First, everyone involved in the negotiations shares the same scorecard. In a pure market, a consumer doesn't really care whether a deal is good for the
THE BIG IDEA FIRST, LET'S FIRE All THE MANAGERS
seller. By contrast, people at Morning Star know they won't have a great place to work if the company doesn' t do well. Second, team members at Morning Star know that if they take advantage of a colleague or fail to deliver on a promise, the repercussions will catch up with them. This encourages associates to think in terms of relationships rather than transactions. Finally, because most folks at Morning Star have been in the tomato business for years, they have a good sense of what needs to be done and who needs to do it. Not every aspect of every contract needs to be rewritten each year. Without this social glueshared goals, long-term relationships, and industry knowledge-Morning Star's system would be much less efficient. On the other hand, Morning Star is a collection of naturally dynamic hierarchies. There isn't one formal hierarchy; there are many informal ones. On any is· sue some colleagues will have a bigger say than oth· ers will, depending on their expertise and willingness to help. These are hierarchies of influence, not position, and they're built from the bottom up. At Morning Star one accumulates authority by demon· strating expertise, helping peers, and adding value. Stop doing those things, and your influence wanesas will your pay. In most companies the hierarchy is neither natu· ral nor dynamic. Leaders don't emerge from below; they are appointed from above. Maddeningly, key jobs often go to the most politically astute rather than the most competent. Further, because power is vested in positions, it doesn't automatically flow
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from those who are less capable to those who are more so. All too often managers lose their power only when they're fired. Until then they can keep muck· ing things up. No one at Morning Star believes that everyone should have an equal vote on every deci· sion, but neither does anyone believe that one person should have the last word simply because he or she is the boss. WHILE MANAGEMENT'S future
has yet to be written, the folks at Morning Star have penned a provocative prologue. Questions remain. Can the company's self· management model work in a company of 10,000 or 100,000 employees? Can it be exported to other cultures? Can it cope with a serious threat, such as a low-cost offshore competitor? These questions keep Rufer and his colleagues up at night. They readily admit that self-management is a work in progress. "Ideologically, we're about 90% of the way there," says Rufer. "Practically, maybe only 70%:' I believe Morning Star's model could work in companies of any size. Most big corporations are col· lections of teams, departments, and functions, not all of which are equally interdependent. However large the company, most units would have to con· tract with only a few others. With $700 million a year in revenues, Morning Star certainly isn't a small business, but it's not a humongous one, either. There's no reason why its self-management model wouldn' t work in a much larger company where Morning Star was, say, a single division-as long as other divisions shared its management philosophy. It's not too hard to imagine divisional representatives within a global giant negotiating the same sorts of intracompany agreements that Morning Star's business units forge each year. In fact, the real question is not whether the model can be scaled up but whether it can be adopted by a traditional, hierarchical organization. Again, I believe the answer is yes, but the metamorphosis will take time, energy, and passion. (See the sidebar "The Road to Self-Management:') ....~r--·ex~w~~h~a~tever the uncertainties, Morning Star's ... makes two things clear. One, with a bit of imagination, it's possible to transcend the seemingly intractable trade-offs, such as freedom versus control, that have long bedeviled organizations. Two, we don't have to be starry-eyed romantics to dream of organizations where managing is no longer the right of a vaunted few but the responsibility of all. 0 HBR Reprint Rl112B
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POWER TO KNOW
Spotlight
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ARTWORK Rachel Perry Welty Lost in My Life (boxes), detail 2009, pigment print
64
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by Darrell Rigby
An interview with Ron Johnson
The Future of Shopping
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Retail Isn't Broken. Stores Are
84
Know What Your Customers Want Before They Do
by Thomas H. Davenport, Leandro Daile Mule, and John Lucker
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The business of retailing has changed foreverthat's obvious. For some retailers, the future is about perfecting analytics. For others, it's about inventing a whole new kind of store. December 2011 Harvard Business Review 63
SPOTLIGHT ON REINVENTING RETAIL
Aboutthe SpotUght Artist Each month we illustrate our Spotlight package with a series of works from an accomplished artist. we hope that the lively and cerebral creations of these photographers, painters, and installation artists will infuse the pages with additional energy and intel· ligence to amplify what are often complex and abstract concepts. This month we show· case Rachel Perry Welty, a Massachusetts-based conceptual artist who finds poetry in the mundane. Her subject, she says, is "the business of living." In the self-portraits on these pages, she fashions the detritus of her daily life- cereal boxes, fruit stickers, price tags- into a playful and sometimes poignant commentary on our consumer culture. View more of the artist's work at yanceyrichardson.com.
t's a snowy Saturday in Chicago, but Amy, age 28, needs resort wear for a Caribbean vacation. Five years ago, in 2011, she would have headed straight for the mall. Today she starts shopping from her couch by launching a videoconference with her personal concierge at Danella, the retailer where she bought two outfits the previous month. The concierge recommends several items, superimposing photos of them onto Amy's avatar. Amy rejects a couple of items immediately, toggles to another browser tab to research customer reviews and prices, finds better deals on several items at another retailer, and orders them. She buys one item from Danella online and then drives to the Danella store near her for the in-stock items she wants to try on. As Amy enters Danella, a sales associate greets her by name and walks her to a dressing room stocked with her online selections-plus some matching shoes and a cocktail dress. She likes the shoes, so she scans the bar code into her smartphone and finds the same pair for $30 less at another store. The sales associate quickly offers to match the price, and encourages Amy to try on the dress. It is daring and expensive, so Amy sends a video to three stylish friends, asking for their opinion. The responses come quickly: three thumbs down. She collects the items she wants, scans an internet site for coupons (saving an additional $73), and checks out with her smartphone. As she heads for the door, a life-size screen recognizes her and shows a special offer on an irresistible summer-weight top. Amy checks her budget online, smiles, and uses her phone to scan the customized Quick Response code on the screen. The item will be shipped to her home overnight. This scenario is fictional, but it's neither as futuristic nor as fanciful as you might think. All the technology Amy uses is already available-and within five years, much of it will be ubiquitous. But what seems like a dream come true for the shopper-an abundance of information, near-perfect price transparency, a parade of special deals-is already feeling more like a nightmare for many retailers. Companies such as Tower Records, Circuit City, Linens 'n Things, and Borders are early victims-and there will be more. Every so years or so, retailing undergoes this kind of disruption. Acentury and a half ago, the growth of big cities and the rise of railroad networks made possible the modem department store. Mass-produced
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automobiles came along so years later, and soon shopping malls lined with specialty retailers were dotting the newly forming suburbs and challenging the city-based department stores. The 1960s and 1970s saw the spread of discount chains- Walmart, Kmart, and the like- and, soon after, big-box "category killers" such as Circuit City and Home Depot, all of them undermining or transforming the oldstyle mall. Each wave of change doesn't eliminate what came before it, but it reshapes the landscape and redefines consumer expectations, often beyond recognition. Retailers relying on earlier formats either adapt or die out as the new ones pull volume from their stores and make the remaining volume less profitable. Like most disruptions, digital retail technology got off to a shaky start. A bevy of internet-based re· tailers in the 1990s-Amazon.com, Pets.com, and pretty much everythingelse.com-embraced what they called online shopping or electronic commerce. These fledgling companies ran wild until a combination of ill-conceived strategies, speculative gambles, and a slowing economy burst the dot·com bubble. The ensuing collapse wiped out half of all e·commerce retailers and provoked an abrupt shift from irrational exuberance to economic reality. Today, however, that economic reality is wellestablished. The research firm Forrester estimates that e·commerce is now approaching $200 billion in reve· nue in the United States alone and accounts for 9% of total retail sales, up from S% five years ago. The cor· responding figure is about 10% in the United Kingdom, 3% in Asia-Pacific, and 2% in Latin America. Globally, digital retailing is probably headed toward 1S% to 20% of total sales, though the proportion will vary significantly by sector. Moreover, much digital retailing is now highly profitable. Amazon's five-year average return on investment, for example, is 17%, whereas traditional discount and department stores average 6.S%. What we are seeing today is onJy the beginning. Soon it will be hard even to define e·commerce, let alone measure it. Is it an e·commerce sale if the cus· tomer goes to a store, finds that the product is out of stock, and uses an in-store terminal to have another location ship it to her home? What if the customer is shopping in one store, uses his smartphone to find a lower price at another, and then orders it electroni· cally for in-store pickup? How about gifts that are ordered from a website but exchanged at a local store? Experts estimate that digital information already in·
THE FUTURE OF SHOPPING HBR.ORG
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fluences about 50% of store sales, and that number is growing rapidly. As it evolves, digital retailing is quickly morphing into something so different that it requires a new name: omnichannel retailing. The name reflects the fact that retailers will be able to interact with customers through countless channels-websites, physical stores, kiosks, direct mail and catalogs, call centers, social media, mobile devices, gaming consoles, televisions, networked appliances, home services, and more. Unless conventional merchants adopt an entirely new perspective-one that allows them to integrate disparate channels into a single seamless omnichannel experience-they are likely to be swept away.
An Industry Stuck in Analog Why will digital retailing continue to grow so fast? Why won't it peak sometime soon, or even implode the way it did the last time around? Anyone who has shopped extensively online knows at least part of the answer. The selection is vast yet remarkably easy to search. The prices are good and easily compared. It's convenient: You can do it at home or at work, without using gasoline or fighting to park. Half of online purchases are delivered free to U.S. consumers-up 10 percentage points over the past two years. Many returns are free as well. Product reviews and recommendations are extensive. Little wonder that
the average American Customer Satisfaction Index score for online retailers such as Amazon (87 points) is 11 points higher than the average for physical discount and department stores. The advantages of digital retailing are increasing as innovations flood the market. For instance, Amazon has already earned valuable patents on keystone innovations such as 1-Click checkout and an online system that allows consumers to exchange unwanted gifts even before receiving them. Digital retailers drive innovation by spending heavily on recmiting, wages, and bonuses to attract and retain top technical talent. They were also among the first to utilize cloud computing (which dramatically lowers entry and operating costs) and to enhance marketing efficiency through social networks and online advertising. Customers are out in front of this omnichannel revolution. By 2014 almost every mobile phone in the United States will be a smartphone connected to the internet, and an estimated 40% of Americans will use tablets such as the iPad. If you doubt whether consumers are ready for technology-driven retail solutions, find a "dumb" video display in any public location and look for fingerprints on the screen- evidence that people expected it to be an interactive touchscreen experience. Meanwhile, traditional retailers are lagging badly. Online sales account for less than 2% of revenue at
Amazon's five-year average return on investment is 17°/o, whereas traditional retailers average 6.5°/o. Harvard Business Review 67
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Walmart and Target. Nor are traditional retailers pioneering digital innovations in other channels, such as mobile shopping and call centers, or seamlessly integrating these technologies in their most important channel- physical stores. It's not surprising that these retailers are bringing up the rear. As a consultant, I often walk through stores with senior retail leaders whose knowledge of physical retailing is impressive: They know precisely where a fixture should be, exactly how lighting is likely to affect sales, and which colors work best in which departments. As a group, however, they are shockingly subpar in computer literacy. Some retail executives still rely on their assistants to print out e-mails. Some admit that they have never bought anything online. Technophobic culture permeates many great retail organizations. Their IT systems are often old and clunky, and knowledgeable young computer geeks shun them as places to work.
Retailers tend to focus on the wrong financial metric: profit margins. If a change dilutes margins, it's bad. But Bain's research shows that retailers' stock prices are driven by return on invested capital and growth rather than by margins. Amazon's five-year operating margin is only 4%- far below the 6% average for discount and department stores. But with faster inventory turns and no physical store assets, Amazon's return on invested capital is more than double the average for conventional retailers. As a result, Amazon's market value, $100 billion, is roughly equivalent to that ofTarget, Best Buy, Staples, Nordstrom, Sears, J.C. Penney, Macy's, and Kohl's combined. Conventional retailers haven't had great experiences with breakthrough innovation. They are most comfortable with incremental improvements and with following the well-known dictum "Retail is detail!' Too many store reinvention programs have launched with great fanfare, only to
Technophobic culture permeates many retailers, and young computer geeks shun them as places to work. But it isn't just computer illiteracy that holds traditional retailers back. Four other factors are at work as well. Retailers were burned by e - commerce hype during the dot-com bubble. Many created separate online organizations to maximize valuations. The separate organizations targeted different customer segments, inhibited collaboration, and created serious frictions and jealousies. When the predictions of dot-com domination proved wildly optimistic, overpriced acquisitions began failing, and store organizations smugly celebrated. A decade later, real collaboration between retailers' store and digital operations remains rare. Digital retailing threatens existing store economics, measurement systems, and incentives. Traditional retailers live and die with changes in same-store sales, in-store sales per labor hour, and compensation systems based on such metrics. That was fine when online sales were 2% to 3% of revenues, but the whole system falls apart when that number reaches 15% to 20%. 68 Harvard Business Review December 2011
die unceremonious deaths. Propose a more novel approach and retailers will ask why, ifit's such a good idea, nobody else is doing it. Retailers tend to believe that their customers will always be there. But as customers grow more comfortable with omnichannel shopping, they grow less tolerant of what they encounter in stores. Sales associates are hard to find . When you find one, he or she doesn't know much about the merchandise. Stockouts are frequent, checkout lines long, returns cumbersome. An omnichannel world, in short, represents a major crisis for traditional retailers. Customers are passing them by. Online players are gaining. To keep up, existing retailers will need to create an omnichannel strategy-and pick up the pace of change.
Redesign Shopping from Scratch The first part of any such strategy is facing reality. Retailing executives must acknowledge that the new technologies will get faster, cheaper, and more versatile. They need to forecast the likely digital density
THE FUTURE OF SHOPPING HBR.ORG
in their categories and prepare for the effects. What should I do differently today if I believe that 20% of our sales will soon come from digital retailing- and that 80% of our sales will be heavily influenced by it? Should we be opening any new stores at all? And ifso, how different should they be? How should we adjust to a world of greater price transparency? What happens when traffic-building categories shift online and no longer pull customers into our stores? Situations like these call for start-from-scratch, across-the-board innovation. In the book Idealized
Online competition increases predictably as online prices, selection, convenience, and customer trust improve relative to physical stores. Here's how three industries scored for key drivers (lelow; sehigh). Try this yourself: If your total is between 30 and 35, digital capabilities are or will soon be a strategic priority for your firm. lf it's below 30, you should focus on developing digital tools to build traffic, enhance in-store experience, and increase basket size before competitors do.
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coauthor Russell L. Ackoff recounts a similar turning point at Bell Labs in 1951. The vice president in charge of the labs asked a group to name the organization's most important contributions to telephonic communications. The VP pointed out that each one, including the telephone dial and the coaxial cable, had been conceived and implemented before 1900. He challenged the group to assume that the phone system was dead and had to be rebuilt from scratch. What would it look like? How would it work? Soon Bell's scientists and engineers were busy investigating completely new technologies-and came up with concepts for push-button phones, call waiting, call forwarding, voicemail, conference calls, and mobile phones. Retailers need the same start-over mentality. The design specifications of omnichannel retailing are growing clearer by the day. Customers want everything. They want the advantages of digital, such as broad selection, rich product information, and customer reviews and tips. They want the advantages of physical stores, such as personal service, the ability to touch products, and shopping as an event and an experience. (Online merchants take note.) Different customer segments will value parts of the shopping experience differently, but all are likely to want perfect integration of the digital and the physical. The challenge for a retailer is to create innovations that bring the vision to life, wowing those customers and generating profitable growth. Let's see what this might mean in practice. Pa thways and pain p oints. Retailers traditionally defined their job with three simple imperatives: Stock products you think your target customers will want. Cultivate awareness of what's in the store. When prospective customers enter the store, make it enticing and easy for them to buy. The job in an omnichannel world is more complex. Products themselves can more easily be customized to the
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As e·commerce sales for u.s. retailers climb, store -based companies face treacherous landscape ahead. In books, the path above 15% digital penetration first brought consolidation; then Borders closed stores. filed for bankruptcy, and liquidated. The largest store-based retailer, Barnes & Noble, lost money in fiscal2011 and struggled to raise additional funding. Physical retailers of music, videos, and consumer electronics face similar challenges. Even apparel and accessories, once considered too experien tial to sell online, could approach tipping points in the next five years. 40%
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SPOTLIGHT ON REINVE NTING RETAIL
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preferences of individuals or small groups. Shoppers' awareness depends not solely on companygenerated marketing efforts but also on online expert reviews or recommendations from friends on Facebook and Twitter. The shopping experience includes not just visiting the store but searching for various vendors, comparing prices, quick and hasslefree returns, and so on. Retailers today have a variety of precision tools that they can apply to discrete parts of these shopping pathways. Consider the job of creating awareness, which in the past relied mostly on mass-market advertising, promotions, and the like. Today marketers can send coupon codes and offers to customers' 70
Harvard Business Review December 2011
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mobile devices. They can optimize search terms and location-based promotions. They can provide targeted offers to customers who check in to stores through external platforms like Foursquare. The list of possibilities is getting longer by the day. Using such tools at each point in the pathway, retailers can identify sets of targeted customers defined by (increasingly) narrow parameters and create appealing interactions. Earlier this year, for example, the UK retailer Tesco studied its South Korean operation, known as Home plus, to determine how it could increase grocery sales to time-starved Korean consumers. The answer: Bring the store to the consumers at a point in the day when they had
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time on their hands. In a pilot program, Home plus covered the walls of Seoul su bway stations with remarkably lifelike backlit images of supermarket shelves containing orange juice, fresh vegetables and meat, and hundreds of other items. Consumers wanting to do their food shopping could simply scan each product's Quick Response code into their smartphones, touch an on-screen button, and thereby assemble a virtual shopping cart. Home plus then delivered the physical goods to the shopper's home within a few hours. According to Tesco, more than 10,000 consumers took advantage of the service in the first three months, and online sales increased 130%.
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Omnichannel retailers can devise different ways of wowing each target segment. Some segments can be served much the way they were in the past. Others will require more imagination and innovation. Disney, for example, is reirnagining its retail stores as entertainment hubs with a variety of interactive displays that will entice all segments of the family to visit more often and stay longer. But retailers will have to devote resources to this search for innovations along the customer's pathways. The trick will be to identify each segment's unique paths and pain points and create tailored solutions rather than the one-size-fits-all approach that has characterized much retailing in the past. December 2011 Harvard Business Review 71
SPOTLIGHT ON REINVENTING RETAIL
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The experience of shopping. Traditional retailers have suffered more than they probably realize at the hands of Amazon and other online companies. As volume trickles from the stores and sales per square foot decline, the response of most retailers is almost automatic: Cut labor, reduce costs, and sacrifice service. But that only exacerbates the problem. With even less service to differentiate the stores, customers focus increasingly on price and convenience, which strengthens the advantages of online retailers. If traditional retailers hope to survive, they have to turn the one big feature that internet retailers lack-stores-from a liability into an asset. Stores will continue to exist in any foreseeable futureand they can be an effective competitive weapon. Research shows that physical stores boost online purchases: One European retailer, for instance, reports that it captures nearly 5% of online sales in areas near its physical stores, but only 3% outside those areas. Online and offline experiences can be complementary. The traditional store, however, won't be sufficient. For too many people, shopping in a store is simply a chore to be endured: If they can find ways to avoid it, they will. But what if visiting a store were 72
Harvard Business Review December 2011
exciting, entertaining, emotionally engaging? What if it were as much fun as going to the movies or going out to dinner- and what if you could get the kind of experience with products that is simply unavailable online? This is hardly beyond the realm of possibility. Jordan's Furniture, a New England chain, achieves some of the highest furniture sales productivity in the country by using themed "streets" within its stores, a Mardi Gras show, an IMAX 3-D theater, a laser light show, food courts, a city constructed of jellybeans, a motion-simulation ride, a water show, a trapeze school, and special charity events. Cabela's and Bass Pro Shops not only have some of the highest-rated websites; they also have some of the most engaging physical stores. These kinds ofstore experiences are expensive to create. Might digital technology improve the customer experience in stores more cost-effectively? In fact, it is already doing so. Digital technology can replace lifeless storefront windows with vibrant interactive screens that change with the weather or time of day and are capable of generating recommendations or taking orders when the store is dosed. It can allow customers to design products or assemble outfits and display their creations in highvisibility locations like Times Square. It can create engaging games that attract customers, encourage them to stay longer, and reward them for cocreating innovative ideas. Digital technology-in the form of tablets, for example-can also give sales associates nearly infinite information about customers, describing the way they like to be treated and creating precise models of their homes or body types that enable perfect choices. It can change pricing and promotions accurately and instantaneously. It can provide customized recommendations. Virtual mirrors accelerate and enliven the dressing room experience by connecting customers with trusted friends. Technology can eliminate checkout lines, capture transaction receipts, file rebate claims, and speed returns. It can give a call center operator full access to a customer's purchase and complaint history. My objective here is not to enumerate every possible innovation. Rather, it's to illustrate how the opportunities for digital technology in stores, mobile devices, call centers, and other channels are just as abundant and viable as they are for websites. Moreover-and this is key-retailers in many categories can link these channels and technologies to create an
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SPOTLIGHT ON REINVE NTING RETAIL
omnichannel experience with stores that is superior to a purely digital retail strategy. One task is to apply these innovations early enough, frequently enough, and broadly enough to change customer perceptions and behaviors. Adopting successful innovations three years after competitors do is unlikely to generate much buzz or traffic. Of course, many digital innovations will fail, and the effects of others will be hard to quantify. So a second task is to upgrade testing and learning skills to 21stcentury levels. It was hard enough to gauge the effects of pricing changes, store-format upgrades, or newspaper versus TV ads in the old world. (Remember John Wanamaker's famous lament that he knew he was wasting half his advertising budget but didn't know which half?) An omnichannel world makes those test-and-learn challenges look like child's play.
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Integrating innovative ideas with the base business, in contrast, requires collaboration, compromise, and detailed planning. It's a bit like putting a satellite into orbit. Send it too far from the core and it will drift aimlessly into outer space, wasting money and squandering opportunity. Launch it too close to the core and gravi tational forces will overwhelm it, causing it to crash and burn. So mobilizing an organization to both develop and integrate omnichannel innovations is challenging. But it can be done. One approach is to create separate formal organizational structures but coordinate key decisions-something most retailers failed to do the first time around. Apple launched its online store in 1997, midway through the dot-com bubble. When it began opening retail stores in 2001, the company established its online and offline channels as
Leading-edge retailers are testing digital and physical innovations using clinical-trial-style methodology. Retailers must now try to assess the effects of paid search, natural search, e-circulars, digital displays, e-mail campaigns, and other new techniques and third-party innovations such as SCVNGR, a locationbased social network game-and must gauge those effects on both physical and digital channels (which include mobile apps as well as the internet). Leading-edge companies such as PetS mart and the UK pharmacy chain Boots have begun applying science to this task: They are testing digital and physical innovations with clinical-trial-style methodology, using sophisticated software to create control groups and eliminate random variation and other noise. All this is costly, but it's hard to see how retailers can avoid doing more ofit.
