PRANAV GAUTAM

When Product Variety Backfires

2006-02-02T15:50:00.000+05:30

"Consumers like choice—but not too much of it. Presented with too many options, buyers may run to a competitor, says professor John Gourville