The Omnichannel Organization How can retailing companies organize themselves around an omnichannel strategy? Historically, mobilizing an organization to develop and integrate breakthroughs that threaten the base business has been one of management's greatest challenges. Dismptive innovation requires a separate team that has autonomy, a distinctive set of talents, different knowledge bases, and a willingness to take bold risks. 74 Harvard Business Review December 2011
wholly separate organizations, each challenged to maximize sales without worrying about potential conflicts. At first, collaboration between the units was limited largely to coordinating merchandise assortments, new product release dates, and pricing policies. Fortunately for Apple, its innovative products and unparalleled service tmrnped its lackluster channel integration. Over time, however, customers began to expect more from a preeminent technology company. Apple increased the level of collaboration, enabling cross-channel returns and using its often frenzied product releases to exp eriment with new systems for checking a store's inventory or reserving items online for purchase in the stores. When Apple revamped its physical stores in 2011, it replaced information cards near demo products with iPads, which provide extensive information and product comparisons in much the way the online site does. The iPads also give customers information on omnichannel support options, and they can page an instore specialist for further assistance. Innovative organizations also need to attract and retain innovative people-imaginative, tech-savvy, often young individuals who spin out new ideas every day. Retailers haven't appealed to many of these
SPOTLIGHT ON REINVENTING RETAIL
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innovators in recent years. Now that they must compete with the likes of Amazon and Google, they will have to upgrade their recruitment efforts. They may find some of the people they need buried deep within their own organizations. Others they will find in creative centers such as New York and San Francisco, or around college campuses. In the past, big retailers have had difficulty hiring innovative people and luring them to headquarters operations in Arkansas or Minnesota or Ohio. And they have had little success creating autonomous disruptive groups and linking those groups to their core operations. But the same technologies that are driving omnichannel strategies can help solve both problems. Desktop videoconferencing, mobile ap plications, social networks, collaborative groupware, shared knowledge bases, instant messaging, and crowdsourcing not only help Amy shop; they also help Sheldon and Rajesh work together-wherever they may live-and integrate their ideas with their employer's existing capabilities.
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The department-store company Macy's may be showing the way here. In February 2009, when Macy's consolidated its U.S. divisions into New York, it conspicuously left a digital team in the heart of Silicon Valley. Since then Macys.corn has started to add 400 people to its existing team of 300. To attract and retain talented technologists, the division launched its own recruiting microsite touting its enviable location, fashion glitz, and unique blend of entrepreneurial ingenuity and business acumen. It rapidly expanded its participation in the social media most favored by desirable recruits. It studied the characteristics of its most successful executives and then developed professional training programs in communication skills, time management, effective negotiations, and financial expertise so that recruits had opportunities for advancement. It capitalized on the local network of technology entrepreneurs, venture capitalists, and leading-edge software and hardware providers not only to identify talent but also to catalyze collaboration and new ways of thinking. These organizational strategies have helped Macy's woo and energize technology stars, increase its e-commerce revenue growth to more than 30% a year over the past two years, and attain the top spot on the 2011 L2 DigitaliQ Index for specialty retailers. For most companies, making changes like these is a tall organizational order. Move too slowly and you're in danger of sacrificing leadership and scale, just at a time when market share is shifting rapidly. Move too quickly, however, and you may not have adequate time for testing and learning. The timehonored rule of the judicial system sets the best course: with all deliberate speed. Retailers need to test and learn quickly but refrain from major moves until they know exactly what they hope to gain.
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IS IT ALL WORTH IT? A successful omnichannel strategy
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should not only guarantee a retailer's survival-no small matter in today's environment. It should deliver the kind of revolution in customer expectations and experiences that comes along every so years or so. Retailers will find that the digital and physical arenas complement each other instead of competing, thereby increasing sales and lowering costs. Ultimately, we are likely to see more new ideas being implemented as customers and employees propose innovations of their own. In today's environment, information and ideas can flow freely. Retailers that learn to take advantage of both will be well positioned for success. 0 HBR Reprint Rm2C
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• • When Ron Johnson left Target in 2000 to join Apple as senior VP for retail, conventional wisdom held that a computer maker couldn't sell computers. Johnson tossed out the retailing rule book and, working alongside Steve Jobs, built the Apple Store from scratch. In November 2011 Johnson took the reins as CEO of the venerable J.C. Penney department store where investors and the board hope ~ he'll work some of his magic. In this edited "' ~ interview, HBR senior editor Gardiner Morse "' ~ talked with Johnson about innovation, ~ leadership, and when to trust your gut.
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HBR: Brick-and-mortar retailers are struggling, in part because of the growth of e-commerce. Is the traditional retail model broken? Johnson: I don't think the model is broken at all. Many stores are executing it very well. Look at the Apple Stores, which have annual sales averaging $40 million per store in a category that in 2000 everyone said would move entirely to the internet. Today the Apple Stores are the highest performing stores in the history of retailing. Physical stores are still the primary way people acquire merchandise, and I think that will be true so years from now. Aren't consumers dramatically shifting their buying to the internet? It varies a lot by category, bu t only about 9% of U.S. retail sales are online today, and that rate is growing at only about 10% a year. And a lot of that buying is from the online businesses of physical retailers like J.C. Penney and Apple. In reality, what's growing is physical retailers' extension into a mnltichannel world . It's not as though there's a physical retail world and an online retail world, and as one grows, the other declines. They're increasingly integrated. But physical stores will remain the main point of December 2011 Harvard Business Review 79
contact with customers, at least for the stores that take the lead in this integrated environment. How do you take the lead? A store has got to be much more than a place to acquire merchandise. It's got to help people enrich their Jives. If the store just fulfills a specific product need, it's not creating new types of value for the consumer. It's transacting. Any website can do that. But if a store can help shoppers find outfits that make them feel better about themselves, for instance, or introduce them to a new device that can change the way they communicate, the store is adding value beyond simply providing merchandise. The stores that can do that will take the lead. So how does a trad it ional retailer figure out how to create value? For most stores, moving from a transaction mindset- "how do we sell more stuff?"-t o a valuecreation mind-set will require a complete overhaul. The Apple Store succeeded not because we tweaked the traditional model. We reimagined everything. We completely rethought the concept of"try before you buy": You can test-drive any product, loaded with the applications and types of content you're actually going to use, and get someone to show you how to use it. If you buy it, we'll set it up for you before you leave the store. If you need help after that, you can come back for personal training. If there's a problem, you can usually get it fixed faster than a dry cleaner can launder your shirt. We also reinvented the sales associates' job. Until the Apple Store launched, customers went to a technology store to acquire a product, and it was often an awful experience driven by a salesperson on commission whose main interest was in emptying your wallet. Apple Store associates are not on commission, and they don't try to sell you anything. They have one job: to So Harvard Business Review Deeember 2011
help you find the product that's right for you, even if it's not an Apple product. All those things create value beyond the transaction. You've just taken the helm at J.C. Penney. Isn't it a pretty risky proposition to completely reinvent a department store? The opposite is what's risky. Over the past 30 years the department store has become a Jess relevant part of the retail infrastructure, largely because of decisions the stores have made. As America exploded with big box and specialty stores and new shopping formats, department stores abdicated their unique role instead of engaging the competition. They retreated from categories and assortments that made them distinctive. They didn't think about the future so much as try to protect the past. There's no reason department stores can't flourish. They can be people's favorite place to shop. They've got aU these strategic advantages- the lowest cost of real estate, exceptional access to merchandise, scale to create enormous marketing power, colocation with specialty stores. And people like stores with huge assortments and one-stop shopping. They love Walmart. They Jove Target. So it's not department stores' size or location or physical capabilities that are their problem. It's their lack of imagination-about the products they carry, their store environments, the way they engage customers, how they embrace the digital future. There's nothing wrong with the capability. There's a problem with the execution. So you foresee the resurgence of the department store? Every decade there are one or two retailers t hat change the game and profoundly influence the entire industry. The 1980s were the Walmart decade, with its new use ofiT, supply chain innovation, and
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pricing. And the Gap reinvented the specialty store in the 1990s with a narrow assortment of private· label goods and a novel presentation and store ex· perience. It's the model that every specialty store has followed since. You could argue that Amazon on the e·commerce front and the Apple Store with the customer experience are the major influences in the industry from 2000 to the present. It remains to be seen what's going to happen in the next decade. I think there will be one leader in the retail space. The question is who. There are good reasons to think it could be a department store. Maybe it will be the retailer that best integrates the virtual and physical experience. That will be a very big part of it, I would say. Certainly it will be about the integration of the mobile inter· net and the in-store experience. But more broadly I think the leaders will be the ones that figure out how to do integration in ways that create value. Think about the online experience today. What on· line does best is compete on price and, depending on your circumstances, convenience. That doesn't ere· ate new value. It's a race to the bottom-the lowest cost and fastest fulfillment. Can you describe what that integration might look like? I don't want to get into it, because I think it would give away a lot of potential competitive advantage. Apple's physical and virtual stores are pretty well integrated, but they're separate organizations in the company. Why do it that way? On the one hand you have to make sure customers see Apple as one company-common pricing and messaging and so on across all channels. So obvi· ously you want tight integration. But physical retail· ing is extremely complicated. It takes a lot of time
and focused effort to pick the right real estate, design stores, build teams, and so on. Steve Jobs and I talked about that a lot, and we realized that for the stores to work well I had to be 100% focused on them. And I was. I was personally involved in every store de· sign. I interviewed every manager who ever worked in an Apple Store. Every employee at an Apple Store knows someone well who knows me well. To have that kind of tight retail strategy, I had to be solely re· sponsible for the stores and not be distracted.
"What online does best is compete on price ....That doesn't create new value. It's a race to the bottom!' You have a great reputation for recruiting people and building teams. What's your approach? I mentioned that I personally interviewed every Ap· pie Store manager. Why do that? Because I wanted to build relationships with all of them. They came to understand who I am and what I value. I don't know if I'm a great selector, but I'm a great connector. The people I hire trust me because of this personal con· nection. You also need a clear vision of what kind of people you want. You want to make sure that some· one is right for the team, and that the team is right for him or her. Everyone has a passion or mission in life that if matched with the right job will allow them to flourish. To find people for whom retail is the right match requires a very thorough interview and December 2011 Harvard Business Review 81
HBR.ORG
selection process. Getting a job on the sales floor at Apple today requires six to eight interviews, including with the person who runs the entire local market. One result of that intensive process is that when people are hired, they feel honored to be on the team, and the team respects them from day one because they' ve made it through the gauntlet. That's very different from trying to find somebody at the lowest cost who's available on Saturdays from 8 to 12. You invented the hugely popular Genius Bar, but it didn' t go so well at first. What made you think it was the right move? Nobody came to the Genius Bars during those first years. I remember going into a store one evening, and no geniuses were on duty. I asked what happened, and the manager told me that there were no customers, and so they sent the genius home. But despite that, I had a belief-a conviction-that face-to-face support was going to be much better for customers than phone and web support, which are often really frustrating and ineffective. So we stuck with it, and gradually customers started coming. Three years later the Genius Bars were so popular that we had to set up a reservation system to manage the demand. By the way, there's a myth that Steve Jobs hated the idea. I remember the day I talked to Steve about the Genius Bar. I said, "Imagine a friendly place that dispenses advice and is staffed by the smartest Mac person in town. He would be like a genius to the customer, because he knows so much. In fact, we could call it the 'Genius Bar!" Steve didn't object to the idea but to the name. And it didn't take long for him to embrace that, too. The next day he asked our legal team to trademark the name. So despite the early data you and Steve followed your gut, with great success. How do you balance gut and analytics? In retailing you've got to trust your intuition much more than you trust the data. There's a tension there, but ultimately if everyone just followed the data, they'd all end up in the same place. And that's part of the problem in retail today. The department stores are redundant. They import the same products, they 82 Harvard Business Review December 2011
price the same way, they carry the same percentage oftheir private label to national brands. They're also redundant because they're driven by people whose primary strength is data analytics. But to break through the clutter and do things that haven't been done before, you need to trust your intuition. To go back to the Genius Bar, the intuition there wasn' t simply "How do we best help people fix their computers?" It was "How do we restore and enhance customer relationships that may have been dam aged by problems with the iPod?" It's not just the product that's broken but also customers' trust in Apple. Apple is in the relationship business as much as the computer business. And the only way toreally build a relationship is face-to-face. That's human nature. That gets at the essence of what retail stores have to be about: deepening connections with people. If I'm a retailer, why shouldn't I wait t o see what Ron is going to do next and then be a fast follower? Let J .C. Penney absorb the risk of inventing the future? If you look at the history of retail ing, there are two ways to win: Be the low-cost player, like Walmart, or be the differentia tor, like Target. The fast-follower strategy works if you're low cost. It doesn' t work if you're a differentia tor. Lots of retailers are trying to do both, and as a result they're neither strong fast followers nor great innovators. They're the stores you're describing when you say that retail is broken. It's not broken; those types of stores are. You can't follow the customer. You've got to lead your customers-anticipate their needs and meet those needs, even before they know what they want. You've been called "the deity ofthe d igerati," "a retailing mastermind," and " the Steve Jobs of the retail industry." So expectations are very high. Everybody in the industry is going to be watching you. What would you say to all those observers? I learned long ago not to believe everything you read. I know what my skills and limitations are, and the fact is, whatever is accomplished at J.C. Penney will be a team game. I don' t see this as a personal Ron thing. It's not about me. 0 HBR Reprint Rl112D
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SPOTLIGHT ON REINVE NTING RETAIL
Spotlight
Retailers need to target customers with the right deal at the right time. Here's how to nail the "next best offer." by Thomas H. Davenport, Leandro Dalle Mule, and John Lucker
84 Harvard Business Review December 2011
ARTWORK Rachel Perry Welty Lost in My Life (Piaymobil) 2010,
pigment print
hoppers once relied on a familiar salespersonsuch as the proprietor of their neighborhood general store-to help them find just what they wanted. Drawing on what he knew or could quickly deduce about the customer, he would locate the perfect product and, often, suggest additional items the customer hadn't even thought of. It's a quaint scenario. Today's distracted consumers, bombarded with information and options, often struggle to find the products or services that will best meet their needs. The shorthanded and often poorly informed floor staff at many retailing sites can't begin to replicate the personal touch that shoppers once depended on-and consumers are still largely on their own when they shop online. Tllis sorry state of affairs is changing. Advances in information technology, data gathering, and analytics are making it possible to deliver something like-or perhaps even better than-the proprietor's advice. Using increasingly granular data, from detailed demographics and psychographies to consumers' clickstreams on the web, businesses are starting to create highly customized offers that steer consumers to the "right" merchandise or services- at the right moment, at the right price, and in the right channel. These are called "next best offers:'
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Consider Microsoft's success with e-mail offers for its search engine Bing. Those e-mails are tailored to the recipient at the moment they're opened. In 200 milliseconds- a lag imperceptible to the recipient- advanced analytics software assembles an offer based on real-time information about him or her: data including location, age, gender, and online activity both historical and immediately preceding, along with the most recent responses of other customers. These ads have lifted conversion rates by as much as 70%-dramatically more than similar but uncustomized marketing efforts. The technologies and strategies for crafting next best offers are evolving, but businesses that wait to exploit them will see their customers defect to competitors that take the lead. Microsoft is just one example; other companies, too, are revealing the business potential of well-crafted NBOs. But in our research on NBO strategies in dozens of retail, software, financial services, and other companies, which included interviews with executives at 15 firms in the vanguard, we found that if NBOs are done at all, they're often done poorly. Most are indiscriminate or ill-targeted-pitches to customers who have already bought the offering, for example. One retail bank discovered that its NBOs were more likely to create ill will than to increase sales. Companies can pursue myriad good goals using customer analytics, but NBO programs provide perhaps the greatest value in terms ofboth potential ROI and enhanced competitiveness. In this article we provide a framework for crafting NBOs. You may not be able to undertake all the steps right away, but progress on each will be necessary at some point to improve your offers.
Define Objectives Many organizations flounder in their NBO efforts not because they lack analytics capability but because they lack clear objectives. So the first question is, What do you want to achieve? Increased revenues? Increased customer loyalty? A greater share of wallet? New customers? The UK-based retailer Tesco has focused its NBO strategy on increasing sales to regular customers and enhancing loyalty with targeted coupon offers delivered through its Clubcard program. As Roland Rust and colleagues have described ("Rethinking Marketing:' HBR January- February 2010), Tesco uses Clubcard to track which stores customers visit, what they buy, and how they pay. This has enabled the retailer 86 Harvard Business Review December 2011
What Makes An NBO? ''Next lwst offer·· is
increasingly used to refer to a proposal customilecl on the IJ~l'-lis of THE CONSUMER ' S ATTRIBUTES AND BEHAVIORS
(demographics, shopping history) THE PURCHASE CONTEXT
(bricks and mortar, online) PRODUCT OR SERVICE CHARACTERISTICS
(shoe style, type of mortgage) THE ORGANIZAT ION'S STRATEGIC GOALS
(increase sales, build customer loyalty) NBOs .:He most often cil•<>igncd to inspire
.1 pun:h.1~c . drive loy:lity. or both. They can consist of PRODUCTS
(a coupon for diapers) SERVICES
(a discount on a spa visit) INFORMATION
(Google ads to click on) RELATIONSHIPS
(Linked In and Facebook recommendations) Despite the name, an NSO may in fact be an initial engagement. And whether the customer relationship is new or ongoing, the NSO is intended to be a "best offer."
to adjust merchandise for local tastes and to customize offerings at the individual level across a variety ofstore formats, from hypermarts to neighborhood shops. For example, Clubcard shoppers who buy diapers for the first time at a Tesco store are mailed coupons not only for baby wipes and toys but also for beer. (Data analysis revealed that new fathers tend to buy more beer, because they are spending less time at the pub.) More recently, Tesco has experimented with "flash sales" that as much as triple the redemption value of certain Clubcard coupons-in essence making its best offer even better for selected customers. A countdown mechanism shows how quickly time or products are running out, building tension and driving responses. Some of these offers have sold out in 90 minutes. Tesco's NBO strategy seeks to expand the range of customers' purchases, but it also targets regular customers with deals on products they usually buy. As a result of its carefully crafted, creatively executed offers, Tesco and its in-house consultant dunnhumby achieve redemption rates ranging from 8% to 14%far higher than the 1% or 2% seen elsewhere in the grocery industry. Microsoft had a very different set of objectives for its Bing NBO: getting new customers to try the service, download it to their smartphones, install the Bing search bar in their browsers, and make it their default search engine. Starting with a clear objective is essential. So is being flexible about modifying it as needed. The low-cost DVD rental company Red box initially made e-mail and internet coupon site offers intended to familiarize consumers with its kiosks. Redbox kiosks were a new retail concept, but in time people became accustomed to automated movie rentals. As the business grew, the company's executives realized that to increase profits while maintaining the low-cost model, they needed to persuade customers to rent more than one DVD per visit. So they shifted the emphasis of their NBO strategy from attracting new customers to discounting multiple rentals.
Gather Data To create an effective NBO, you must collect and integrate detailed data about your customers, your offerings, and the circumstances in which purchases are made. Know your c u s t omers. Information valuable for tailoring NBOs can be relatively basic and easily acquired or derived: age, gender, number of children, residential address, income or assets, and
KNOW WHAT YOUR CUSTOMERS WANT BEFORE THEY DO
Targeting individuals with perfectly customized offers at the right moment across the right channel is marketing's holy grail. As companies' ability to capture and analyze highly granular customer data improves, such offers are possible-yet most companies make them poorly, if at all.
Perfecting these "next best offers" (N BOs) involves four steps: defining objectives; gathering data about your customers, your offerings, and the contexts in which customers buy; using data analytics and business rules to devise and execute offers; and, finally, applying lessons learned.
HBR.ORG
It's hard to perfect all four steps at once, but progress on each is essential to competitiveness. As the amount of data that can be captured grows and the number of channels for interaction proliferates, companies that are not rapidly improving their offers will only fall further behind.
psychographic lifestyle and behavior data. Previous about 600 billion geospatially tagged data feeds purchases are often the single best guide to what a back to telecommunications providers every day. customer will buy next, but that information may be An application developed by the software analytharder to capture, particularly from offline channels. ics company Sense Networks can compare a conLoyalty programs like Tesco's can be a powerful tool sumer's movements with billions of data points on for tracking consumers' buying patterns. the movements and attributes of others. Using this Even as companies work (and sometimes strug- location history, it can estimate the consumer's age, gle) to acquire these familiar kinds of customer data, travel style, level of wealth, and next likely location, the growing availability of social, mobile, and loca- among other things. The implications for creating tion (SoMoLo) information creates major new data highly customized NBOs are dear. Know your offerings. Unless a company has sets to be mined. Companies are beginning to craft offers based on where a customer is at any given detailed information about its own products or moment, what his social media posts say about his services, it will have trouble determining which ofinterests, and even what his friends are buying or ferings might appeal most to a customer. For some products, such as movies, third-party databases discussing online. One example is Foursquare, which makes cus- supply product attributes, and companies that rent tomized offers according to how many times con- or sell movies can surmise that if you liked one sumers have "checked in" to a certain retail store. movie with a particular actor or plot type, you will Another is Walmart, which acquired the social media probably like another. But in other retail industries, technology start-up Kosmix to join its newly formed such as apparel and groceries, compiling product atdigital strategy unit, @WalmartLabs, in capitalizing tributes is much more difficult. Manufacturers don't on consumer SoMoLo data for its offers. Among uniformly classify a sweater as "fashion forward" or the unit's projects is finding ways to predict shop- "traditional:' for example. They don't even have clear pers' Walmart.com purchases on the basis of their and standardized color categories. So retailers must social media interests. Walmart is also looking into spend a lot oftime and effort capturing product atlocation-based technologies that will help custom- tributes on their own. Zappos has three departments ers find products in its cavernous stores. The apparel working to optimize customers' searches and create retailer H&M has partnered with the online game the most effective offers for its shoes. Even when MyTown to gather and use information on customer the attributes are narrowed down to product type, location. If potential customers are playing the game style, color, brand, and price, a shoe might have any on a mobile device near an H&M store and check in, of more than 40 material patterns-pearlized, patchH&M rewards them with virtual clothing and points; work, pebbled, pinstripe, paisley, polka dot, or plaid, if they scan promoted products in the store, it enters to name just those beginning with "p." Without a them in a sweepstakes. Early results show that of system for such detailed classification of product at700,000 customers who checked in online, 300,000 tributes, Zappos wouldn't know that a customer had went into the store and scanned an item. often bought paisley in the past, so it wouldn't know Many retailers focus on how to use customers' that it should include paisley products in NBOs to location information in real time; where the cus- that customer. tomers have been can also reveal a lot about them. Similarly, without good classification systems, In the United States alone, mobile devices send grocers can't easily determine what products will December 2 011 Harvard Business Review 87
SPOTLIGHT ON REINVENTING RETAIL
lure adventurous, health-conscious, or pennypinching customers. When Tesco wants to identify products that appeal to adventurous palates, it will start with something that is widely agreed to be a daring choice in a given country- Thai green curry paste in the UK, perhaps- and then analyze the other purchases that buyers of the daring choice make. If customers who buy curry paste also frequently buy squid or wild rocket (arugula) pesto, these products have a high relationship coefficient. Know the purchase context. Finally, NBOs must take into account factors such as the channel through which a customer is making contact with a business (face-to-face, on the phone, by e-mail, on the web), the reason for contact and its circumstances, and even voice volume and pitch, indicating whether the customer is calm or upset. (Emotiondetection software is proving valuable for the last factor.) Bank of America has learned that mortgage offers presented through an ATM at the moment of
BUILDING THE NEXT BEST OFFER Exemplary companies build or sharpen an NBO strategy through four broad activities:
88 Harvard Business Review December 2011
HBR.ORG
customer contact don't work well because customers have neither the time nor the inclination to engage with them, whereas they might be receptive to the same offers during a walk-in. Likewise, someone who calls customer service with a complaint is unlikely to respond to a product offer, though he or she might welcome it by e-mail at another time. Other contextual factors that may affect the design of an NBO-and a consumer's response to it-include the weather, the time of day or the day of the week, and whether a customer is alone or accompanied. Although clickstrearn or recent online purchase data are often the most relevant in guiding an online NBO strategy, in some cases, such as airtravel ticket pricing, time and day are important: Airlines can hike prices on a Sunday evening, because more people search then than, say, midday during the week. A Chinese shoe retailer we studied is testing offers that target primary buyers' companions. When a woman walks into one of its stores with her
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he weather, the time of day or day of the week, and whether or not a customer is accompanied may affect the design of an offer. husband, she is usually the primary buyer, and the retailer's NBO is usually a relatively inexpensive item for the husband. The choice of what to offer him arises from the insight that men who accompany their wives shopping but are not actively shopping themselves are more price sensitive than solo husbands who are searching for a specific product. Of course, countless other contextual factors depend on the nature of the business and its customers.
Analyze and Execute The earliest predictive NBOs were created by Amazon and other online companies that developed "people who bought this also bought that" offers based on relatively simple cross-purchase correlations; they didn't depend on substantial knowledge of the customer or product attributes, and thus were rather a blunt instrument. Somewhat more targeted offers are based on a customer's own past purchase behavior, but even those are famously indiscriminate. If you buy a book or a CD for a friend who doesn't share your tastes, that can easily skew the future offers you receive. Companies that have systematically gathered information about their customers, product attributes, and purchase contexts can make much more sophisticated and effective offers. Statistical analysis and predictive modeling can create a treasure trove of synthetic data from these raw information sources to, for example, gauge a customer's likelihood of responding to a discounted cross-sell offer d elivered on her mobile device. Behavioral segmentation and other advanced data analytics that simultaneously account for customer demographics, attitudes, buying patterns, and related factors can help identify those customers who are most likely to defect. Armed with this information and a customer's expected customer lifetime value, an organization can determine whether its NBO to that customer should encourage or discourage defection. (A detailed discussion of marketing data analytics is beyond the scope of this article, but the 2002 book Marketing Engineering, by Gary L. Lilien and Arvind Rangaswamy, go Harvard Business Review December 2011
offers a robust overview of key analytical, quantitative, and computer modeling techniques.) Although such analytics can yield a profusion of potentially effective offers, business rules govern the next step. When an analysis shows that a customer is equally likely to purchase any of several products, a rule might determine which offer is made. Or it might limit the overall contact frequency for a customer ifanalyses have shown that too much contact reduces response rates. These rules tend to go beyond the logic of predictive models to serve broad strategic goals-such as putting increasing customer loyalty above maximizing purchases. A carefully crafted NBO is only as good as its delivery. Put another way, a brilliant e-mail NBO that never gets opened might as well not exist. Should the NBO be delivered face-to-face? Presented at an in-store kiosk? Sent to a mobile device? Printed on a register receipt? Often the answer is relatively straightforward: The channe l through which the customer made contact is the appropriate channel for delivering the NBO. For example, a CVS customer who scans her ExtraCare loyalty card at an in-store kiosk can instantly receive customized coupons. There are times, however, when the inbound and outbound channels should differ. A complex offer shouldn't be delivered through a simple channel. Recall Bank of America's experience with mortgage offers: The inbound channel- the ATM-was quickly found to be a poor outbound channel, because mortgages are just too complicated for that setting. Similarly, many call-center reps don't understand customer needs and product details well enough to make effective offers-particularly when the reps' primary purpose is to complete simple sales or service transactions. Companies often test offers through multiple channels to find the most efficient one. At CVS, ExtraCare offers are delivered not only through kiosks but also on register receipts, by e-mail and targeted circulars, and, recently, via coupons sent directly to customers' mobile phones. Qdoba Mexican Grill, a quick-serve franchise, is expanding its loyalty pro-
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Learn and Evolve Creating NBOs is an inexact but constantly improving science. Like any science, it requires experimentation. Some offers will work better than others; companies must measure the performance of each and apply the resulting lessons. As one CVS executive said to us, "Think ofevery offer as a test:' Companies can develop rules of thumb from their NBOs' performance to guide the creation of future offers-until new data require a modification of the rules. These rules will differ from one company to the next. In our research we identified some that leading companies use: Footlocker: Promote only fashion -forward shoes through social media. CVS: Provide discounts on things a customer has bought previously. Sam's Club: Provide individually relevant offers for categories in which a customer has not yet purchased, and reward customer loyalty. Nordstrom: Provide offers through sales associates in face-to-face customer interactions. Rules of thumb should be derived from datadriven and fact-based analyses, not convention or promotions for food, drinks, and merchandise based lore. The rules above have been tested, but they will on their SoLoMo information. need to be challenged and retested over time to enNordstrom and other upscale retailers, and fi- sure continued effectiveness. Meanwhile, legal, ethical, and regulatory issues nancial services firms with wealthy clients, invest heavily in their salespeople's product knowledge associated with NBO strategies are evolving fast, as and ability to understand customers' needs and the collection and use of customer data become inbuild relationships. For these businesses, a human creasingly sophisticated. When companies enthusibeing is often the best channel for delivering offers. astically experiment with NBOs, they should be wary Many organizations devise multiple offers and sort of unwittingly crossing legal or ethical boundaries. them according to predictive models that rank a It would be hard for any company to incorporate customer's propensity to accept them on the basis every possible customer, product, and context variof previous purchases or other data. Salespeople or able into an NBO model, but no retailer should fail customer service reps can select from among these to gather basic demographics, psychographies, and offers in real time, guided by their dialogue with the customer purchase histories. Most retailers need to customer, the customer's perceived appetite for a accelerate their work in this area: Their customers given offer, and even the comfort level between the are not impressed by the quality or the value of ofcustomer and the salesperson. Combining human fers thus far. Variables and available delivery chanjudgment with predictive models can be more ef- nels will only grow in number; companies that aren't fective than simply following a model's recommen- rapidly improving their offers will just fall further dations. For example, insisting that a rep deliver a behind. ~ HBR Reprint R1112E specific offer in every case may actually reduce both Thomas H. Davenport is the President's Distinguished customers' likelihood of accepting the offer and ......._. Professor of Information Technology and Management their postpurchase satisfaction. The investment firm at Babson College, a senior adviser to Deloitte Analytics, and T. Rowe Price provides call-center representatives the research director of the International Institute for Analytwith targeted offers, but it has concluded that ifa rep ics. Leandro Daile Mule is the global analytics director at Citibank. John Lucker is a principal at Deloitte Consulting delivers the offers in more than 50% of interactions, LLP, where he is a leader of Deloitte Analytics in the U.S. and he or she probably isn't tuning in to customers' needs. of advanced analytics and modeling globally.
gram by delivering coupons to customers' smartphones at certain times of the day or week to increase sales and smooth demand. Late-night campaigns near universities have seen a nearly 40% redemption rate, whereas redemption rates average 16% for Qdoba's overall program. Starbucks uses at least 10 online channels to deliver targeted offers, gauge customer satisfaction and reaction, develop products, and enhance brand advocacy. For example, its sma.rtphone app allows customers to receive tailored
pscale retailers and financial services firms find that a human being is often the best channel for delivering offers.
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Sharp, was ready to step aside from his day-to-day duties and assume more of an advisory role. COO Katie Taylor would become the company's first CEO. The hospitality industry was in shambles, particularly at the high end, as vacationers canceled and business travelers sought cheaper options. Four Seasons held firm on room rates, but occupancy dropped and the company slashed the staff at headquarters. Sharp's move added to the concern. Yet under his guidance, Taylor and her team not only got the company back on track but positioned it for leadership once again. Today bookings are up dramatically from 2008, and employee engagement scores are higher than ever. Or consider Standard Chartered Bank, which thrived even as its peers received bailouts, suffered
debilitating reputational blows, or simply closed up shop. Or the beauty retailer Sephora, on the brink of extinction a decade ago and now opening an average of two stores every week. We have spent the past three years studying companies across industries that have defied conventional logic. We developed and administered a survey to 45 companies around the world; interviewed dozens of CEOs, senior executives, and mid level managers; and conducted workshops to construct a model that captures how they've succeeded. That model is expressed in what we call collective ambition- a summary ofhow leaders and employees think about why they exist, what they hope to accomplish, how they will collaborate to achieve their ambition, and how their brand promise aligns with
The Four Seasons Compass The Four Seasons hotel chain clarified its purpose and repositioned itself for industry leadership by using a tool we call a compass. Purpose is at the center; leader behavior forms the outermost ring. In between are the other elements of collective ambition, along with targets and the milestones that will measure your progress in each.
BRAND PROMISE DEDICATION TO THE HIGHEST HOSPITALITY STANDARDS
QUALITY
CONSISTENTLY CARING
SERVICE
AND CUSlOMIZED U-HOUR SERVICE
CULTURE
CULTURE OF EMPLOYEES INSPIRED TO OFFER
BRAND
EXCEUENT SERVICE
STRATEGIC& OPERATIONAL PRIORITIES
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Against all odds, some companies come through hard times stronger than ever. Sephora was nearly out of business a decade ago, yet the beauty retailer is now opening an average of two stores a week- a turnaround launched at an especially low moment for consumer luxuries.
For the Four Seasons hotel chain, bookings are up dramatically since 2008, even though the recession struck a considerable blow at luxury travel.
their core values. These companies don't fall into the trap of pursuing a single ambition, such as profits; instead, their employees collaborate to shape a collective ambition that supersedes individual goals and takes into account the key elements required to achieve and sustain excellence. In this article, we'll describe those elements and why they matter- and why one matters most of all. (Spoiler: It's purpose.) Drawing on the companies we've studied, we'll show how some of them focus on two priorities-what we ca11 the glue (collaborative engagement) and the grease (disciplined execution)-to achieve their collective ambition. Our hope is that their journeys will inspire you to do the same.
The Elements of Collective Ambition We're not starting from scratch with the concept of collective ambition. For decades, organizational scholars have studied what makes for a company that is both sustainably profitable and engaged with employees and other stakeholders. But many organizations tackle engagement in a one-off fashion or define it too narrowly (for instance, as the degree to which employees feel engaged with their work) rather than creating a compelling story of the company's future and a collaborative process for building the capabilities to achieve it. So, what elements does a company's collective ambition comprise? Some are drawn from prior studies; others we've gleaned from our recent research. All seven must be carefully integrated. They are as follows. Purpose: your company's reason for being; the core mission of the enterprise. Vision: the position or status your company aspires to achieve within a reasonable time frame. Targets and milestones: the metrics you use to assess progress toward your vision. Strategic and op erat ional priorities: the actions you do or do not take in pursuit ofyom vision.
The French food giant Danone struggled for decades to make its mark in the United States, fighting Americans' lack of interest in yogurt. Now the company is poised to triple its U.S. growth over the next few years.
How do they do it? Instead of focusing on one goal, employees shape a collective ambition: a shared sense of purpose, how the company will fulfill it and track progress, and how leaders and others will behave every day as they achieve and sustain excellence.
Brand promise: the commitments you make to stakeholders (customers, communities, investors, employees, regulators, and partners) concerning the experience the company will provide. Core values: the guiding principles that dictate what you stand for as an organization, in good times and bad. Leader behaviors: how leaders act on a daily basis as they seek to implement the company's vision and strategic priorities, strive to fulfill the brand promise, and live up to the values. Clearly defined, these elements can help leaders spot areas of misalignment and launch initiatives to address them. They might find, for example, that although leaders are energized by the concept of community impact, their bonuses are pegged to top-line growth. This disconnect may make it hard to inspire them to behave in a way that suits the organization's purpose and vision. (See the sidebar "The Seven Elements in Action" for an example of how a global biopharmaceutical firm defined these elements.) We use a design of concentric circles to represent collective ambition. We think ofit as a compass. Purpose is at the center. The outermost ring contains the leader behaviors that enable progress. Vision, brand promise, strategic and operational priorities, and values lie in between, along with the targets and milestones that will measme your progress in each
Many organizations tackle engagement in a one-off fashion or define it too narrowly. Decemb er 2011 Harvard Business Review 97
THE POWER OF COLLECTIVE AMBITION
Audit Your Collective Ambition
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element. As you can see in th e exhibit "The Four Seasons Compass:' the hotel chain clarified its oncefuzzy vision by assigning to it the targets of achieving a first-choice ranking among guests, being the best employer, and being the industry's number one builder of sustainable value.
For a quick self-check on how far you've come in shaping and implementing your company's collective ambition, answer the following • questions: 1. Does your company have a clear
and meaningful statement of its core purpose- why it exists?
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2. Is your company's vision compelling
Shaping a collective ambition isn't simply about crafting an inspiring story. The point is to build engagement as a means to an end: to make the purpose personal. In other words, shaping your collective ambition is an opportunity to build or strengthen the organizational glue. It's also a chance to launch enterprise-wide change initiatives, which require disciplined execution-the grease. Glue and grease exist in parallel, but we'll describe each in turn. The glue. The ongoing stability ofStandard Chartered Bank despite a grueling recession can be attributed partly to serendipity. The bank had limited exposure in the United States, for instance, where the crisis hit first and hard. But with more than 85,000 employees representing 125 nationalities, SCB used the crisis as an opportunity to bind diverse and dispersed stakeholders by recommitting to the principles that had made it great in the first place. In short, it strengthened its glue. Going into the recession, the bank had a strong purpose, which was to maintain a positive presence for all its stakeholders, and a vision for the future: to be the world's best international bank, leading the way in Asia, Africa, and the Middle East. But although employees were clear on why their work mattered, most of the world-including many key stakeholders-couldn't articulate just what made the bank unique. Its leaders sensed that the performance ofSCB exceeded its reputation. To address this, CEO Peter Sands created a task force in 2009 to travel the world, meeting wit h thousands of customers, employees, regulators, shareholders, and communities where the bank did business. Diverse as they were, the stakeholders consistently regarded the bank as an ethical partner that was in it for the long haul. The company had stayed put in bad times, such as the Asian financial crisis, when many banks pulled out of certain communities. On the basis of this evidence, SCB articulated its new brand promise: to stay around for the long term and to do good for communities. The bank called it "Here for Good"- double meaning intended. A senior executive in Southeast Asia
and aspirational yet achievable, motivating employees to contribute their very best?
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s. Does your company's brand promise capture the experience you intend to deliver to stakeholders (customers, communities, investors, employees, and business partners}?
7- Do senior leaders' day-to-day behaviors reflect t he leadership behaviors t hat you say are critically important to your company's success?
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If your company's total is below 35, you have your work cut out for you. What's most important is to start an honest dialogue about two or three things leaders and managers will commit to doing now to strengthen the company's collective ambition.
Once you open up this dialogue. be ready to commit to doing your part to make sure the organization follows through.
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SCB's community initiatives are well entrenched explained it this way: "Our local connections are very deep, in part because we make a big effort to in the company's brand and culture-a sign that the bank's promise is more than just words. Whether develop local talent and also because we've been in our markets so much longer than other multi· building health centers for the blind in India, spon· nationals. It is not uncommon for me to meet a soring the Liverpool Football Club, or giving people customer who says, 'You gave my grandfather a time off to volunteer for causes that matter to them loan so years ago, and you've stood by my family (one employee spoke to us of his work at a stable business in good and bad times. We wouldn't go to for rescued horses), SCB is part of the fabric of the communities in which it operates. Seeing colanother bank!" Sands and his executive team worked to ensure leagues get involved in philanthropic efforts is enthat the new promise was kept. The first priority was ergizing, employees say, and builds their allegiance to introduce it to employees, the people who deliver to the bank. Although the new brand promise has had an over· the promise day in and day out. SCB held town hall whelmingly positive effect, SCB's executives are re· meetings throughout the world; they included a documentary-style video clip showing real people alistic-cautious, even-about claiming victory. "We talking about their experiences with the bank, such have been here for good, and we want to be in the as a farmer in Sri Lanka who used its services to help future;' an executive notes. "At the same time, we're trying not to be too brazen about it because we don't fund his children's education. The clip moved and rallied employees, particularly when it started to ap· want to become a target or have people waiting for pear on television in key markets. us to fail. we have demonstrated that a bank can be The cynicism that accompanies many rebrand· a force ofgreat good, but we also know the limits." In ing efforts was largely absent at SCB, mostly be· other words, you can't prepare for all unanticipated cause "Here for Good" captured what was already consequences. A manufacturer applying for a loan there. This exercise was about strengthening the might commit to sustainable waste disposal but end glue that would make the promise real for all stake· up selling a product that includes a potentially danholders. To customers, for example, SCB's commit· gerous chemicaL ment is a promise that they will be offered fair deals and treated as partners. Whether lending to cocoa farmers in Ghana (SCB helps sustain employment for more than 70,000 Ghanaian farmers) or to big pharma companies in Europe, SCB assists customers in building their businesses for the long term. The bank also does business only with customers that comply with a country's regulatory guidelines. SCB views regulators as partners in building healthy business environments, which in turn lead to great opportunities for the bank- good for business, good for the community. Take the UAE, where many in· temational banks fail to meet the country's Emiri· In its rebranding initiative, SCB included all the tisation quotas and willingly pay fines. SCB instead components of our collective ambition compass, thinks of the quotas as crucial to developing local with a similar intention of integrating and a.ligning talent. In Nigeria the bank has helped educate regu- purpose, vision, targets, strategic and operational lators on best practices-all in the name of building priorities, brand promise, core values, and leader the region's human and economic capital. behaviors. All were integral to the effort. The bank's SCB has also begun to bake "Here for Good" into campaign was a good fit because, as Sands said, its core business processes. For example, loan appli· '"Here for Good' is not only true of Standard Chartered already but also aspirational and, quite frankly, cants must write a paragraph about why SCB should trust that they, too, will be here for good. A manu· inspirational for us all." It was the organizational facturer seeking a loan for a new factory might be glue that reminded people why they came to work expected to include a commitment to sustainable every day. Going forward, the bank's challenge is to waste-disposal practices. remember, not abandon, its roots.
Standard Chartered Bank's new brand promise "Here for Good" captured what was already there.
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The Seven Elements in Action
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For a closer look at how a company might define the seven elements of collective ambition, let's consider a global biopharmaceutical firm, in which the CEO and his top team convened a conference dedicated to this task. The goal was to present the company as a whole with a compelling sense of purpose, a clear vision and strategy, and a brand promise that reflected its core values.
PURPOSE
VISION
To make significant scientific contributions to global health and well-being
To become the premier biopharmaceutical company in the world and a leading provider of nutrition services
The grease. Collaborative engagement, the glue, creates a unified culture prepared for disciplined execution- the grease that drives productive change. Let's look again at Four Seasons, during the fraught time when Katie Taylor took over as CEO. She first needed to strengthen the glu e, so she took a team of executives out of their day jobs for six months and charged them with visiting guests, employees, and stakeholders around the world to get an up-to-date picture of the business. The team's presentation of what it had learned confirmed that guests valued the luxury experience and employees had a shared sense of purpose. But the presentation was theoretical and, as one employee put it, "overly intellectual!' Employees were unmoved, left without an idea ofhow to translate the findings into day-to-day efforts. Organizational glue is important but insufficient: Without everyday solutions, new promises are easily abandoned. Working with our compass, Taylor and her team organized their findings in a more tangible framework, consistent with the company's purpose and values but with a bias for action. Now Four Seasons was ready to create the grease-a methodical plan, detailed in a series of work initiatives that were aligned with the company's purpose: to create the world's best hospitality experiences. For example, one of the company's teams led an initiative called "Who gets to be a leader around here?" The aim was to transform what had been a relatively informal approach to promoting people into a robust system for evaluating potential and performance and making promotions on the basis of them. This was important for ensuring that Four Seasons had th e right people in the right roles and was developing, rewarding, and retaining them. After all, when service is your competitive advantage, your people are essential. 100
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TARGETS AND MILESTONES Evidence of tangible progress will include membership among the top three companies in its field in China and India; holding the first or second spot in securing new patents in each of those markets; and becoming a preferred partner for the world's leading teaching and research hospitals.
As Taylor put it: "We have 34,000 employees who get up every morning thinking about how to serve our guests even better than the day before. So while all of this trouble is swirling around us, our brand promise of providing the most exceptional guest experience wherever and whenever you visit us is instilled in the hearts and minds of our dedicated employees. They are the ones who fulfill that promise day in and day out."
Putting Purpose First Whether you use the compass we've provided or some other tool to create your company's story, we recommend that you place purpose at the heart. Purpose is the center around which vision, strategy, brand, values, and leader behaviors must orbit. Remember- a purpose doesn't have to be about saving the world. Providing excellent entertainment or banking services is just as meaningful a purpose as improving health care in emerging economies- as long as it is an authentic representation of why your company exists. A purpose statement is your starting point for differentiation and engagement. Let's consider how Sephora, one of the world's leading beauty retailers, developed its purpose. The company was founded in France in 1969 by Dominique Mandonnaud. He thought that shopping for cosmetics should be fun, so he designed Sephora's stores to be entertaining places where customers could test products before buying them. The concept took off-and so did competitors' adeptness in copying it. Sephora increased the number ofbrands it carried, hoping to differentiate itself. But the company soon learned that carrying a wide range of cosmetic, fragrance, and skin care brands in addition to its private label was not enough to stay ahead of the pack. It needed something hard to copy. Sephora is part of LVMH, the world's leading luxury products group. In 2003 LVMH was consid-
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STRATEGIC AND OPERATIONAL PRIORITIES Reducing costs annually by 2% without diminishing quality; reducing cycle time in new-product rollouts by s% a year; consolidating IT systems from recent acquisitions so that field staff receives timely information superior to that of benchmarked competition
BRAND PROMISE "Team up for a healthier world." For instance, communities where the company does business will experience better health care; employee.s will work collaboratively to address major global health challenges.
ering selling Sephora because of its troubles but instead brought in a new CEO, Jacques Levy, to tum the company around. After studying customers' preferences, Levy and his senior team realized that Sephora's competitive advantage wasn't in the store layout or the brands it carried; it was in the fun and playful shopping experience the company had always delivered. In a nod to the past and an acknowledgment of what future success would require, Levy and his team crafted a new purpose statement: "To provide customers with the most entertaining shopping experience ofthe retail industry-giving them a moment of relaxation and discovery, enabling them to experiment and play with their beauty:' Although purpose is the source from which all the other elements of collective ambition flow, it is critical to integrate all seven elements. For example, Sephora determined that if its purpose was to provide an entertaining shopping experience, its strategy should be to deliver exceptional service-not conventional great service but service in line with the company's core values of freedom, emotional connection, excellence, and boldness. Purpose, strategy, and values play a role in everything Sephora does. Consider the training at Sephora University, which encourages employees to use their own means to reach desired ends. For example, a booklet that explains the "Sephora Management Style" provides a list of principles, examples of how current employees are successfully demonstrating each principle, and a space for trainees to write how they will do the same. A trainee might consider applying a product to customers' faces or to her own to help people play with their beauty and have fun in the process. One of the world's largest food companies, Danone, and its U.S. business, Dannon Milk Products, provides another example of the centrality of purpose. Launched during World War II, Dannon strug-
CORE VALUES Integrity, innovation, and collaboration. This means, for instance, that all constituencies should trust that products will be sold with transparency and that the company will provide opportunities for both individual and organizational growth.
LEADER BEHAVIORS Leaders are expected to demonstrate respect for individuals, a drive to succeed, and flexibility even in turbulent times.
Articulating these elements of collective ambition gave everyone in the organization a better sense of the company's purpose and how he or she could contribute to it. This summary became a framework for identifying milestones and making strategic and operational choices.
gled for decades to make its mark, mostly because Americans eat only one-fifth as much yogurt as is consumed in some European markets. The company enjoyed relative vigor in the early 2000s as Americans embraced low-carb diets, but growth fell off again with the financial crisis. In 2009 Danone appointed the Argentinian Gustavo Valle president and CEO of the U.S. business. Valle had engineered a turnaround in Brazil by focusing employees on vision and purpose, and he wasted no time in pursuing this approach at Dannon. His idea was not to project the past onto the future but to see the future as one ofboundless possibilityand then to act as if the company were already there.
The organizational glue reminded people why they came to work every day. Dannon employees were aligned with the company's purpose, as laid out in its mission statement: "Dannon is committed to bringing health to the greatest number of people across America through our products' benefits:• But they lacked a tnte commitment to achieving that purpose. Valle declared a goal of tripling Dannon's business by 2014 by focusing on culture, communications, and cross-unit collaboration. "If we want to become the largest business unit ofDanone, we have to start acting like it:' he said. "And ifl want to be the CEO of a multibillion-dollar business, I have to start acting like one, too ....There's a big opportunity. And if we want to seize it, we have to work differently:• December 2011 Harvard Business Review
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complaints about, say, aspartame or sugar in yogurt marketed to children to social media campaigns that engage consumer feedback. It's early days, but Valle sees his vision as achievable, as long as employees adhere to the company's purpose and work together to bring it to life.
Dan non's CEO decided to see the future as one of boundless possibility. Since then, Valle has established the Danone Leadership College, which includes workshops emphasizing employees' responsibility for their own contributions to Dannen's transformation. It's a work in progress, but by framing initiatives in terms of purpose, Valle has effected some cultural change. For instance, there's evidence of mind-set shifts inside functional areas: The vice president of supply chain told us that he would be willing to accept less efficiency if it meant helping sales. "We're more in it together," he said. Dannon is easing up on the notion of a zero-sum game (growing by stealing market share from others) and focusing instead on building the category. The company's marketing efforts have shifted as well, from one-way campaigns that dismiss consumer
OUR NEW SLOe.AN:
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no gun• who can show you the way in an hour's speech. It's up to you and your team. The good news is that it's not terribly complicated. Commit to collaborating to shape a powerful story about why people should come to work and how they can pull together to build a future. The glue and the grease- combined with a dose of good old-fashioned discipline-will allow the team to unleash your company's collective ambition. 0 H BR Reprint R1112F THERE'S NO easy path to excellence,
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P
Douglas A. Rea dy is a professor of leadership at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, and the founder of ICEDR, the International Consortium for Executive Development Research, a global network of leadership development profes· sionals. Emily Truel ove, a former researcher at ICEDR, is a PhD student at MIT Sloan School of Management. She is the coauthor of a book on the relationship between leadership and innovation, to be published by Harvard Business Review Press in 2012 .
AT LEAST IT'S EASY TO UNI7ERSTAN/7
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Not every top executive is in the CEO's inner circle. But kitchen cabinets and executive committees are both essential. by Bob Frisch
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TOM, THE CHIEF MARKETING OFFICER of a company I'U
call Lawn Care, is sitting in the biweekly executive committee meeting, and he's becoming increasingly uncomfortable. The business development group is presenting the case for acquiring a competitor whose grass trimmers and lawn mowers are sold through big-box retailers. The acquisition, the team explains, would complement LawnCare's high-end offerings, which are sold exclusively through a network of Goo distributors.
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WHO REALLY MAKES THE BIG DECISIONS IN YOUR COMPANY?
The slide deck clicks by, the lights come up, and Mark, LawnCare's CEO, thanks the team for its hard work. Casting his gaze around the table, he asks, "Well, what do you think?" Gus, the head of sales, pipes up: "I have to adnut I was concerned when you and I talked about this a few weeks ago, but strategically it's a great move. By the time the deal is announced, we'll have the sales force focused on retaining the major distributors!' Ellen, the CFO, adds: "We took another look at the volume projections after last week's meeting with sales, and I'm comfortable with the assumptions that Gus and I developed for dealer defections!' "Good:' Mark replies. "Any questions or concerns before we proceed? I plan to take this to the board next week!' Tom has no quarrel with the numbers, and he knows the acquisition is a sound idea. But he can also see that it means distancing LawnCare from its st rong customer value proposition, not to mention its 80 years of advertising that has consistently stressed the expertise of those 600 dealers. The executive committee hasn't discussed this issue, and unless someone objects right now, they' ll aU go on record as having unanimously approved the deal without ever having talked about the consumer, except as a sales-volume projection. "That's the way it always is:' Tom thinks to himself. "Mark, Ellen, and a couple of others make the big calls in private, and the rest of us are out of the loop. Why bother to have an executive committee if all we do is rubber-stamp decisions?" But the train has dearly left the station. No point in jumping in front of it. So when Mark looks in his direction, Tom nods and says, "Sounds good. We' ll make it work."
The Unnamed Decision Makers Who really makes the major strategic decisions in your company: the acquisition and divestiture decisions; the capital investment decisions; the where, when, and how to go to market decisions; the decisions to expand or shut down operations? I' ll wager that two or three names are popping into your head right now- confidants the CEO always consults. Maybe the CFO, the head of sales or HR, a major division head, a trusted board member? They are always the same few, occasionally joined by others with special knowledge of the issue at hand. Almost every organization I've encountered has such a group that the CEO consistently taps. 106
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Despite its power, this team rarely has a name. Ad hoc, unofficial, and flexible in its makeup, it doesn't formally exist. It has no charter. It doesn't appear on org charts or process maps. Yet most executives can name its core members. At Berkshire Hathaway, it's Warren Buffett and Charlie Munger. At Microsoft, it was Bill Gates and Steve Ballmer. At the property and casualty division of Cigna, CEO Gerry Isom had a standing weekend golf game with his chieflieutenants, Bill Palgutt and Dick Wratten. The word around the watercoolers at Cigna was that the three had made the major decisions for the week by the time they took the clubhouse tum, and they would spend the back nine planning the week ahead. Research conducted during the past decade shows that the roles-and even the roster- of senior management teams can be far from self-evident, even to those who serve on them. In their book Senior Leadership Teams, Harvard's J. Richard Hackman, Ruth Wageman, and others identified four types of top management teams, with varying levels of influence. The smallest and most critical is the decision-making team; the others have a coordinating, consultative, or informational role- or a combination of the four. The aut hors make a compelling case for clarifying the roles of various teams at the senior management level-as they've found that many, like LawnCare's executive committee, serve a multitude of ambiguous purposes. Tom is not alone in his belief that decision making should be the province of an executive commit tee, or that as a member of the C-suite he's responsible for helping to make the major strategic decisions. During nearly three decades of consulting to senior executive teams of all kinds, at Fortune soo companies to family-held businesses, in 14 countries on five continents, I've run across any number of top teams whose charters officially designate them as the company's lead decision-making body. And I've met many senior executives who, like Tom, are frustrated that the major decisions are nevertheless being made elsewhere. This apparent conflict can lead to very real problems, most notably these: • The senior team is brought in too late in the process for its input to matter. • The team members appear to have power to protect the interests of the departments they oversee-but they really don't. • The way the CEO actually makes decisions is unacknowledged and underconsidered.
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The executive committee is often officially responsible for making a company's big decisions while another, unofficial group, led by the CEO, seems to hold the real decision-making power. Although that informal "kitchen cabinet" lacks a proper name, everyone knows who's in it.
This disconnect can cause senior executives to: Learn about important decisions after the fact; Assume they have the power to protect their departments when they really don't; and Endure a system in which the way decisions are actually made goes unacknowledged.
The ultimate decision maker is, of course, the CEO, who should consult both groups deliberatively. The key is to give the executive committee specific advisory and coordinating responsibilities while building a small, effective, and still-nameless kitchen cabinet that is free of the tyranny of the org chart.
Rather than trying to resolve the conflict in favor of one team or another, I'd like to suggest a simpler approach: Acknowledge that these nameless teams exist and ask how you can make more deliberate use of them, along with the senior management team. After all, as any CEO will tell you, neither team is ultimately responsible for the company's major decisions. That's the job of the CEO, who can- and should-have access to the best possible advice.
that the nameless decision-making teams exist, and ask how you can make more deliberate use of them.
Why Senior Teams Don't Make the Big Decisions Over the course of a year, a senior management team sees itself making lots of decisions, many of which generate little dissent. So what looks like a group decision is often merely ritualistic approval. It's the rare business case, for instance, that is turned down at the final presentation. As one CEO I interviewed put it, "Only an idiot would bring a business case for final approval in front of an executive committee without having every single person in that room wired ahead oftime!' More subtle are the situations when a boss brings a decision to the team for consensus and remains at the table for the discussion. Because the group may reach a different conclusion than the boss might have arrived at on his own, both he and the group are likely to believe that he genuinely delegated the decision maldng. But because the boss participates in a discussion whose final outcome is within a range of possibilities that he finds acceptable, he never actually relinquishes his decision-making authority. Therefore, it's something of an illusion that the executive committee makes many of the top decisions. But it could hardly be otherwise, for some fairly straightforward reasons. First, orgaruzational accountability for making important decisions virtually always rests with indivi.duals, not teams. I can't think of a single case when an executive has been put in charge of a division or
function and her boss has said, "Jill, I want you and your team to make good decisions together to run the business well. And I'm holding the entire group accountable for the outcome!' It's no different at the top. Ajay Banga, CEO of MasterCard, is typical of the CEOs I've interviewed. He says, "The collective brains of the group and their diverse set of experiences add enormous value, but the CEO has to make the decisions and live with them!' What's more, teams in general are unwieldy vehicles for rapidly making difficult decisions. In top teams, this challenge is compounded by the dual and sometimes conflicting roles that members play as both corporate officers and heads of divisions and functions, not to mention the wide disparities in power and influence among them. Bob Selander, Banga's predecessor as MasterCard's CEO, put it this way: "If you have somebody on the team who is responsible for $2 billion in revenue, and he says that this course of action is really going to adversely affect his urut, then you're more likely to take that into consideration than if it came from someone with $100 million in revenue!' Perhaps less obvious are the opportunity costs. When, for instance, was Tom supposed to bring up his concerns about the acquisition? As a practical matter, if you focus the top team on decision making, the result may be too much collective, holistic review of preordained outcomes and too little emphasis on raising more-parochial nuts-and-bolts December :1.011 Harvard Business Review 107
WHO REALLY MAKES THE BIG DECISIONS IN YOUR COMPANY?
issues that could improve the chances of successful implementation. That's what my colleagues and I found when we researched senior management teams. We surveyed senior executives and asked, ''What percentage of the time in senior team meetings would you estimate that you are expected to take the overall corporate perspective versus the functional perspective?" Answers ranged from 75% up to 90% for the corporate view and from 25% down to a mere 10% for the functional view. That's not much scope for issues like Tom's or for more-urgent concerns. Consider the case of a CIO who told me about a discussion within his company's senior management team about expanding a plant in China. When he tried to point out that the timing of the initiative coincided with a major ERP upgrade, potentially straining IT resources, the CEO replied, "The senior management team isn't a forum for parochial concerns. Work that off-line. We're here to talk about our strategic commitment to expand in China, not resource planning for IT:' But "off-line" in this case meant the CIO had no opportunity to discuss alternatives with all his colleagues around the table, leaving him and his own IT leadership team with responsibility for two trains speeding along a collision course. I would argue that to make the most of the senior management team's abilities, the proportion of time spent on holistic versus functional perspectives should be reversed. Although meetings of senior management teams are excellent forums for brainstorming, developing options, sharing information, coordinating resources, mapping dependencies, fostering creativity, and a host of other functions, they are not optimal for making difficult decisions. Those are typically made by the accountable executive, supported by a very different type of team. And there are good reasons for that.
The Virtues of the Kitchen Cabinet Informal kitchen cabinets may be used well or badly (see the sidebar "Building a Better Kitchen Cabinet"), but their advantages help explain why leaders almost invariably turn to them- not to make decisions, as people around the watercooler may assume, but for advice. Here are some advantages:
The kitchen cabinet frees the CEO from the tyranny of the org chart. Much of the ambiguity about corporate decision making stems from the misconception that an org chart reflects how a company is run. In fact, it merely describes report108
Harvard Business Review December 2011
ing relationships. Members of a kitchen cabinet may answer directly to the CEO, but that's not why they're being consulted. One person might nearly always be in the room, because he's the adviser the CEO trusts most to tell the truth or question assumptions. Another, perhaps a key board member, may offer both seasoned counsel and a preview of how the board will react to a particular decision. Someone else, an old friend or consultant, might provide an outside perspective. Another person may have special knowledge of the issue at hand. What's certain is that the kitchen cabinet will be smaller than the CEO's staff of direct reports, which leads to my next point.
Small groups are much better than large groups at considering critical decisions. This is the logical corollary of the premise that large teams don't make complicated decisions effectively. A small team- by preempting the problems of uneven organizational power, turf issues, and the inability to reach closure-is much better at providing the tightly focused advice CEOs need.
The kitchen cabinet's small size and its composition foster candor and discretion. Floating trial balloons and shooting them down can be a messy process that unnecessarily unsettles larger groups such as the executive committee. These groups include people who may be alarmed by whatif scenarios- say, the divestiture of a line of business- that, in all likelihood, are fleeting ideas that will never be implemented.
Cabinet membership isn't fixed, so CEOs can get precisely the counsel they need when they need it. Who is in the group at any one time can vary, depending on the issue the CEO faces. That sin1Ple fact ensures the group's flexibility.
The group has no name, so people can't easily lobby to be included. Naming a kitchen cabinet would only increase the likelihood that people in particular roles will think they deserve a voice:
Much of the ambiguity about corporate decision making stems from the m n that an org chart reflects how a company •1s run.
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Today, the term "kitchen cabinet" applies to any leader's unofficial group of top advisers, but it's worth remembering that the label originated as a term of abuse. It was applied by political opponents of President Andrew Jackson to the loose collection of advisers he used, in parallel with his official ("parlor") cabinet, to make important decisions. In nineteenth-century American dwellings, the kitchen was a smoke-filled room hidden from guests, whereas the parlor presented the publ icly acceptable face of the home. As CEO, you can go a long way toward improving the relationship between parlor and kitchen by publicly acknowledging that ad hoc groups do- and should- exist. Make it clear that just as decisions are yours to make, so are the choices of input mode and forums in which to do that. Once these groups are openly recognized, it becomes easier to consciously plan their deployment, defuse unnecessary conflict, and create official, truly integrated decision-support channels. That said, there is no one best way to manage a kitchen cabinet, but you can begin with a few basic considerations:
Rethink the usual suspects. The criterion should not be "With whom do I feel comfortable?" but rather "Will the discussion and the final decision be better if that person is brought into the inner circle?"
Consider including a contrarian.
Select outsiders with care.
As annoying as they may be, devil's advocates can nevertheless help in neutralizing
Relying on outsiders as trusted advisers can create political volatility. Still, even the most t rusted subordinate is, in the end, a subordinate. External counsel, consultants, other CEOs, retired executives, and peers
the influence of yes-men (and women) and in providing antidotes to groupthink.
Remember your hlgh·level objectives. Finance and operations executives tend to dominate kitch en cabinets. But if the customer figures prominently in your strategic objectives, you would do well to regularly include someone from marketing or sales in certain huddles.
Anticipate development and succession. It may sound like a waste of precious resources to include high potentials in your kitchen cabinet when the topic falls outside their immediate scope of responsibility. But participation can prepare them well for unfamiliar decisions they may one day face.
"Shouldn't marketing be in on these conversations?" Instead, members should be chosen for their potential to improve the quality of the decision. These advantages make kitchen cabinets an ineradicable fact of corporate life. CEOs are no more likely to give them up than they are to make them official-and that's as it should be.
A Better Use of the Top Team's Time Let's return to Lawn Care and engage in a thought experiment. What would happen if the company's executive committee were not perceived as a decision-making body, leaving Mark feeling unobligated to seek its formal approval for the acquisition? In a sense, the answer is "nothing!' Mark would have, as before, consulted Ellen, the CFO, and Gus, the sales head, and would have made the decision to do the deal. But that final meeting-in which Tom nodded his assent to a course of action whose irnpli-
outside the organization have proven to be the most valuable sounding boards for many CEOs.
Think through the Implications for senior team members. Before meeting with a kitchen cabinet about a particular issue, give senior management team members a chance to express their concerns. Better to have fair warning if their arguments aren't going to win the day. They can use that time to reset their own teams' expectations and plan redeployment of resources. No one gains if by the time the senior management discussion takes place, all that's left to decide is whether to step in front of the moving train or to wave approval as it speeds by.
cations hadn't been fully considered- would probably not have occurred. If Mark had wanted Tom's input, he would have had to ask for it. If Mark didn't consult Tom, well, that would say something, too. Tom was accustomed to having many major decisions made without his real involvement. But explicitly relieving the executive committee of the burden of major decision making would close the gap between that reality and what Tom's subordinates and some of his colleagues believed. Tom's team would realize that he isn't always in a position to defend their interests as well as they might like. They would expect sometimes to accommodate and implement decisions they might not necessarily agree with. And the executive committee would be free to spend its time on more-productive pursuits. In such a world, I would argue, the senior management team still has three very central roles to play as a group. Let's look at each one: Decem ber 2011 Harvard Business Review 109
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A company that conceives of its senior management team in an advisory and coordinating role can focus its efforts far more productively than a company that treats it as a decision-making body. Here's what a CEO can do to shift the team's focus.
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expect to make key strategic decisions
focus on alignment, coordination, issue identification, tradeoff management, development of possible solutions, and so on
attempt to precisely rank-order initiatives and leave accountability to the sponsors
prioritize initiatives in loose clusters by relative importance, integrate them for maximum impact, and take collective responsibility for the most important ones
rubber-stamp business cases and strategic initiatives
identify and manage the critical dependencies within and among the organization's most strategically important activities
110 Harvard Business Review December 2011
Establish a common worldview as the basis for decision making. Few would dispute that the
various members of a senior team could see their company's competitive environment and its future prospects very differently. What's tmly astonishing is not that they might disagree; it's that they may not know they disagree. All too often, that's because they've never discussed the topic. Several years ago, for instance, I was working with the senior team of a large non·U.S. carpet manufacturer. Domestic new-home construction was in a trough, depressing demand-a reality that every team member recognized. But the head of sales be· lieved firmly that the market would rebound in the next two years, whereas the operations head was equally sure that the downturn would persist for at least three more years. The two of them were mak· ing hundreds of day-to-day decisions guided by these fundamentally different assumptions. I found this persistent divergence in worldviews surprising, given that the senior management team met every other Monday momillg. When I asked the CFO about it, he told me, simply, "We've never actually discussed as a team what's likely to happen in the housing market?' This team needed to develop a shared view of the world their company was operating in. Even if its members couldn't ultimately agree, they needed to know that operations, whlch planned plant capacity and inventory levels, and sales, which drove and forecast revenue, were proceeding under vastly dif· ferent assumptions. This company is hardly alone. Few senior teams, in my experience, spend time engaged in this kind of discussion, and those that do often focus too nar· rowly. They begin by examining their core capabili· ties and their competitors rather than the broader economic, demographic, social, technological, and other powerful trends that determine the shape of an industry and the future of a business. Broadly prioritize initiatives. Consider the CIO who could so clearly see that the China plant expansion was on a collision course with the ERP upgrade. Ifa meeting to decide whether to expand into China is not the place to raise that issue, the senior management team is nevertheless the right group to be uncovering and discussing such relative priorities. "Relative" is the operative word. Conflicts inherent within the team get it into trouble when members try to precisely rank-order initiatives or, worse, kill projects outright. But the team's representativeness makes it the ideal body for general discussions of the
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relative importance of, interrelationships between, and opportunity costs among current and potential courses of action. Discussions of this sort can prevent serious misalignment. For example, in a survey preceding an off-site my firm recently conducted with a major midwestern company, we asked senior team members to identify the three most important obstacles to overcome in the next two years in order to meet shareholder commitments. Each of the 17 members gave us different answers, reflecting 25 unique priorities. We spent the next two days shaping that list into a manageable set that everyone could get behind-not by trying to rank the 25 in order but by grouping them broadly into must-do, should-do, and nice-to-do buckets. Imagine the confusion just one level down if instead alll7leaders had pursued their separate priorities. Allocate resources and manage dependencies. Business cases, like the one Tom felt compelled to approve, often sail through senior team meetings without attendees' knowing exactly what they're signing up for. However, the value of the top management team really comes into play in coordinating resources so that the most important initiatives actually get executed. When you realize that what gets done is really in the hands of the leaderbut that how it gets done is where the senior tean1 needs to spend its time and attention-you can make real progress (see the exhibit "Attitude Adjustment for the Senior Management Team"). Instead of ritu ally approving business cases, senior management teams can convene to assure the CEO that each executive around ilie table will commit the specific resources required to make a proposal succeed.Ifnot, the business case can be reconfigured to reflect the realities of those resource constraints. That's precisely what the CEO and leadership team of Talisman Energy, a Calgary-based oil and gas company, do when they consider a business case. "We don't challenge the numbers, say, for a $1 billion capital investment;' says Jim Noble, senior vice president ofiT and business services. "That's already been decided by the CEO, CFO, and the relevant executives. Instead, we talk about the ability of the organization to accommodate it. It's sort oflike corporate air traffic control. It requires the intellect of everyone in the room because no one person knows all the subtle things going on in all of the functions." High-level management of initiatives is the bridge between setting a strategy and seeing it successfully implemented. Probing, formal, and regular
Having regular dialogue about the senior team's worldview is one of a strategically well-managed business. conversations about the senior team's view of the world; the general prioritization of potentially competing initiatives; and tl1e ownership, coordination, and execution of initiatives are the hallmarks of a strategically well-managed business. WHAT MIGHT Mark,
LawnCare's CEO, have done differently to make more deliberate use of his kitchen cabinet and his executive committee? He could have discussed the acquisition idea with the entire committee far earlier and asked team members to respond to it in two ways-once from their corporate perspective and, separately, from a functional point of view. At iliat point, Tom could have raised his concerns about the customer value proposition. Backers of the acquisition might have been pressed into thinking more about how implementation of a multichannel strategy would work. Tom would have had time to consider new marketing approaches with his own team, to reallocate resources, and to adjust plans accordingly. Most important, the organization as a whole would have gained a clearer view of the decision and its implications. Whichever approach a CEO chooses, the goal is not necessarily to win ilie consent, real or resigned, of all members of the executive committee but instead to base a decision on the best possible input. CEOs who acknowledge and think through the role of their kitchen cabinets and refocus their senior management teams on the tasks to which they are best suited will more ably avoid clashes between appearance and reality. Their teams will waste less time and talent. The enterprise will free itself from the tyranny of the org chart, and then leaders can create the structures that let them manage best. 0 HBR Reprint R1112G Bob Frisch is the managing partner of the Strategic Offsites Group and the author of two previous HBR articles, "When Teams Can't Decide" (November 2008) and "Off-Sites That Work" (June 2006). His forthcoming book is Who's in the Room ? How Great Leaders Structure and Manage the Teams Around Them (Jossey-Bass, January 2012). December 2011 Harvard Business Review
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• Manufacturers are delegating too much power to top-tier suppliers, undermining their own ability to innovate, cut costs, and manage risk. by Thomas Choi and Tom Linton 112
Harvard Business Review December 2011
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n the past 25 years, major originalequipment manufacturers around the world have shifted to the Japanese tiered approach to supply chains. They've radically reduced the number of suppliers that they directly manage and off-loaded responsibility for supervising the rest, along with the task of building major subsystems, to a handful of firsttier suppliers. The attractions for OEMs were faster new-product introductions, larger volume discounts, reductions in the capital and risks associated with developing and producing the subsystems, and the ability to spend less management time on overseeing the multitude oflower-tier suppliers and more on building core competencies. But we believe that the delegation has gone too far. Our conclusion is based on studies of the practices at some 20 leading multinational corporations that one of us (Thomas Choi) conducted and the longtime experience that the other (Tom Linton) has had as a purchasing executive at such companies as LG Electronics (LGE), Agere Systems, Freescale Semiconductor, and IBM. We discovered that a heavy reliance on first-tier suppliers is dangerous for OEMs. It weakens their control over costs,
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reduces their ability to stay on top of technology developments and shifts in demand, and makes it difficult to ensure that their suppliers are operating in a socially and environmentally sustainable fashion. The remedy is for OEMs to forge direct relationships with a select number of lower-tier suppliers, and in this article, we'll explainhow.
The Dangers But first, let's look at the risks of giving top-tier suppliers too much responsibility. Less control over costs. Managers oflarge OEMs assume that they can save money by outsourcing the design and production of major supply subsystems. But here's what happens when a company delegates considerable control over a product's bill of materials: The total costs of ownership of the product (including such things as transportation and inventory management) become opaque to the OEM. And, as some manufacturers found out the hard way during the recent recession, that means the company has little leverage to reduce costs- especially iJit has handed over an entire subsystem to a single supplier and can' t quickly stage a competition or switch suppliers.
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Managers also need to factor in various hidden costs. One is the resources and time required to investigate and resolve problems rooted in lower-tier suppliers. Another is quality. Honda of America learned that when it allowed top-tier suppliers to select their own vendors of plastic parts, the textures and colors of the parts often didn't match, because their makers bought resins from different companies.
Less visibility into technology developments. Lower-tier suppliers can provide valuable information about the latest manufacturing advances and technological innovations. In consumer electronics, for example, having direct access to the newest ideas of chip-design houses, which often are second- or third-tier suppliers, is critical. Such access has enabled companies like Apple and LGE to influence the development of emerging technologies, incorporate them into products before their rivals do, and secure supplies at an advantageous price. Conversely, companies that lack such access have found themselves reacting to competitors' innovations and struggling to match their features and prices. We have seen the same pattern in other industries, including aerospace, automobiles, and telecommunications-network equipment. Less access to market information. Lowertier suppliers that serve a number of markets sometimes spot shifts in the economy early. OEMs that don't have close relationships with such suppliers can miss opportunities to adjust orders and lock in favorable prices for parts and materials, losing ground to more-astute competitors. This happened in the consumer electronics industry in early 2009, when a number of companies didn't realize that 114 Harvard Business Review December 2011
demand for semiconductors was about to rebound. (Read on for more about that.) Less control over sustainability. Environmentally and socially sensitive consumers are increasingly holding manufacturers accountable for the performance of their individual suppliers. (See "Don't Tweak Your Supply Chain-Rethink It End to End:' HBR October 2010.) For example, the massive contamination of the Pearl River Delta area in China by suppliers to the denim industry had the potential to damage the image of Western apparel makers, and suicides at a Chinese contract manufacturer used by Dell, Hewlett-Packard, and Apple could have tainted those companies' brands. As technology makes the supply chain much more transparent to end customers (see "The Transparent Supply Chain:' HBR October 2010), more and more companies will face the fallout from their suppliers' misbehavior. Many OEMs incorrectly believe that creating an approved vendor list (of the companies from which top-tier suppliers are supposed to buy parts and materials) will protect them from the dangers described above. But this common practice poses potential problems. First, ensuring that top-tier suppliers abide by the list is easier said than done. They will naturally look for ways to depart from the list when it's in their interest-for example, ifthey can boost their profits by getting a better price from another subcontractor or can obtain a volume discount by pooling orders from several OEM customers. What's more, having a comprehensive approved vendor list can make it easier for a top-tier supplier to build a business that competes with its OEM customer. But in our view, not having a list poses bigger risks. Left to their own devices, top-tier suppliers will likely keep most if not all of the cost savings they wring from the lower tiers. In addition, the lack of a list can make it much more difficult for an OEM to switch top-tier suppliers. The OEM would then be changing not just the one company but the entire supply chain beyond that firm. Also, when OEMs don't have an approved vendor list, the loyalty of the subcontractors typically shifts to the top-tier supplier. Even with an approved vendor list, an OEM may put itself at risk if it delegates the management of lower-tier vendors to the top-tier supplier- as a large aerospace manufacturer discovered when it stopped buying raw material directly for one of its top-tier suppliers. That supplier then developed
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Big original-equipment manufacturers have gone too far in delegating management of lower-tier vendors to top-t ier suppliers.
By doing so, OEMs have weaKene6 tt.eir control over costs, reduced their ability to stay on top of technology developments and shifts in demand, and made it more difficult to ensure that suppliers are operating in a sustainable fashion.
a close relationship with the raw-material vendor. When the aerospace company wanted to switch to a new top-tier supplier and asked a prospective candidate to submit a proposal, the candidate contacted the raw-material vendor for a price quote, and the vendor leaked word to the incumbent top· tier supplier. The result: The incumbent purposely kept its inventory of finished parts for the aerospace manufacturer so low that the manufacturer couldn't make the transition to a different supplier. So what's the answer? An OEM should have a list, be vigilant about getting suppliers to abide by it as much as possible, and directly manage relationships with select lower-tier suppliers itself.
How to Choose Best-practice companies such as Apple, Dell, HP, Honda, ffiM, LGE, and Toyota do what we just advised: They have approved vendor lists but never completely relinquish decisions about a product's components and materials to top-tier suppliers. They carefully determine which items they should directly source themselves and which they should totally delegate. Here are some guidelines: Ret ain control over items that have the most significant impact on the total cost of goods sold. Typically, 20% of the items on the list of a product's parts and materials-the bill of materials, or BOM-account for 80% of the total cost. A standard mobile phone, for example, contains two or three semiconductors and an LCD screen that represent more than SO% of its total BOM cost. Usually, even a 1% reduction in the price ofsuch items translates into
fiie remedy: OEMs should selectively reestablish direct relationships with lower-tier suppliers. These include suppliers that have the most significant impact on the total cost of goods sold, are leaders in developing innovative solutions, pose the biggest sustainability risks, and can provide early informa· tion on impending shifts in the economy.
considerable savings. If decisions about purchasing them are turned over to a first-tier supplier, it might make changes to the BOM that are not in the OEM's best interest. For instance, that supplier might try to replace a key part with one that is used in a competing OEM's product, which could lead to problems: In times of high demand, the supplier of the part might put the other OEM's needs first. Manufacturers that retained control over their BOMs, developed deep knowledge of the critical costs in their supply chains, and selectively maintained direct ties with lower-tier suppliers were able to react quickly when the Great Recession occurred. Take LGE. In 2009, its 18 major commodity teams worked with about 300 top- and lower-tier suppliers to reduce costs in a way that everyone felt was fair-and found savings of more than $6 billion. One such collaboration resulted in the revelation that the power cords on LGE's products were longer than those on competitors' offerings. Shortening the cords and standardizing their color (making them all black) saved $10 million annually. In another case, an LGE-Qualcomrn team figured out how to combine on one chip functions that had previously been performed on multiple chips, eliminating the need for several components. Had LGE merely imposed a unilateral price reduction on top- tier suppliers, as many OEMs do, it could never have realized such large savings and probably would have alienated critical top-tier suppliers. Consider a supplier's innovation potential. In emerging markets in general and in India, China, and Taiwan in particular, the rapid growth in the
Lower-tier suppliers that serve a number of markets often spot shifts in the economy early on-and can warn customers about them. December :1.011 Harvard Business Review 115
DON'T LET YOUR SUPPLY CHAIN CONTROL YOUR BUSINESS
The companies that supply important technology might not necessarily account for the highest-cost materials for a product. number of college graduates is spawning a network of creative new suppliers. But OEMs that have outsourced purchasing and cut their own purchasing staffs might not be able to spot these up-and-comers. If a particular supplier shows promise, an OEM should consider retaining control over that relationship. While this might seem obvious, a lot of companies don't do it-mainly because they are focused too much on bottom-line issues and too little on how suppliers could help them innovate. Managers should remember that the suppliers of important technology might not necessarily be those currently responsible for the highest-cost items on the BOM. A case in point is human-machine interface (HMI) technology, which makes the operation of products more intuitive. Five years ago the suppliers that delivered HMI-related software and design work did not represent a significant portion of a product's total cost. But Apple, for one, felt that HMI technologies would play a strategic role in future products, so it maintained dose relationships with companies in that domain. That was wise: HMI technologies now account for more than 40% of the iPad 2's total cost, according to iSuppli, a market research firm. How can an OEM identify inventive lower-tier suppliers? One way is to look for suppliers that have been especially successful at reducing the cost of what they produce. Cost innovators usually are also technology innovators. Another is to look for suppliers that serve multiple industries and whose vendors also serve several industries. They typically are exposed to a wide diversity ofideas.
Take into account the environmental and social impact of parts, including the processes used to produce them. We suggest that in addition to using approved vendor lists, OEMs employ an updated form of value analysis when making sourcing decisions- including which items top-tier suppliers will be allowed to purchase on their own. Traditionally, value analysis has focused on maintaining the functionality of a product while reducing its cost. The new sustainable value analysis focuses on maintaining the functionality and cost of a product while reducing its negative effects on the environment. 116 Harvard Business Review December :1.011
This kind of analysis led IKEA to learn how to design and manufacture furniture from wood with knots, which in the past had been considered waste. The move reduced the environmental impact of IKEA's furniture and significantly lowered its cost. Similarly, LGE swapped the metal it used for the back panel of its TVs for a plastic composite, thereby decreasing the environmental impact, weight, and cost ofthose products.
Stay close to vendors that can provide early information on shifts in the economy. These also tend to be firms that serve a wide range of industries, such as Taiwan Semiconductor Manufacturing Company (TSMC). In January 2009, LGE bypassed toptier supplier Qualcomm and established a direct tie with TSMC, one of the world's largest chip foundries. Concerns that Qualcomm wasn't passing on the savings from then -plunging chip prices and uncertainty about what would happen to the global economy that year prompted Tom Linton, who was then LGE's chief procurement officer, to take this step. In the first quarter LGE learned that TSMC's orders from a large nun1ber of industries were picking up, that its capacity was tightening, and that lead times were increasing. Those were all indicators that the global economy was going to rebound in 2009, sooner than many anticipated. In response, LGE rushed to negotiate deals with suppliers and was able to lock in cost savings before prices rose. Caught off guard, anumber of competitors couldn't do the same. An OEM can forge direct ties with lower-tier suppliers in a number of ways. It can build informal personal relationships with the suppliers' executives even if it doesn't have contracts with those companies. Alternatively, it can establish a formal agreement. Honda of America and Toyota, for example, negotiate contracts with select lower-tier vendors, and then order their top-tier suppliers to use those vendors exclusively and execute the terms. (See tlle exhibit "A Model Supply Chain:')
Revamping Purchasing Switching to the approach to supply chain management that we've described may require OEMs to
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Honda of America often contracts directly with key second- and third-tier vendors and then asks its top-tier suppliers to receive the contracted parts from those vendors. In essence, Honda is asking the top-tier suppliers to manage those vendors for quality and delivery, while it manages them in areas related to cost and technology. The diagram below illustrates how this works in the portion of the Honda Accord Center's supply chain that has been delegated to its console assembly company. (Note that all suppliers' names have been disguised to provide anonymity.) This approach allows Honda to be efficient but retain control over vendors that have a significant impact on cost and quality. Honda protects itself against risks with the remaining lower-tier suppliers by requiring that most of them be chosen from its approved vendor list.
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reshape their purchasing functions. Manufacturers that radically shrank their purchasing departments when they delegated sourcing may have to expand them in order to handle more relationships. They may need to supplement or replace people who have only commercial expertise with people who have analytical skills and deep knowledge of commodity markets. And companies that have organized their purchasing functions around particular commercial relationships or types of commodities might have to change their teams' focus to staying on top of technological, supply-and-demand, and cost trends in broader commodity sectors like semiconductors, oil and plastic resins, and metals.
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to managing select lower-tier vendors constitutes a major change for OEMs that have been focusing predominantly on top-tier suppliers. It can take one to two years to accomplish. In addition toreshaping the purchasing function, it involves getting the buy-in of key internal stakeholders such as the product divisions, the chief technology officer, and the chlef financial officer. (Since one aim of the approach is to consolidate commodity pur· chases further, product divisions may be asked to compromise on particular components or materials.) For all these reasons, purchasing will need the support of the company's leaders to sell the change. Since they stand to lose power, top-tier suppliers naturally will not be happy with the new arrangement and may resist it. So another challenge is maintaining the peace and persuading them that by en· abling the OEM to be more competitive and sell more products, they will profit over the long term, too. Even though implementing the new multitier approach isn't easy, OEMs have no choice but to embrace it. In an era when the pressures to continually drive down costs and stay on top of trends in technology and sustainability are growing more intense by the day, it's essential. The reality is that an OEM simply cannot delegate responsibility for keeping itself competitive to its top-tier suppliers. It must control its own destiny. 0
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University's W.P. Carey School of Business, the director of its Center for Supply Networks, and the co-editor-in·chief of the Journal of Operations Management. Tom Linton is the chief executive of Linton Advisors, a procurement and supply chain consulting firm in Newnan, Georgia. He previously served as chief procurement officer of Agere Systems, Freescale Semiconductor, and, most recently, LG Electronics. December 2011 Harvard Business Review
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The Globe
Heroes How an Indian hotel chain's organizational culture nurtured employees who were willing to risk their lives to save their guests by Rohit
Deshpande and Anjali Raina
ABOVE Employees and guests of the Taj Mumbai hotel are rescued as fire engulfs the top floor on November 26, 2008.
Harish Manwani, chairman, and Nitin Paranjpe, CEO, ofHindustan Unilever hosted a dinner at the Taj Mahal Palace hotel in Mumbai (Taj Mumbai, for short). Unilever's directors, senior executives, and their spouses were bidding farewell to Patrick Cescau, the CEO, and welcoming Paul Polman, the CEO-elect. About 35 Taj Mumbai employees, led by a 24-year-old banquet manager, Mallika Jagad, were assigned to manage the event in a second-floor banquet room. Around 9:30, as they served the main course, they heard what they thought were fireworks at a nearby wedding. In reality, these were ON NOVEMBER 26, 2008,
the first gtmshots from terrorists who were storming the Taj. The staff quickly realized something was wrong. Jagad had the doors locked and the lights turned off. She asked ev· eryone to lie down quietly under t ables and refrain from using cell phones. She insisted that husbands and wives separate to reduce the risk to families. The group stayed there all night, listening to the ter· rorists rampaging through the hotel, hurling grenades, firing automatic weapons, and tearing the place apart. The Taj staff kept calm, according to the guests, and constantly went around offering water and December
2011
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THE GLOBE
SEEK fresh recruits rather than lateral hires. HIRE from small towns and semiurban areas, not metros.
asking people if they needed anything else. Early the next morning, a fire started in the hallway outside, forcing the group to try to climb out the windows. A fire crew spotted them and, with its ladders, helped the trapped people escape quickly. The staff evacuated the guests first, and no casualties resulted. "It was my responsibility.... I may have been the youngest person in the room, but I was still doing my job:' Jagad later told one of us. the upscale Japanese restaurant Wasabi by Morimoto was busy at 9:30 PM. A warning call from a hotel operator alerted the staff that terrorists had entered the building and were heading toward the restaurant. Forty-eight-yearold Thomas Varghese, the senior waiter at Wasabi, immediately instructed his SOodd guests to crouch under tables, and he directed employees to form a human cordon around them. Four hours later, security men asked Varghese if he could get the guests out of the hotel. He decided to use a spiral staircase near the restaurant to evacuate the customers first and then the hotel staff. The 30-yearTaj veteran insisted that he would be the last man to leave, but he never did get out. The terrorists gunned hin1 down as he reached the bottom of the staircase. ELSEWHERE IN THE HOTEL ,
the Taj Mumbai's general manager, heard about the attacks, he immediately left the conference he was attending at another Taj property. He took charge at the Taj Mumbai the moment he arrived, supervising the evacuation of guests and coordinating the efforts WHEN KARAMBIR SINGH KANG,
120 Harvard Business Review December 2011
RECRUIT from high schools and second -tier business schools rather than colleges and premier B-schools. INDUCT managers who seek a single-company career and will be hands-on.
of firefighters amid the chaos. His wife and two young children were in a sixth-floor suite, where the general manager traditionally lives. Kang thought they would be safe, but when he realized that the terrorists were on the upper floors, he tried to get to his family. It was inlpossible. By midnight the sixth floor was in flames, and there was no hope of anyone's surviving. Kang led the rescue efforts until noon the next day. Only then did he call his parents to tell them that the terrorists had killed his wife and children. His father, a retired general, told him, "Son, do your duty. Do not desert your post:' Kang replied, "If it [the hotel] goes down, I will be the last man out:' hree years ago, when armed terrorists attacked a dozen locations in Mumbai- including two luxury hotels, a hospital, the railway station, a restaurant, and a Jewish center-they killed as many as 159 people, both Indians and foreigners, and gravely wounded more than 200. The assault, known as 26/n, scarred the nation's psyche by exposing the country's vulnerability to terrorism, although India is no stranger to it. The Taj Mumbai's burning domes and spires, which stayed ablaze for two days and three nights, will forever symbolize the tragic events of26/U. During the onslaught on the Taj Mumbai, 31 people died and 28 were hurt, but the hotel received only praise the day after. Its guests were overwhelmed by employees' dedication to duty, their desire to protect guests without regard to personal safety, and their quick thinking. Restaurant and banquet staff rushed people to
FOCUS more on hiring people with integrity and devotion to duty than on acquiring those with talent and skills. TRAIN workers for 18 months, not just 12.
safe locations such as kitchens and basements. Telephone operators stayed at their posts, alerting guests to lock doors and not step out. Kitchen staff formed human shields to protect guests during evacuation attempts. As many as 11 Taj Mumbai employees-a third of the hotel's casualties-laid down their lives while helping between 1,200 and 1,500 guests escape. At some level, that isn't surprising. One of the world's top hotels, the Taj Mumbai is ranked number 20 by Conde Nast Traveler in the overseas business hotel category. The hotel is known for the highest levels of quality, its ability to go many extra miles to delight customers, and its staff of highly trained employees, some of whom have worked there for decades. It is a well-oiled machine, where every employee knows his or her job, has encyclopedic knowledge about regular guests, and is comfortable taking orders. Even so, the Taj Mumbai's employees gave customer service a whole new meaning during the terrorist strike. What created that extreme customer-centric culture of employee after employee staying back to rescue guests when they could have saved themselves? What can other organizations do to emulate that level of service, both in times of crisis and in periods of normalcy? Can companies scale up and perpetuate extreme customer centricity? Our studies show that the Taj employees' actions weren't prescribed in manuals; no official policies or procedures existed for an event such as 26/ll. Some contextual factors could have had a bearing, such as India's ancient culture of hospitality; the values of the House of Tata, which owns
HBR.ORG
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the Taj Group; and the Taj Mumbai's historical roots in the patriotic movement for a free India. The story, probably apocryphal, goes that in the 1890s, when security men denied J.N. Tata entry into the Royal Navy Yacht Club, point ing to a board that apparently said "No Entry for Indians and Dogs:' he vowed to set up a hotel the likes of which the British had never seen. The Taj opened its doors in 1903. Still, something unique happened on 26/11. We believe that the unusual hiring, training, and incentive systems of the Taj Group-which operates 108 hotels in 12 countries-have combined to create an organizational culture in which employees are willing to do almost anything for guests. This extraordinary customer centricity h elped, in a moment of crisis, to turn its employees into a band of ordinary heroes. To be sure, no single factor can explain the employees' valor. Designing an organization for extreme customer centricity requires several dimensions, the most critical of which we describe in this article.
A Values-Driven Recruitment System The Taj Group's three-pronged recruiting system helps to identify people it can train to be customer-centric. Unlike other companies that recruit mainly from India's metropolitan areas, the chain hires most of its frontline staff from smaller cit-
ENSURE t hat recognition
training.
comes from immediate supervisors, not top management.
ies and towns such as Pune (not Mumbai); Chandigarh and Dehradun (not Delhi); Trichirappalli and Coimbatore (not Chennai); Mysore and Manipal (not Bangalore); and Haldia (not Calcutta). According to senior executives, the rationale is neither the larger size of the labor pool outside the big cities nor the desire to reduce salary costs, although both may be additional benefits. The Taj Group prefers to go into the hinterland because that's where traditional Indian values-such as respect for elders and teachers, humility, consideration of others, discipline, and honesty- still hold sway. In the cities, by contrast, youngsters are increasingly driven by money, are happy to cut comers, and are unlikely to be loyal to the company or empathetic with customers. The Taj Group believes in hiring young people, often straight out of high school. Its recruitment teams start out in small towns and serniurban areas by identifying schools that, in the local people's opinion, have good teaching standards. They call on the schools' headmasters to help them choose prospective candidates. Contrary to popular perception, the Taj Group doesn't scout for the best English speakers or math whizzes; it will even recruit would-be dropouts. Its recruiters look for three character traits: respect for elders (how does he treat his teachers?); cheerfulness (does she perceive life positively even in adversity?);
and neediness (how badly does his family need the income from a job?). The chosen few are sent to the nearest of six residential Taj Group skill-certification centers, located in the metros. The trainees learn and earn for the next 18 months, staying in no-rent company dormitories, eating free food, and receiving an annual stipend of about s,ooo rupees a month (roughly $100) in the first year, which rises to 7,000 rupees a month ($142) in the second year. Trainees remit most of their stipends to their families, because the Taj Group pays their living costs. As a result, most work hard and display good values despite the temptations of the big city, and they want to build careers with the Taj Group. The company offers traineeships to those who exhibit potential and haven't made any egregious errors or dropped out. One level up, the Taj Group recruits supervisors and junior managers from approximately half of the more than 100 hotelmanagement and catering institutes in India. It cultivates relationships with about 30 through a campus-connect program under which the Taj Group trains faculty and facilitates student visits. It maintains about 10 permanent relationships while other institutes rotate in and out of the program. Although the Taj Group administers a battery oftests to gauge candidates' domain knowledge and to develop psychometric profiles, recruiters admit that they primarily
The Taj Group prefers to recruit employees from the hinterland because that's where traditional Indian values still hold sway. December 2011 Harvard Business Review 121
THE GLOBE
assess the prospects' sense of values and desire to contribute. What the Taj Group looks for in managers is integrity, along with the ability to work consistently and conscientiously, to aiways put guests first, to respond beyond the call of duty, and to work well under pressure. For the company's topmost echelons, the Taj Group signs up so or so management trainees every year from India's second- and third -tier B-schools such as Infinity Business School, in Delhi, or Symbiosis Institute, in Pune, usually for functions such as marketing or sales. It doesn't recruit from the premier institutions, as the Taj Group has found that MBA graduates from lower-tier B-schools want to build careers with a single company, tend to fit in better with a customer-centric culture, and aren't driven solely by money. A hotelier must want, above all else, to make other people happy, and the Taj Group keeps that top of mind in its recruitment processes.
Training Customer Ambassadors The Taj Group has a long history of training and mentoring, which helps to sustain its customer centricity. The practice began in the 1960s, when CEO Ajit Kerkar- who personally interviewed every recruit, including cooks, bellhops, and wait staff, before employing them-mentored generations of employees. The effort has become more process-driven over time. Most hotel chains train frontline employees for U months, on average, but the Taj Group insists on an 18-month program. Managers, too, go through 18 months of classroom and on-the-job operations training. For instance, trainee managers will spend a fortnight focusing on service in the Taj Group's training restaurant and the next 15 days working hands-on in a hotel restaurant. The Taj Group's experience and research has shown that employees make 70% to 80% oftheir contacts with guests in an unsupervised environment. Training protocols therefore assume, first, that 122 Harvard Business Review December 2011
employees will usually have to deal with guests without supervision- that is, employees must know what to do and how to do it, whatever the circumstances, without needing to turn to a supervisor. One tool the company uses is a twohour weekly debriefing session with every trainee, who must answer two questions: What did you learn this week? What did you see this week? The process forces trainee managers to absorb essential concepts in the classroom, try out newfound skills in live settings, and learn to negotiate the differences between them. This helps managers develop the ability to sense and respond on the fly. The Taj Group also estimates that a 24hour stay in a hotel results in between 40 and 45 guest-employee interactions, which it labels "moments of truth." This leads to the second key assumption underlying its programs: It must train employees to manage those interactions so that each one creates a favorable impression on the guest. To ensure that result, the company imparts three kinds of skills: technical skills, so that employees master their jobs (for instance, wait staff must know foods, wines, how to serve, and so on); grooming, personality,
at moments of truth. Trainees are assured that the company's leadership, right up to the CEO, will support any employee decision that puts guests front and center and that shows that employees did everything possible to delight them. According to senior executives, this shift in perspective changes the way employees respond to situations. Moreover, it alters the extent to which they act- and believe they can act- in order to please guests. A senior executive told us that when an irate guest swore he would never stay at the Taj Mumbai again because the air conditioner hadn't worked all night, a trainee manager offered him breakfast on the house and provided complimentary transportation to the airport. She also ensured that someone from the next Taj property at which he was booked picked him up from the airport. Did the trainee spend a lot of the company's money on a single guest? Yes. Did she have to ask for permission or justify her actions? No. In the Taj Group's unwritten rule book, all that mattered was that the employee did her best to mollify an angry guest so that he would return to the Taj. The Taj Group's training programs not only motivate employees, but they also
Trainees are assured that the company's leadership, right up to the CEO, will support any employee decision that puts guests front and center. and language skills, which are hygiene fac- create a favorable organizational culture. tors; and customer-handling skills, so that H.N. Shrinivas, the senior vice president of employees learn to listen to guests, under- human resources for the Taj Group, notes: stand their needs, and customize service or "If you empower employees to take deciimprovise to meet those needs. sions as agents of the customer, it energizes In a counterintuitive twist, the Taj them and makes them feel in command." Group insists that employees must act as That's in part why the Taj Group has won the customer's, not the company's, ambas- Gallup's Great Workplace Award in India for sadors. Employees obviously represent the two years in a row. chain, but that logic could become counterIncumbent managers conduct all the productive ifthey start watching out for the training in the Taj Group, which uses few hotel's interests, not the guests', especially consultants. This allows the chain to impart
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not just technical skills but also the tacit knowledge, values, and elements of organizational culture that differentiate it from the competition. Every hotel has a training manager to coordinate the process, and given that Taj properties impart training only in the areas in which they excel, they vie with one another to become training grounds. Like all the other companies in the House ofTata, the Taj Group uses the Tata Leadership Practices framework, which lays out three sets ofleadership competencies that managers must develop: leadership of results, business, and people. Every year 150 to 200 managers attend training sessions designed to address those competencies. The company thereafter tailors plans on the basis of individuals' strengths and weaknesses, and it hires an external coach to support each manager on his or her leadership journey. The Taj Group expects managers to lead by example. For instance, after a day of work, the general manager of every hotel is expected to be in the lobby in the evenings, to welcome guests. That might seem old-fashioned, but that's theTaj tradition of hospitality.
A Recognition-asReward System Underpinning the Taj Group's rewards system is the notion that happy employees lead to happy customers. One way of ensuring that outcome, the organization believes, is to show that it values the efforts of both frontline and heart-of-the house employees by thanking them personally. These expressions of gratitude, senior executives find, must come from immediate supervisors, who are central in determining how employees feel about the company. In addition, the timing of the recognition is usually more important than the reward itself. Using these ideas, in 2001 the Taj Group created a Special Thanks and Recognition System (STARS) that links customer delight to employee rewards. Employees accumulate points throughout the year in three domains: compliments from guests, com-
Many guests were panic-stricken, but the Taj staff members remained calm and optimistic. pliments from colleagues, and their own suggestions. Crucially, at the end of each day, a STARS committee comprising each hotel's general manager, HR manager, training manager, and the concerned department head review all the nominations and suggestions. The members of this group decide whether the compliments are evidence of exceptional performance and if the employee's suggestions are good. Then they post their comments on the company's intranet. If the committee doesn't make a decision within 48 hours, the employee gets the points by default. By accumulating points, Taj Group employees aspire to reach one of five performance levels: the managing director's dub; the COO's dub; and the platinum, gold, and silver levels. Departments honor workers who reach those last three levels with gift vouchers, STARS lapel pins, and STARS shields and trophies, whereas the hotel bestows the COO's club awards. At an annual organization-wide celebration called the Taj Business Excellence Awards ceremony, employees who have made the managing director's club get crystal trophies, gift vouchers, and certificates. According to independent experts, the Taj Group's service standards and customerretention rates rose after it launched the STARS program, because employees felt that their contributions were valued. In fact, STARS won the Hermes Award in 2002 for the best human resource innovation in the global hospitality industry. THE TAJ GROUP'S hiring, training, and rec-
ognition systems have together created
an extraordinary service culture, but you may still wonder if the response of the Taj Mumbai's employees to 26/11 was unique. Perhaps. Perhaps not. At about 9:30 AM on December 26, 2004, a tsunami rippled across the Indian Ocean, wreaking havoc on coastal populations from Indonesia to India, killing about 185,000 people. Among those affected was the island nation of the Maldives, where tidal waves devastated several resort hotels, including two belonging to the Taj Group: the Taj Exotica and the Taj Coral Reef. As soon as the giant waves struck, guests say, Taj Group employees rushed to every room and escorted them to high ground. Women and children were sheltered in the island's only two-story building. Many guests were panic-stricken, believing that more waves could follow, but staff members remained calm and optimistic. No more waves arrived, but the first one had inundated kitchens and storerooms. A Taj Group tean1, led by the head chef, immediately set about salvaging food supplies, carrying cooking equipment to high ground, and preparing a hot meal. Housekeeping staff retrieved furniture from the lagoon, pumped water out of a restaurant, and restored a semblance of normalcy. Despite the trying circumstances, lunch was served by 1:00PM. The two Taj hotels continued to improvise for two more days until help arrived from India, and then they evacuated all the guests to Chennai in an aircraft that the Taj Group had chartered. There were no casualties and no panic, according to guests, some of whom were so thankful that they later volunteered to help rebuild the island nation. These Taj Group employees behaved like ordinary heroes, just as their colleagues at the Taj Mumbai would four years later. That, it appears, is indeed the Taj Way. 0 HBR Reprint R1112J
r.. Rohit Deshpande is the Sebastian s. Kresge
a.J Professor of Marketing and the faculty
chair of the Global Colloquium for ParticipantCentered Learning at Harvard Business School. Anjali Raina is the executive director of the HBS India Research Center in Mumbai. December 2011 Harvard Business Review
123
Taking Measure of Talent As business models change, the pressure to leverage the true value of human capital and better understand talent management grows. IN TODAV'S KNOWLEDGE ECONOMY, an organization's workforce is its most important asset as well as one of its greatest investments. Understanding the ski ll. knowledge, and experience of the workforce is increasmgly important as companies push to improve top· and bottom-line performance while aggressively managing costs 1n a highly competitive, complex. and global environment.
Yet in many companies. there has been a lack of understanding about and visibility into how human cap1tal is managed -a shortage of analytical Insights about where investments are made. what form the investments take. the1r 1mpact. and how best to shift resources and practices. And without clear metrics and a deep view into data on the workforce. organizations have not had clear reporting on their key assets - and have not had access to Insights to create strategies to drive better business performance. There are clear associations between a company's financial performance and strong talent management practices when they are targeted to real business needs. A global study by McKinsey & Company found compan1es that scored highest m global talent management pract1ces earned significantly higher profit per employee - almost 30 percent - than those companies that scored lowest on the human capital measures.
This approach ro workforce management can optimize both efficiency and strategic 1mpact of human cap1tal decisions. According to a recent white paper. "Taking Measure of Talent" by Harvard Business Review Analytic Services, companies are now bringing together the1r HR data. performance management data. corporate financial statements. employee surveys, and other sources into a unified view. and deploying analytic methods so that executives can get answers to vital questions in key areas such as: • What are key levers in engaging and retaining the talent that are critical for the growth of the busmess units and the company? Where should key investments be made? How are dollars spent in development and training aligned with overall strategy? • How can the organization understand the skills and capabilities in the current talent pipeline. forecast workforce needs. predict gaps, and understand t he viability of outsourcing as new strategies emerge? • Where can companies quickly identify and deploy the right employees as growth opportunities arise around the globe? How can succession planning be better aligned with strategic goals? The trend to deploy business analytics as a key part of human capital management is increasing. In a recent talent survey by Deloitte. about 39 percent of the
companies said they had pilot programs deploying HR and talent technology. Those companies that have put implementations in place. however, are already reporting impact in areas such as reducmg turnover. Increasing engagement. designmg more effective development plans. and helping business leaders in making strategic decisions. At Intuit. for instance. workforce intelligence has been key in identifying the most important drivers 1n engagement and retention - thus driving down costs of turnover. "W1th leaders focused on accelerating business growth through talent management. we can answer their quest1ons about organizational makeup, key jobs. and how to deliver the nght experiences for employees to be engaged and productive:· says Jennifer Hall. v1ce president of HR at lntu1t. "As an HR leader. 1 also can provide quantitative insights to make sure we consider long-term talent strateg1es as we solve short-term operational needs." Such strateg1c deployments of workforce analytics are clearly movmg the human resources leader from the role of manager of transactional data to a key business partner. As the Harvard Business Review Analytic Services research pomts out. HR leaders and other senior leaders are just beginning to understand how they can exploit all the benefits of the technology, wh1ch range from mcreasing employer ag1lity 1n workforce deployment. to shifting reward des1gns. to developing a personalized delivery system for career management and development programs. For a copy of the white paper "Taking Measure of Talent," visit: http://s.hbr.orgjtaking-measure-ot-talent
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MANAGING YOURSELF
Get Ready for Your Next Assignment Three steps for making the most of an internal move
by Katie Smith Milway, Ann Goggins Gregory, Jenny Davis-Peccoud, and Kathleen Yazbak hen Bruce Wilkinson, an executive in World Vision International's Zambia operation, learned that he was going to be promoted to regional director for southern Africa, he inlillediately started reading performance reviews of key staff members and talking to his peers, other national officers in the $2.6 billion organization. In doing so he uncovered
a serious weakness: A host of critical positions in the region had gone unfilled for as long as 16 months, leading to lost contracts and deterioration in the programs WVI undertakes to empower poor communities. Human resources needed to step up its game. But Willinson also saw that his appointment offered an opportunity-to both fix
broken functions, such as HR, and create new ones, such as quality assurance, that could improve his region's performance. He developed a plan of action that would involve laying off the top two tiers of managers- about 20 people- and asking them to reapply for their jobs. "You want the elements of your vision to take shape before you start:• Wilkinson explains. "In my case, I was redefining the role oft he regional office as a true service center, and managers got the message:• Most executives know what their next project or promotion will be well before the day it starts, but too few take advantage of their insider status and the time beforehand to prepare well. That is an opportunity lost. Your next assignment is your next chance to create results-for your organization and for your career. Asmart invest-
-December 2011 Harvard Business Review 125
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ment of time and effort up front can make the difference between simply getting by and truly excelling, between a dead-end move and a stepping-stone to bigger and better things. A key factor in your transition will be knowledge-not only substantive infor· mation about the project or field, but an understanding of how others inside and outside the organization have tackled simi· Jar assignments, what challenges and op· portunities lie ahead, and what resources are available and how you can mobilize them to overcome obstacles. Combining insights from our ongoing study of how knowledge is best captured and shared, our experience with consulting and execu· tive search clients, and interviews with
Time and effort up front can make the difference between getting by and truly excelling. successful leaders across different types of enterprises, this article identifies three practical steps for building your know I· edge capital to excel in new roles throughout your career. We call them phase zero, teaming tour, and affinity groups. Wilkinson used all three to implement his plan, reinterviewing staff members and translating his network offormer peersthe national directors-into a source of feedback. This enabled him to upgrade the HR leadership, add a director of quality, and rapidly fill open positions. Let's look at each step in detail. Phase Zero This is a chance to use your insider advantage to become familiar with a new unit's people and performance and to discern the opportunities and challenges of your assignment-before it begins or is even announced. In the weeks leading up to the assignment, carve out and hold sacred at least 30 minutes a day to prepare. You may find ways to increase effectiveness, reduce 126 Harvard Business Review December 2011
identify the people who will help you get there
costs, or even reassess a business model. In phase zero you can identify problems Failing to identify the true ques~ ..· · ' tions, problems, and roadblocks and develop a hypothesis for how to solve to be addressed, which may be them - as Wilkinson did in southern Africa. And your solutions can be tested and ad· quite different from what you assumed justed as you move into your new role. Among the likeliest places to look for objective data in this step are company iJC· :1 Dominating conversations as you > _f introduce yourself and your plan; documents-such as performance reviews if you speak for more than 30% and reports on services and operationsof a meeting, you are hearing but and feedback from customers and suppliers. For qualitative input, tum to not listening colleagues who have supervised the role, interacted with it, or previously filled a ( - ~· Letting perspectives you've heard ,, .. · before you start overly affect similar role. Push to understand the story . yourv1ews behind the story- for example, ask "What challenges might I encounter that aren't apparent from the description of the ,,...:5· .. :'1 Relying on old power dynamics, ' . ., which may have shifted with the assignment?" Finding these people and new role getting the information you need, without fanfare, will help you understand expecta· tions and possibilities, think through a Focu~ing too na~row~ rather 1 ·, . ~ than mcorporatmg d1verse plan of action, and prepare personally for the transition. perspectives Consider the experience ofTodd Hod· dick, who in early 2011 became vice presi· sales force while maintaining ambitious dent of the North American entertainment division of Barco, a global visual solutions revenue targets. His next stop was Barco's worldwide company based in Belgium, in January 2011. Having joined the firm in2008 as head ofsales, to whom he would be reportvice president of digital cinema in North ing. Roddick had one pressing query: America, Roddick had developed a strong "What constitutes success, and what do you expect me to accomplish that others reputation for building a profitable single· haven't been able to?" The answer: "Help business unit. In 2010 he was approached for the new position, which would add Barco to be the number one projection rental and staging, digital signage, home company in the world:' That dearly meant more travel and some long hours up front. cinema, image processing, and corporate So Roddick spent time preparing his family audiovisuals to his plate. It would be a big leap. "I wanted to for the change and getting their support for understand the challenges of the role his additional responsibilities. I was about to assume compared with Learning Tour what I was already handling:• Roddick Phase zero involves solitary study and told us. He began gathering information from a colleague then in the role who under-the-radar conversations. The learnwould be moving to another position, ing tour involves systematic dialogue with as yet unannounced. "He and I were in the people who can help you do your new similar strategic meetings for the company, job, including direct reports, suppliers, and so I was able to ask questions about the customers. You'll be testing your definitions of problems and your hypotheses for business without seeming odd," Roddick solving them, identifying leverage points, said. He learned, for example, that the division had significantly streamlined the building relationships, and tapping into
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diverse perspectives to help you understand how to energize support and convert opposition. Hoddick's learning tour started with a big meeting in Austin, Texas, where be asked key salespeople what they needed
Be mindful of your reputation in the organization. Approach your team members with an open mind. to be successful. The answer was less paperwork and a specific back-office resource: a jack-of-all-trades named Carlos who had been laid off during the recent retrenchment. Hoddick told them that he
would fix both problems if the reduced sales force would commit to hitting its numbers. Six months later the group was ahead of plan. You should use your change of role as an excuse to meet with all the important stakeholders-even those you already know. But remember that your "first 90 days" will differ from those of an external hire, because both your reputation and your biases are established. We recommend two tactics for making the most of this step: Be mindful of your reputation in the organization, reinforcing your positive attributes and acknowledging where you will need help. And approach your team members and their ideas with an open mind. Ask inclusive, open-ended questions, such as "If you could make one change in this area tomorrow, what would it be?"
Gary Chapman took a learning tour in early 2011, when he was promoted from vice president of field operations to executive vice president of the national network at Communities in Schools- a $225 million nonprofit singled out by the White House as one of the most effective youth mentoring organizations in the nation. "I had two sides to my new team:' Chapman recalls. "Field operations, where I had worked before, and research and evaluation [R&E, which audits field operations]. I had a lot of work to do to understand the latter:• Right away he met with staff members to learn about their responsibilities and what motivated them. "A number of people told me there was a disconnect;• he says. Audit teams worried that field teams weren't learning from their research, and field teams thought they weren't getting enough feedback and felt too busy to
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elicit it themselves. Although Chapman came from the field, he listened to both sides as an honest broker. He decided to introduce weekly meetings between field and R&E directors in an effort to promote collaboration. He also reached out to the four other members of CIS's executive team and realized that he could work more closely with communications, government relations, and the development team on advocacy and fundraising. "These teams needed more information on certain groups of students so that they could make our case on the Hill, with the right data at the right time, and plug us into education dollars we hadn't accessed in the past:' Chapman says. He encouraged his field and audit staffs to engage with those colleagues as well-in effect taking his unit on a learning tour of the organization and giving everyone a chance to participate in change with an open mind.
the composition of your internal network. Rather than asking yomself"Who can help me get this done?" as you did in your learning tour, continually ask "Whose perspectives will keep me on the right footing to advance my organization's mission, and how can I connect with those people?" Your answers may lead you to other unit heads, former leaders, or even the board. That's exactly the question Austin Rothbard asked when he moved from vice president ofstrategy and business development for bowling and billiards at the leisure equipment company Brunswick to president of its Cabo Yachts division, which makes premium boats for sport fishing. His answer-after pre-assignment preparation that included fishing trips, dealer visits, and a switch from business attire to khakis and boat shoes-was to become familiar with dealer networks
The affinity group you're looking for may not exist. If it doesn't, create it-either formally or informally.
Affinity Groups Chapman's initial check-in with other leaders on the executive team led to ongoing relationships that made him part of an internal network of influencers he hadn't been able to reach in his prior position. Finding and staying in touch with colleagues who can sharpen your thinking and create ties to the two founders of the and cormect your role to your organizabusiness, who had sold it to Brunswick and were three weeks from the end of their tion's broader mission is essential not only to getting smart but also to staying smart in contractual obligations. Staying in touch with those two men was critical, because your new job. Many managers tap existing peer networks to share experiences, or get dealers had great respect for them and beassigned to a working group on a specific cause they continued to be innovative and bold. "As long as I could keep the foundinitiative. But too few intentionally construct and hone support networks that will ers involved:' Rothbard says, "especially help them garner the skills and fresh ideas since I was limited in what I understood, we were able to build the best boat in the they need to succeed. Two mind-sets can help you get the business." expertise and perspectives necessary for Rothbard also connected regularly your new role: Be open to the idea that the with the chief financial officer and the vice affinity group you're looking for may not president for HR of Cabo's sister company, exist-and if it doesn't, then create it, eiHatteras. They gave him advice about ther formaUy or informally. And recognize financial and personnel decisions at Cabo. "They were extremely willing to help me that the right affinity group at the start of an assignment may not be the right one understand the business and make deciover time; be willing to make changes to sions about handling challenging employ128
Harvard Business Review December 2011
ees," he says. "They helped me grow as a leader." In a very different enterprise-Maine Medical Center, in Portland-Peter Bates, newly promoted to chief medical officer, built an affinity group ofsenior administrators, including the CEO and the board, and tapped their wisdom for a project that rep· resented a huge bet for MMC: developing a medical school to strengthen the hospital's talent pipeline. "Thad to understand the board's needs and interests and ground the vision in a progression ofstrategies that people could agree to:' Bates told us. Ultimately, the CEO and key directors became passionate advocates, and the vision resulted in a partnership with the Tufts University School of Medicine, in Boston, to build a branch campus at MMC. Bates also helped create a network of community hospitals, which provide innovative educational experiences for medical students, including up to nine months in a rural facility during the third year. Throughout, he has continued to see patients, which keeps him connected to the front line. "1 still practice one day a week;' Bates said. "Others see that I'm not just a guy in a suit. I walk through the hospital and make myself accessible." Phase zero, learning tours, and affinity groups can help any manager prepare for the next promotion and keep learning and growing in the job. Sometimes the steps neatly follow this sequence, and sometimes they don't. An existing affinity group may inform yom approach to phase zero, for example, or an inflection point in the job may become a good excuse to take are· newed learning tour. Whatever their order, these steps are critical for role changers who want to have greater impact in their organizations-and greater success in their careers. 0 HBR Reprint R1112K .
Katie Smith Milway is a partner with
The Bridgespan Group and the head of its knowledge unit. Ann Goggins Gregory is Bridgespan's senior director of knowledge. Jenny Davis- Pec:c:oud is the senior director of Bain & Company's global organization practice. Kathleen Yazbak is a Bridgespan partner in executive search.
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Jeffrey Pteffer is the Thomas D. Dee 11 Professor of organizational Behavior at Stanford University's Graduate School of Business.
1n1s by Jeffrey Pfeffer
Marshall Goldsmith is a leading executive educator and coach. His 30 books include What Got You Here Won't Get You There and Mojo.
Richard c. Kessler is the president and CEO of the Kessler Collection, a group of 10 boutique hotels in the southern and western U.S. He is a former president and chairman of Days Inns of America.
..~. ~
HBR's fictionalized case studies present 1....!"-J dilemmas faced by leaders in real companies and offer solutions from experts. This one is based on research by Jeffrey Pfeffer.
dam Baker had been bothered all day by the blunt message his boss and mentor, Merwyn Straus, had de· livered to him on the phone that morning: Adam was not the right guy to lead their company's latest venture. "That door isn't open to you" was how Merwyn had put it. It was one of those comments that sting a bit at first but inflict much more pain as time passes. So now, in considerable distress, Adam was driving from downtown Washington to the suburban Maryland headquarters of Straus Event Specialists (SES), where he served, for all intents and purposes, as COO. He wanted Merwyn, his CEO, to explain in person why this door that Adam cared so much about was closed. At age 32, Adam considered himself to be at the beginning of his career, still emerging from the cocoon of his inlpressive education. When friends described him, they invariably mentioned that he had graduated at the top of his prestigious North Carolina MBA program and then became the youngest person ever to serve on the business school's board of trustees. To hear them talk, you'd think he was the number one golden boy at a school that
produced a lot of golden boys and girls. But he wasn't a golden boy- not really. And he knew that was part of his appeal. Adam Baker was, like his name, barely noticeable. He was dark-haired, soft· spoken, and on the short side, with a thick neck. He looked like a third-stringer on a high school football team -which he had been. Yet everyone knew him and every· one loved him. He'd achieved this status by being not the loudest or funniest guy in the room but the most approachable, someone who could instantly put you at ease. At parties- he attended and threw a lot of them-people flocked to him. This was especially true on formal occasions, which the true golden boys hated almost as much as they hated being sober. They would follow him around the wide verandas and brick patios as though he provided shelter. All the while he would chatter-not saying anything very scintillating but always being truthful and down-to-earth. He knew that he fascinated peoplethat strangers said behind his back, "That little guy was picked for the school's board? That little guy was the CEO of a company in his twenties?" When they got to know December 2011 Harvard Business Review
131
EXPERIENCE
him, they saw that he was the complete for the position. He knew, because he Sarah?-had pointed out how much Adam package: smart, loyal, present. made it his business to know, that the enjoyed delighting his friends by staging imaginative parties. The idea clicked, and partners were split on his candidacy. His "Present" was an important concept Adam started to focus on a career in event fellow board member favored it; the other, for him. He would show up, do the work, although he apparently respected Adam's solve problems, fulfill expectations- just planning. The sector intrigued him in part competence, was inclined to oppose him as he'd done growing up in a small house because it didn't attract the best and the outside Charlotte, with his three younger because of his youth. Merwyn was the brightest. Amazingly, his first recruitment siblings, their quiet, imperturbable mother, swing vote. interview resulted in a CEO job. At age 27 and their unfathomable father, whose "Ilove hotels;' Adam said. "I'm ready to he was running Tallyryrnple, a Raleigh· presence created as much tension as his lead. I can do this." based outfit that staged high-end parties for a long list of wealthy clients. But it was "It's not about loving hotels;' Merwyn sudden absences. said. "It's not about love or passion or a horrible experience. Within a year the It was therefore natural for Adam to respond to Merwyn's painful remark by dedication, all of which you have in spades. company was facing bankruptcy. jumping into his car and racing to the main The hotel business is tricky, and it's not your area of expertise?' offices ofSES, one of the world's biggest event-planning businesses. He wanted to "You know how quickly 1learn," Adam talk to his boss in person. said. He found Merwyn in the design Merwyn paused. "True," he said. "There's nothing I give you to do that you department, asking typically probing don't master in 24 hours. But the hotel questions about a model of a convention· floor setup. His warm smile when Adam business isn't just tricky. It's brutal." arrived seemed to indicate that nothing "And I'm not brutal?" "I wasn't prepared for that kind of had changed between them. Had Adam "Thankfully, no. You're not. That's why competition," Adam said. Tallyrymple had the door is closed. I'm sorry:• become embroiled in a turf war with an misheard the comment about "that door"? Once inside the CEO suite, Merwyn aggressive company that didn't distinguish between ethical and unethical behavior: asked Adam where he'd been that morning Just Let It Go It used cash payments and threats of when they'd talked. Adam said he'd been "You know why he said that, don't you?" downtown, looking at one of the boutique exclusion to secure deals with food-service Adam's friend Kaleeb asked. They were properties that would be part of the hotel standing at the railing ofKaleeb's secondproviders and talent agencies. Adam went into overdrive to expand his network of chain SES was investing in-the new ven· floor deck in Georgetown. The sun was ture Adam hoped to run. The company was down and the evening was chilly, but potential referrers and clients, but time to be a 33% owner with two other investors. Adan1 felt he needed to be outside. His and again he found that he'd been beaten Merwyn nodded. He was thin and spry, sweater was keeping him warm, as was to the ptmch. Merwyn Straus had eventu · with wiry white hair. "I know you really the mixture of Jim Beam and Coke that he ally bought Tallyrymple at a bargain price care about this venture:' he said. was drinking. Kaleeb's wife, Sarah, was in· and absorbed it, hiring a chastened Adam "Very much so:' Adam said. "That's why in the process. side-on the phone, as always. Right after "Merwyn saved you;• Kaleeb said. I'm here:' the wedding, she'd taken a job with a real "That's why he's so protective. He doesn't The new business was to be built estate powerhouse. Kaleeb had followed around an existing string of five urban a very different career route, becoming a want to see anything like that happen to fund raiser for the Newseum. you again:' hotels in Washington, Baltimore, and "Overly protective, maybe." Philadelphia. Adam had been the first to "My age;• Adam said. "I think you should let it go;• Kaleeb notice that the chain was up for sale-at a "And-" fairly reasonable price, given its potential said. "You've got your whole career ahead "And Tallyrymple;• Adam said with a value. Although SES had never been in the sigh. "That's going to haunt me forever." of you. You love working for Merwyn, and hotel business, he'd persuaded Merwyn "Everybody has failures:• he thinks you walk on water. You've got a that the acquisition would be a good fit and great gig at SES. Merwyn is central to your After business school Adam had fol· then rounded up the other investors, one network now-don't ruin that relationship. lowed the herd into investment banking Remember what we always used to talk of whom was a fellow B·school trustee. but immediately becan1e bored by it. He about back in B·school? Keep growing the From the beginning, Adam had hinted knew he should look for a job in a field that he would like to lead the new chain. he could relate to, but he couldn't figure network, keep growing the network, keep Then he had begun actively lobbying growing the network:' out what that might be. Kaleeb-or was it
"Merwyn is central to your network now," Kaleeb said. "Don't ruin that relationship."
132 Harvard Business Review December 2011
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Inside, Sarah slammed down the phone and cursed, but by the time she'd come out to the deck, she was all smiles. "I do love a good fight:' she said, referring to whatever work-related drama she had been dealing with. "Now, what were y'all talking about?"
Call in Your Marker "Merwyn said what?" Sarah asked when Adam told her the story. "That is the most condescending, infantilizing thing I ever heard!' She managed to say this with a lilt in her voice and a sparkle in her eye. Adan1 was at a loss for words. How could he begin to explain the depth of his respect and admiration for Merwyn, who was teaching him everything there was to know about the event-planning businessand who constantly sang Adam's praises and promoted his career? Adam looked at Kaleeb, who signaled with a nod that he understood completely: Sarah just didn't get it about mentors and proteges. "I remember when you introduced me to him:' Sarah said, "and he told me all about how you're like a son to him, blah blah blah!' "Sarah, please:' Kaleeb said. "Talk about something else. I'm getting Adam another drink!' "There's nothing wrong with being treated like a son:' Adam said. "No, of course not-as long as he recognizes when you're all grown up." She put a hand on his arm. "Adam, we love you. We want the best for you. But you have to be more aggressive. Be clear about who you are. About what you want. Merwyn may be condescending, but he's a good guy. That's why you like him. He's fair and square. He's a fair dealer. He may be the fairest man in the land!" That radiant smile again. "You can use his fairness to your advantage!' Adam gently separated himself from her. "I don't want to take advantage of him. I don't want to take advantage of anyone:' "Listen to me:' she said. "Who discovered that sorry old chain of roach hotels and saw what it was really worth-you or him? Who did all the due diligence about
the health violations and the labor issues and the back taxes-you or him?" "OK, OK." "Who first said that SES should buy the chain? Who wouldn't take no for an answer when Merwyn hemmed and hawed? Who went out and found parmers to share the risk? Who did the deal, nailed it down, made it work? You!" "So what?" Adam asked impatiently. "He owes you-that's what!' There was a flash of anger in her eyes. "In my world, when you owe, you pay. And my world is no different from Merwyn's. He knows he owes you:' "I'm not going to pressure him:' Adam said. "Why not? He's expecting it. Believe me. Adam, you can't keep letting the game come to you :• "He doesn't think I'm ready to be the CEO:' Adam said. "I'm too young. I've got this past-" "You make it sound like you served time, for cripes' sake. You did nothing wrong. You got manhandled by trailer trash. A gentleman rises above such things!' Kaleeb had returned; he handed Adam a fresh drink and rolled his eyes at his wife. She threw her arms up in mock capitulation. "OK, yes, Merwyn will be annoyed if you call in your marker. Ifthat's all.that matters to you, don't ask him. But keep this in mind: If he's such an impeccably upright guy, a true straight shooter, and you do ask him-if you really make the case that you built this deal yourself, so be owes you big time-he'll say yes." She took the drink from Adam, sipped it, and put it back into his hand. "Just think on that:' she said.
Don't Say It The following day seemed strangely hushed to Adam, as though someone had turned down the master volume. Everything looked staged-the window washers on the scaffolding in front of the bank, the man sitting stiffly on the park bench. It was the same way at headquarters. No one seemed to be re.ally doing any work-
everybody appeared to be pantomiming. Adam exchanged a quick glance with Merwyn's assistant and was wordlessly shown into the CEO suite. Now everything was real again. The volume can1e back up. Merwyn looked at Adam warily. "You've got something you want to say?" "I just wanted to review that deal with you-the hotel deal. How it came about!' Merwyn closed his eyes. "I know where you're going with this:• he said. "I'm not surprised!' He continued slowly and deliberately. "I'm fully aware that if it weren't for you, the new venture wouldn't exist. And I think we're going to make a lot of money on those hotels. So in a sense I'm indebted to you-perhaps more deeply indebted than cash could ever compensate you for. You might even say that out of gratitude I should grant you any wish you have-such as making you CEO of the new company!' Merwyn looked squarely at Adam. "Yes, I will grant you any wish. But let me just say what I know for a fact: You are a perfect number two-brilliant, farsighted, empathetic. But that doesn't mean the CEO job is a good fit for you. The more I see you in action and think about your history, the more I'm convinced iliat door shouldn't be open to you!' He added, "So that's why I have one wish. Do you want to know what it is?" Adam nodded, feeling numb. "My wish right now is that you will not ask me to grant you the wish you're thinkingof:• There was a long silence as they stared at each other. Merwyn was the first to speak. "So?" he asked, arching an eyebrow.
st ould Adam ask Merwyn to make him CEO of the new venture? See COil mePtaries on the next page. December 2011 Harvard Business Review 133
EXPERIENCE
Marshall Goldsmit h is a leading executive educator and coach. His 30 books include What Got You Here Won't Get You There and Mojo.
NO, ADAM shouldn't ask for the CEO job. But before I explain why, let me address three important issues in this case. The first is whether Adam wants to get the CEO job or wants to be the CEO. There's a difference. Does he want the title so that he can have more status, or would he find the role meaningful and fulfilling? Being a CEO is a tough job. You have to make hard decisions. You have to watch what you say in every meeting. If Adam is mainly after the title and the status, he won't be successful. He may not be able to tell whether he really wants the job until he gets more experience as a line manager. But for argument's sake, let's assume he does want to be the CEO. That brings us to the second issue: Is he suited for the job? He probably does have some weaknesses. He may not be decisive, for example. And he has failed once. So what? I've seen over and over again in my career as an executive coach that almost all leaders can change their behavior, and the ones who are intellectually and technically qualified can be developed to become great CEOs. But that's not the end ofthe story. This case study is not just about Adam. It's also about Merwyn. The third key issue is
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whether Merwyn would give Adam a fair chance in a leadership role. I don't think he would. Even if he allowed Adam to take the CEO job, 1doubt that he would let Adam succeed. That's because Merwyn has decided that Adam is a poor leader. He is not trying to coach or help him- he believes that Adam is a hopeless case. lfthe boss writes you off, you are usually done. At best, your odds of success are dramatically lowered. Believing that Adam lacks the wherewithal to be a CEO, Merwyn would be looking for
Merwyn has decided that Adam is a poor leader. If the boss writes you off, you are usually done. signs of failure on his part- and we all tend to find what we are looking for. That's why 1would advise Adam not to ask for the job. Instead, he should continue to work hard in his current role at SES. It's a tough job market out there-he shouldn't cut off his nose to spite his face by leaving
precipitately. But he also shouldn't feel any obligation to stay with SES over the long term. He has made plenty of money for the company, and his future success will always be limited there. He needs to find a new place where he won't have the baggage that he carries at SES. He could start by investigating M&A functions in large organizations- places where he'd have an opportunity to move into a line manager role. That way he could see whether he likes being a boss, and he could improve his leadership skills. We all stereotype people to some extent. We have a tendency to put people in boxes- to say, "That's just the way they are." But some managers take it to an extreme, refusing to see that employees can change and that shortcomings aren't the result of incurable genetic defects. Unless an employee has "fast track" written all over him, these managers withhold challenging roles and useful feedback. If you've got a manager like that, your choices are limited. You can try to get him or her to take a broader view of your potential-an uphill battle if ever there was one-or you can move on and look for a boss who will give you a real chance to succeed.
WHAT WOULD YOU DO? SOME ADVICE FROM THE HBR.ORG COMMUNITY
MERWYN IS RIGHT: Adam is the
ADAM MUST demand the job if he
ADAM SHOULD defer to Merwyn's
perfect number two and shouldn't ask for the CEO job. But something inside Adam tells him he'll have value only if he becomes a CEO. So he must make the inner journey to an understanding that it's much more important for him to be the best he can be as number two than a not-so-good number one. Dashiell Borges, software quality analyst, IBM
wants to make career progress in that company. It's not Adam but his boss, Merwyn, who's the subpar CEO, because Merwyn finds it difficult to promote leadership among his managers.
judgment that the role isn't right for him at this point. But as his experience grows, he should make sure he demonstrates that his second-fiddle traits are becoming a smaller and smaller part of his arsenal. Everyone wins if patience rules the day.
134
Harvard Business Review December 2011
Daniel Hernandez Aldaco, student, lnstituto Tecnol6gico Aut6nomo de Mexico (/TAM)
Robert M. Calvanico, senior partner, RMC Communications
HBR.ORG
Richard c. Kessler is the president and CEO of the Kessler Collection, a group of10 boutique hotels in the southern and western U.S. He is a former president and chairman of Days Inns of America.
ADAM SHOULD ignore Kaleeb's advice to
play it safe and follow Sarah's recommendation to press for the job of CEO. In the early 1970s I was in a somewhat similar situation. Having looked at a lot of corporate jobs and realized I wouldn't be happy in a big company, I became the right-
If Adam refrains from pressing his advantage, he will be shortchanging Merwyn as well as himself.
hand man for Cecil B. Day, who started Days Inns. But I was never the typical number two. Cecil hated getting involved in operations, so 1 always had a lot of
th ings get hairy. People who claim to be bold and fearless often don't come through
responsibility. It was the perfect position -
in the moment of truth. I've seen it happen
l'm not a good follower, and autonomy is
in the Kessler Collection: People with the
very important to me. When he asked me
background and resumes to be winners
to become the CEO of Days Inns of America,
could not pull it off. Then someone who
in 1975, it was a natural transition for me.
was perceived as weak became the hero.
Although Adam is much more of a number two guy than I was, I think he could do the job he's looking for. He's obviously smart,
Adam seems like the kind of person who would rise to the occasion. He's loyal and "present." To me, that means he shows up
he has integrity, he's fired up about the new
wherever and whenever he's needed. And
hotel chain, and he has some leadership
he's not selfish. The best businesspeople
skill. As for whether he's tough enough,
I've known are the antithesis of selfish.
that's often overemphasized in business.
They're people you like to be around.
The toughest managers aren't always the
But there's another reason Adam should
best leaders, and people who appear to
push for the CEO job: The benefit to Mer-
lack a hard edge may turn out to have the
wyn. Merwyn obviously cares a lot about Adam; he really likes him, and he wants
qualities you really need in a CEO. In fact, you never know what kind of
the best for him. His feelings for Adam are making him overprotective, but the new
leader a person can be until you put him in a position of responsibility and author-
hotel chain could be a big win for both of
ity. I hear military officers talk about this.
them. When the chain has become a huge
You don't know who will be the hero when
success under Adam's leadership, Merwyn will say that allowing Adam to find fulfill-
MERWYN IS looking for the hidden CEO in Adam and hence looking at what Adam will do to get the job. There is no door for Adam to enter-he is already inside. Saurabh Fadia, manager, market
intelligence, Bayer CropScience
ment as a leader was one of his biggest accomplishments. So if Adam refrains from pressing his advantage, he will be shortchanging Merwyn as well as himself. I'm not saying that he should be pushy and irritating. He should ask in a nice way, and he should acknowledge Merwyn's misgivings. He should suggest that Merwyn become chairman of the new venture and that someone who's highly experienced in the hotel business be put on the board. He should say, in effect, "I know I've got a lot to learn, so let's get this right." Then I would bet on Adam to succeed. 0 HBR Reprint R1112L Reprint case only R1112X Reprint Commentary only R1112Z
•
I
A review of emerging ideas in the media
The hottest artist in the world right then was lnterscope's rapper so Cent, and the highly anticipated video for his song "P.I.M.P:' started with him holding his iPod. Close-up on the product: He spins the dial until the menu highlights "Playlists." Click. What follows is a vision of limitless, decadent luxury. "Not many could afford the fantasy life," writes Stoute, "but they could afford the iPod?' Suddenly, "artists were calling up lnterscope asking to get their hands on the devices. Once in the hands of the tastemakers, consumers gravitated en masse to Apple's offerings:· Stoute does not include this anecdote ' in Tanning to showcase a smart crosscultural or multicultural marketing strategy, which effectively draws in different demographic groups. No, this is about the ..t~ devolution of those groups and what that , J means for marketers. ~ / Just look at the data. The 2010 census shows a smudging of traditional demo• graphic lines-whether it's distribution ~ of urban-suburban populations or the ':::::: growth in multiracialism. People who • list themselves as of two or more races (not including Hispanic) now make up a not-insignificant 3% of the total population (more than 9 million people). And the category grew 30% between 2000 and 2010 (46% for those younger than age 18). What's more, technology is helping us identify new, more complex "demoDon't market to who they are. Understand how they think. graphic" groups. With so much information collected, crunched, recrunched, and by Scott Berinato cross-tabbed, marketers have to see that ne of the cornerstone products that too-only running on Macs and branded what defines us and what we buy no longer helped to shape Steve Jobs's legacy, with a Beatles-era guitar at a time when maps easily to traditional categories. the iPod, just tlrrned 10. It's hard to the kids were listening to Usher. Patchwork Nation (patchworknation. believe now, but that ultramodern white What really, finally made the iPod-and org), run by the not-for-profit JefferiPod owners-cool was hip-hop. half-pound jukebox with the touch wheel, son Institute, bas, for example, come As Steve Stoute, record exec turned adup with 21 new divisions to describe which became the aughts' harbinger of cool, us. The "Boom Town" type is someone was not instantly successful. It sold 150,000 vertising legend, tells it in his smart, enterunits in its first nine months. (Compare taining book The Tanning ofAmerica: How who lives in a "fast-growing community that with the 190,000 sales per day that the Hip-Hop Created a Culture That Rewrote the with a rapidly diversifying population:• Rules ofthe New Economy, Apple agreed to iPhone has averaged for the past year.) The "Shifting Middle" refers to people underwrite production of new videos from Marketing pundits will say that iTunes in "middle income districts in established turned things around, but Apple's music lnterscope Records in return for product suburbs and midsize cities [with) mixed delivery service underwhelmed at launch, placement of iPods in those videos. ethnic populations and a growing Latino
--
"
-
-
f'{ The Demographics of Cool
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136 Harvard Business Review Decemb er 2011
HBR.ORG
HBR.org As a matter of policy, we don't review our own
books, but check out our "New Books from the Press" blog post each month at blogs.hbr .org/ synthesis.
The Tanning of America: How Hip-Hop Created a Culture That Rewrote The Rules ofthe New Economy Steve Stoute
Those Guys Have All The Fun: Inside the World of ESPN James Andrew Miller and Tom Shales little, Brown & Company. 2011
Gotham Books. 2011
Patchwork Nation patchworknation .org
presence!' These categories offer a more nuanced look at the U.S. population, and they can reshape our understanding of current events. When others were reporting bad news in foreclosures this past fall, Patchwork saw good news in Boom Towns, which have in the past served as leading indicators for the site's analysts. Still, Tanning is about more than just high-def demography. Stoute is arguing that out of hip-hop a new culture has emerged, one "shared mental complexion" that no demographics- not even Patchwork's-can capture. Age, race, and income don't matter. Location doesn't matter. Only the mind-set matters. The Ivy League sophomore from Oregon, the 34-year-old Inclian-bom waiter in Queens, and the 16-year-old kid from Alabama may all be part of the same target market, all mentally "tan!' In a tan world, urban has nothing to do with place or race and everything to do with attitude. Stoute is as likely to see urban consumers in the O.C. as he is in D.C. These tan consumers, defined by hip-hop culture, choose what becomes cool and, more crucially, decide when something isn't cool anymore. The iconic story is the one in which an exec at the company that sells Cristal champagne
tries to distance the product from hip-hop, resulting in a boycott led by rapper and media mogulJay-Z, who ends up investing in a competitor's champagne, which immediately becomes a top seller and critical darling. Cristal, Stoute notes, hasn't recovered its market share. Another theme that should scare marketers is the uselessness of analytics. The more you honor the tan psychographic, Stoute argues, the more meaningless the demographic data and quantitative research become. And when you define a market not by who's in it but rather by how the people in it think, marketers have a far more complicated and expensive job. Suddenly, "female" and "affluent" are replaced with "adaptive mmd-sets" and "people who seek authenticity."
"No longer can advertising lecture or dictate to customers; marketing to the group conversationthe megalogue-must be seamlessly incorporated." Steve Stoute, The Tanning of America
The business heroes in Tanning are the ones who succeed by actively ignoring data and by "marketing to the megalogue": the ubiquitous, constant conversation among trendsetting tan consumers. Part memoir, part history of hip-hop, part marketing playbook, Tanning is not technically a business book, but it is a book about business. Same goes for Those Guys Have All the Fun: Inside the World ofESPN, an exhausting oral history compiled by James Andrew Miller and Tom Shales that chronicles the ascendance of the sports media dreadnought. It's harder to find the management lessons here amid all the narcissistic alpha male preening and insecurity, but they're in there, and they're similar to Stoute's. Most of ESPN's successes-from its founder's counterintuitive bets that there
was a demand for an all-sports channel right on down to its current coolest show, Pardon the Interruption (PTI)-are ones that demographics and analytics clidn't predict and can't explain. PTfs executive producer Erik Rydholrn recalls a colleague saying to him: "You have two old guys sitting around the table talking about sports. That is the antithesis of everything all of our market research tells us that people are interested in....Why do you think that this is going to work?" Rydholm responded: "Because no one showed me that research before I decided to take the job:' It's no accident that Stoute, who focuses on hip-hop, is talking about the same phenomena as ESPN programmers, who focus on sports. Sports defy demographics more than any other product. Fandom is innately tan. Marketing to, say, New En· gland Patriots fans requires understanding a shared attitude much more than it requires income and gender splits. Stoute shows any number ofstruggling or dying brands that become cool, as ESPN did, by marketing to a mind-set: Adidas, Reebok, Ray-Ban, Cadillac, McDonald's. And Apple. Following its deal with lnterscope, Apple sold 28 million iPods in 24 months and grabbed three-quarters of the nascent digital music business. Earnings have quadrupled. That deal spawned another important change at Apple, too. Accorcling to Stoute, Jimmy Iovine, lnterscope's chairperson, told the company's execs that they should rebrand iTunes, get away from its boomer Guitar Hero sensibilities. Apple did, creating the now-iconic silhouetted hipsters sporting white earbuds, striking poses on bus shelters and billboards, and dancing to hit songs in TV ads. You can't tell if those silhouettes are 18 or 34 years old, rich or poor, black, white, or Asian, from Brooklyn or from Tokyo. All you know for sure is that they're cool. 0
r.. Scott Berinato is a senior editor at HaNard
a..J Business Review.
December 2011 Harvard Business Review
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SPECIAL ADVERTISING SECTIOI'J
SPECIAl ADVERTISING SECTION
and vet an orgaruzation or understanding better how to make contributions that make sense for their accounts."
In recent years, Alcoa and the Alcoa Foundation have invested millions of dollars to encourage recycling programs across the United States. Donating recycling bins, developing consumer education programs. and supporting community recycljng efforts in partnership with Keep America Beautiful are not just good for the environment- they're good for Alcoa's business too. "There's a huge societal benefit for recycling, but we share the need to get recycling rates up because it's much more economical to use recycled material than to use virgin aluminum in manufacturing," says Paula Davis, president of the Alcoa Foundation. Alcoa's charitable-giving strategy illustrates a growing trend in corporate philanthropy: It's no longer enough to write checks to a handful of good causes and local community organizations. Today. corporate philanthropy departments are aligning their grant making with a strategjc business objective, so that supporting a major social or environmental cause will also deliver a bottom-line benefit such as increasing sales, creating supply-chain and production efficiencies, or reducing costs. And corporate philanthropy departments are not the only donors taking a more strategic approach with their charitable giving. Individuals also are discovering ways to support non profits
more effectively wbjle making the most of the tax advantages of their donations. However, making philanthropy a win-win for donors and nonprofits is not without its challenges. Aligning a corporation's charitable giving with a core business objective requires a whole new way of thinking. "Making a connection between a business's challenges and the problems commuruties are facing is not something a lot of people are trained to do, but that's what this strategy is asking them to do," says Margaret Coady, di rector of the Committee Encouraging Corporate Philanthropy. For individuals, charitable giving must be viewed as another type of ongoing investment strategy, one wruch requires careful decisions about the types of assets to give, how to invest charitable funds for growth, and the best way of administering grants. "Donors are becoming more educated," says Sarah Libbey, president of Fidelity Charitable, which operates a donor-advised fund that allows individuals to make regular charitable contributions to a special account, invest those funds in a number of financial vehicles for growth, and then disburse grants to charities of their choice. "They are asking us for ways to be more effective with their dollars- whether that's understanding how to better research
Moving Beyond Traditional Giving A recent CECP survey of CEOs found that 74% said their orgarrizations are getting started or are on their way to developing philanthropic strategies that support a bottom-line benefit for the company. Another 9% of CEOs said they can already measure both company profit and commurrity benefits from their giving. Yet identifying a social cause that's closely aligned with a business objective remains one of the biggest challenges for corporate philanthropy departments. Philanthropy can' t exist as an isolated activity within the corporation. Instead, charitable-giving teams must work closely with company executives and employees to identify the unique concerns of the business - as well as the urrique resources and expertise that the company can bring to bear on a social cause. For example, Davis says her first step in aligning the foundation's activities with the company's corporate identity was acknowledging that Alcoa could not make a big impact on every worthy cause in the world. "Our business is aluminum, so it would be very djfficult for us to make a dent in health care or in arts and culture," Davis says. "We just don't have that consumer interface." Instead, she conducted interviews with Alcoa corporate executives and regional leaders to understand the business's top priorities. She also conducted focus groups with shop-floor employees to understand their social concerns. From that research, two major philanthropic opportunities emerged: supporting environmental causes and promoting technical education. Corporations also must look beyond the obvious, direct connections and
SPEC l A~ ADVERTISING SECTION
It's no longer enough to write checks to a handful of good causes and local community organizations. Today, corporate philanthropy departments are aligning their grant making with a strategic business objective.
identifY larger economic or social factors that will impact their business in the long run. For example, semiconductor manufacturer Intel has donated $1 billion in the past decade to support math and science education around the world, in part to help train future engineers needed to fill the company's employment ranks. But the company also believes that math and science education will spark economic advances in developing countries and foster a new generation of global technology entrepreneurs who might invent products that depend on InteYs chips. "It goes well beyond employment," says Shelly Esque, president of the Intel Foundation. "For economies to develop to the point where they need technology, they need education. Education is the key to economic development." Donors also recognize that the traditional practice of writing checks might not be the best way to suppott social causes. For corporations, emerging options for grant making include providing in-house expertise or raw materials to support nonprofit programs, such as Alcoa's donation oflightweight aluminum wheels for Yale University's biodiesel campus shuttle buses. Individual donors are finding that alternative assets often provide better tax advantages for their charitable giving
than a cash donation. "Cash isn't always the best asset to give," says Fidelity Charitable's Libbey. "As a matter of fact, there are more advantages for some individuals to look for appreciated securities or privately held, nonliguid assets to donate." Many business owners and wealthy individuals began examining the benefits of donating nonliquid assets after Facebook CEO Mark Zuckerberg donated $roo million worth of his company's private stock to Newark, New Jersey, schools in 2010. Libbey says she's seen donations of nonliquid assets, such as shares in privately held companies or real estate, quadruple since the beginning of 2on. The reason: Donating these assets allows the individual to avoid capital gains taxes, and the tax deduction is based on the market value of that asset on the day it is donated, not the original cost basis. And the work isn't done once a corporation or individual donor decides to look beyond traditional giving strategies. Maintaining this type of strategic approach requires a longer-term view of philanthropic activity. Corporations that typically measure business goals on a quarterly basis must be more patient about assessing social change, says Esque of the Intel Foun-
dation. While you can measure how many teachers you've trained each year, the true economic impact of a bettereducated population might be measured over the span of a generation. "Not everything can have an immediate return. That's why there is philanthropy," says Esgue. "Businesses can't wait that long, but philanthropy can." Individual donors also must treat charitable giving as an ongoing financial strategy - not an end-of-year tactic for a quick tax deduction. This means choosing a primary focus for their charitable giving, such as cancer research, so they can effectively research the sector and select which nonprofits to support. It also means recognizing the best time to donate an appreciated security to avoid realizing a capital gain, or knowing how to donate privately held shares in advance of a liquidity event such as a merger or acquisition. But taking this long-term view helps ensure that donors - and the non profits they support - receive the maximum benefits of those efforts. "When you have a giving account, you can look back over several years to understand what percentage you've granted to different sectors or categories and what you might need to downweight," says Libbey. "[Donors) feel very empowered to make decisions."
Fidelity Charitable5M offers a flexible way to
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Executive Summaries
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SPOTLIGHT ON REI NVENTING RETAIL
Retailers are finally getting good at ;;"'- "omnichannel" selling, which blends the best of digital and physical stores. They're using analytics to make better bet s about what customers will want next. And one or two are inventing a whole new ki nd of store.
Midsize businesses are the engines of a smarter planet. IBM and its Business Partners are providing forward -thinking businesses with insights, tools and affordable IT solutions to help them work smarter. Read on to learn about some of our success stories.
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The Future of Shopping
Retail Isn't Broken. Stores Are An interview with J.C. Penney CEO Ron Johnson by Gardiner Morse I page 78
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Darrell Rigby I page 64
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Papa Gino's is earning a bigge r piece of the pie. IBM business analytics software is the secret ingredient in this midsize Boston-based pizza and sandwich chain's increase in online order size and purchase frequency.
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When the dot-com bubble burst 10 years ago, the ensuing collapse wiped out half of all onli ne retailers. Today, ecommerce is well established and much digital retailing is now highly profitable. As it evolves, digital ret ailing is quickly morphing into something so different that it requires a new name: omnichannel retailing. The name reflects the fact that retailers will be able to interact with customers through countless channels- websites, physical stores, kiosks, direct mail and catalogs, call centers, social media, mobile devices, gaming consoles, televisions, networked appliances, home services, and more . If t radit ional retailers hope to sur· vive, they must embrace omnichannel retailing and also transform the one big feature internet retailers lack- storesfrom a liability into an asset. They must turn shopping into an entertaining, exciting, and emotionally engaging experience by skillfully blending the physical with the digital. They must also hire new kinds of talent, move away from outdated measures of success, and become adept at rapid test-and-learn met hodologies. A successful omnichannel strategy should not only guarantee a retailer's survival- no small matter in today's environment- but also deliver a revolu tion in customers' expectations and experiences. HBR Re p r int R1112C
When Johnson joined Apple, in 2000, as the senior vice president for retail, conventional wisdom held that a computer maker couldn't sell computers. Johnson promptly tossed out the retailing rule book and built the Apple Store from scrat ch. "The Apple Store succeeded not because we tweaked t he traditional model," Johnson says. "We reimagined everything." Today, Apple stores are t he highest perform ing stores in the history of retailing. In November, Johnson took the reins as CEO of the venerable J.C. Penney department store. Times are t ough for many retailers, but Johnson, charac· teristically, sees the chance t o reinvent the department store as a great opportunity. He also understands the challenges ahead. "A store has got to be much more than a place to acquire merchandise," he says. "It's got to help people enrich their lives." In this edited interview, Johnson discusses his vision of t he future of retail and shares insights about innovat ion, leadersh ip, and why he t rusts his gut. HBR Re p rint R1112D
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2011
GENERAL MANAGEMENT ANALYTICS
First, Let's Fire All the Managers
Know What Your Customers Want Before They Do
Gary Hamel ) page 48
Thomas H. Davenport, Leandro Daile Mule, and John Lucker I page 84
Executives don't realize it, but a hierarchy of managers exacts a hefty tax on any organizat ion: Managers are expensive, increase the risk of bad decisions, disenfranchise employ· ees, and slow progress. In fact, management may be the least efficient activity in any company. Yet it's clear that market mechanisms alone can't provide the degree of coordi· nation and control that many companies require. Is there any way to get the flexibility of a market SYStem and the discipline of a tightly knit hierarchy-without a management superstructure? Morning Star, the global market leader in tomato processing, proves that there is. Morning Star, which has seen doubledigit growth for the past 20 years, has no managers. That's right- no bosses, no t itles, no promotions. Its employees essentially manage themselves. Workers negotiate responsibilities with their peers, anyone can issue a purchase order, and each individual is responsible for acquiring the tools needed to do his or her work. Compensation decisions are handled by local committees elected by the employees, and pay reflects the contribu· tions that people make-not their status. And if staffers find themselves overloaded or spot a new role that needs filling, they simply go ahead and initiate the hiring process. Morning Star's self-management model has two cornerstones: the personal mission statement, and the Colleague Letter of Un· derstanding, or CLOU. 1n a personal mission statement, each employee outlines how he or she will help the company achieve its goals. The CLOU, which must be hammered out every year with colleagues, is an operating plan for fulfilling it. A CLOU covers as many as 30 activity areas and spells out relevant performance metrics. The system isn't without its challenges, and it isn't for everyone. But it has produced a dedicated workforce with exceptional initia· t ive and expertise. And Its success shows that it is possible for organizations to t ranscend the seemingly intractable trade-off of freedom versus control. HBR Reprint Rlll2B
Shoppers once relied on familiar salespeople to help them find exactly what they wanted- and sometimes to suggest additional items they hadn't even thought of. But today's distracted consumers, bombarded with informa· tion and options, often struggle to find products or services that meet their needs. Advances in informat ion technology, data gathering, and analytics are making it possible to deliver something like the personal advice of yesterday's sales staffs. Using increasingly granular customer data, businesses are starting to create highly customized offers that steer shoppers to the "right" merchan · dise-at the right moment, at the right price, and in the right channel. But few companies can do this well. The authors demonstrate how retailers can hone their "next best offer" (NBO) capability by breaking the problem down into four steps: defining objectives, gathering data (about your customers, your products, and the purchase context), analyzing and executing, and learning and evolving. Citing successful strategies in compa· nies such as Tesco, zappos, Microsoft, and Walmart, they provide a framework for nailing the NBO. HBR Reprint Rlll2E
Gramo A/ S is rewriting the book on ene rgy solutions. By implementing an intelligent energy management system, this midsize bookbindery in Denmark created its own virtu al power plant that controls consumption and cut costs by 10%. •
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vee is building a new client base. A smartphone-enabled customer relationship management (CRM) solution was the blueprint lor an increase in new business for this midsize construction company.
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EXECUTIVE SUMMARIES
HUMAN RELATIONS
ORGANIZATION & CULTURE
OPERATIONS
The Power of Collective Ambition
Who Really Makes the Big Decisions in Your Company? Bob Frisch I page 104
Don't Let Your Supply Chain Control Your Business
Douglas A. Ready and Emily Truelove I page 94
Gruppo Intergea is accelerating its data security. This Italian midsize business has been able to improve infrastructure security in car dealerships, showrooms and repair shops by identifying new threats and staying ahead of them.
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Sun World is harvesting new insights. Specializing in the growing, packing and shipping of fresh produce, this midsize business in California is using IBM Cognos0 business analytics solutions to analyze operations data and improve harvesting efficiency.
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In the past few years, some companies have not just weath· ered the economic storm: They've emerged stronger than ever. How did such players as Four Seasons, Sephora, and Standard Chartered Bank defy conventional logic? Instead of pursuing a single ambition, such as profits, employees defined a collective ambition. As a result, those organizations deepened their engagement with employees and other stakeholders and became sustainably profitable. Purpose, a company·' s rea· son for existence, is the central element of collective ambition. The other elements- vision, targets and milestones, Strate· gic and operational priorities, brand promise. core values, and leader behaviors- must be aligned to serve the company's purpose. Articulating the elements of collective ambition can give everyone in the organization a better sense of the company's purpose and how they can contribute to it. Purpose does not have to be about saving the world; providing excellent en· tertainment or banking services is just as meaningful a purpose as improving health care in emerging economies- as long as it is an authentic representa· tion of why the company exists. To shape and then achieve a collective ambition, companies must strengthen their organi· zational glue (the collaborative engagement that creates a unified culture) and grease (the disciplined execution that enterprisewide change initia· tives require). HBR Reprint R1112F
In many companies, the top management team is officially responsible for helping the CEO make a company's big decisions. But another, unof· ficial group usually does that job de facto. That's the way it should be, argues Frisch, of the Strategic Offsites Group, provided that the CEO is deliberate in devising the role of this informal and unnamed "kitchen cabinet." Problems can nevertheless arise when senior executives learn about important deci· sions after the fact, mistakenly assume that they have real power to protect their depart· ments, and find themselves in a system where the way deci · sions are actually made goes unacknowledged. The key, according to Frisch, is to make better use of senior executives' time and talents by giving them specific responsi• bilities that complement-but do not overlap-the advisory duties of the kitchen cabinet. A CEO who explicitly acknowl· edges the role of her cabinet and strikes the right balance between it and her official ad· visory group of executives can get the best from both. HBR Reprint R1112G
Thomas Choi and Tom Linton
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In the past 25 years, major original-equipment manu · facturers have delegated the management oftheir supply chains to a handful of first-tier suppliers. Although this ap· proach frees OEMs from the task of building and supervis· ing supply subsystems, speeds up product introductions, and helps manufacturers secure larger volume discounts, it has gone too far. In this article, Choi, of Arizona State Univer· sity, and Linton, a former chief procurement officer of LG Elec· tronics, point out the dangers of relinquishing so much power to first-tier suppliers: It weak· ens an OEM's ability to control costs, stay on top of critical technology developments and shifts in demand, and ensure that suppliers are operating in a socially and environmentally sustainable fashion. The solution is for an OEM to selectively establish direct relationships with key lower· tier suppliers. Specifically, an OEM should form close ties with vendors that have a significant impact on its cost of goods sold, have strong innovation potential, pose sustain· ability risks, and can provide insights into important trends. Implementing this approach isn't simple- it may require reshaping the entire purchas· ing function. But it's essential for manufacturers that want to stay ahead of competitors. HBR Reprint R1112H
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HBR.ORG
THE GLOBE
HSN's CEO on Fixing the Shopping Network's Culture Mindy Grossman I page 43
ORGANIZATION & CULTURE
The Ordinary Heroes of the Taj Rohit Deshpande and Anjali Raina page 119
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When terrorists attacked the Indian city of Mumbai in 2008, employees of the Taj Mumbai hotel displayed uncommon valor. They placed the safety of guests over their own well-being, thereby risking-and, in some cases, sacrificing- their lives. oeshpande, of Harvard Business School, and Raina, of the HBS India Research Center in Mumbai, demonstrate that this be· havior was not merely a crisis response. It was instead a manifestation of the Taj Group's deeply rooted customer-centric culture that, the authors argue, other companies can emulate, both in extreme circumstances and during periods of normalcy. The key ingredients of this Taj-style customer centricity include: • a values-driven recruitment system that em· phasizes integrity and duty over talent and skills; • training of customer ambassadors who serve the guest first and the company second; and • a recognition-as-reward system that values well-earned plaudits-from customers, colleagues. and immediate supervisors-over money and advancement. Each of the three elements has important features and nuances, which the authors explore in detail so that your company can take its cues. HBR Reprint R1112J
POSTMASTER Send domestic address changes. orders, and inquiries to: Harvard Business Review, Subscription Service, P.O. Box 62270, Tampa, FL 33662. GST Registration No. 1247384345. Periodical postage paid at Boston, Massachusetts, and additional mailing offices. Printed in the U.S.A. Harvard Business Review (ISSN 0017·8012; USPS 0236-520), published monthly with combined issues in January- February and July-August for professional managers, is an education program of Harvard Business School, Harvard University; Nitin Nohria, dean. Published by Harvard Business School Publishing Corporation, 60 Harvard Way, Boston, MA 02163. Copyright @2011 Harvard Business School Publishing Corporation. All rights reserved. Volume 89. Number 12
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When Grossman was approached to head the parent company of Home Shopping Network, she had no televi· sion experience, no direct· to-consumer experience, ~~ and no experience in most ofthe product categories HSN sold. She'd never even watched a home shopping channel. But after a crash course consisting of channel surfing, she had an "aha" moment: She realized that HSN needed to become more of a lifestyle network that would inspire people through products. That pitch won her the job. Then she visited headquarters- where the staff appeared downtrodden and the organ!· zation seemed frozen in time. Grossman saw that she would need to dramatically alter the company culture, understand and reposition the brand, and devise a new product strategy. She began with white paint and new office chairs. HBR Reprint R1112A
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Dragon Hotel is providing a legendary guest experience. At the heart of this Chinese hotel is a dynamic IT infrastructure that uses RFID-equipped smart ¥ cards for fast check-ins and ~ custom room preferences, so guests feel right at home.
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Managing Yourself Get Ready for Your Next Assignment Katie Smith Milway, Ann Goggins Gregory, Jenny Davis· Peccoud, and Kathleen Yazbak page 125
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Your next internal assign· Ex )enence mentis your next chance to create results- for your organization and for your career- and a smart investment of time and I~ ~ effort up front can mark t he __,. }" '_- - :- V difference between getting by and truly excelling. A key factor in your transition will be knowledgenot only substantive information about the project or field, but an understanding of how others inside and outside the organiza· tion have tackled similar assignments, what challenges and opportunities lie ahead, what resources are available, and how to mobilize those resources to overcome any obstacles you may encounter. The authors provide practical steps that will help you not only get smart for your next assignment but also stay smart, building knowledge capital to excel in new roles throughout your career. They then expand on those steps, which they call phase ~ero, learning tour, and affinity groups. HBR Reprint R1112K
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Let's build a smarter planet. To learn more about the insights and solutions behind these success stories, or to find an IBM Business Partner that's right for you, visit ibm.com/engines Join the conversation:
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To t al pa id a nd/or requested circulat i on . . • • • • • • • . . • • . . . • . . . . • . • . • . .
277,654
Free distribution by mail: Outs1de·county as stated o n Form 3541 • . . .
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In-county as stated on Form 3541 . . • . . . • • • • . • . . . • • . . • • • . • • . . . • • • . . Other classes mailed through USPS . • . . • . • • . .
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Free distribution outside the mall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Total free distribution . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . .. 4,303 Total d istribuuon . . . . . . . • • . . . • • . • • • . . • • . . • . • . . • . . . • • . . • . . . . . . 281.957 Copies not distributed .. . .••. . .•• . .•• . .••• . ••• . • • • . . • . . . • . . • . . . . 28.852 Total . . . . . . . . . . . • . . . . . . . . . . . . . . . • • . . • . . . • • . . . • • . . • . . . . . . 31o.Bog Percent paid andforrequested circulation . . • . . .
Order on-line: ""~· tncenterprises .net/hbr
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Life's Work Kenneth Cole is a designer. activist. and married father of three who says he thrives at work, at home, and in the community by merging these three worlds. As the creative head of his eponymous fashion company, he has long championed the AIDS research foundation amfAR and firmly believes in engaging the public through social media, in spite of a Twitter controversy he sparked earlier this year. Interviewed by Alison Beard
HBR: How did you get into the fashion business? cole: My father had a shoe factory in Brooklyn. I was on my way to law school, but that summer I became fascinated with the business-by the san1ple room and by how, with the slightest manipulation of the shape of a heel or the finish of a leather, you could end up with a totally different product. In law, the quest was to learn the rules. In fashion, there weren't any rules, and in fact, the better you were at creating something new, the greater the likelihood you would be successful. So I decided to defer law school. How do you maintain creative control over all your products: five brands, shoes and clothes, men's and women's? It's difficult. What I oversee is not the actual design but the design direction of our products. It's 35 different classifications now, and they all have seasons and market needs and executional complications, but unless they're executed consistently, the brand fails. So we have to have a specific point of view, and that's what I spend my time doing. The design groups meet at the beginning to discuss concept and direction. Then everybody goes off and interprets it and executes it. Then we circle back and review it at one or two points and ultimately approve the final product. Why was your first big ad campaign, in the 1g8os, linked to AIDS awareness? At the time, people wanted to get involved in causes. There was "We Are the World:' Hands Across America, Live Aid. And I thought: If this is what is inspiring people, I, too, would like to connect with them in a more meaningful way. AIDS was a problem nobody was speaking about. We knew how to contain it, but the biggest obstacle was the stigma. So I did a campaign showing models
HBR.ORG HBR.ORG To read the
extended interview, go to hbr.orgfcole.
and children with the message "support AIDS research." All of a sudden, my associates were feeling a bigger, more emotional bond to the business and the brand. What have you learned by living with four women? That life is about compromise. When my youngest daughter was eight, she came to me one day and said, "What are you doing?" I said, "I'm working:• She said, "Who gives you the work? Aren't you the boss?" I said, "Yes, that's why I give myselfthe work, to make sure it gets done." The next day: "What are you doing? Aren't you the boss?" Then again two days later. I told a friend about it: "She's a smart girl, but she just doesn't get it." And he said, "Or you don't." So I learned not tol take what I do all that seriously. At the end of the day, people don't need our shoes and clothes. We have to make 'em think they do and make 'em glad they thought it. But I remind myself that important as this may feel, people have more, compelling ways to spend their money.
I
A tweet of yours-linking the uprising in
Egypt to your spring collection- sparked a backlash. What's the best way to handle a mistake like that? I think if you say something and miscalcu late the impact, it's important to not dig your heels in. We put out an explanation, an apology. And I filter myself now. But I still love that I have this viral platform to talk to people. I need to understand what's on people's minds, and I Jove hearing it. el HBR Reprint R111'? M I
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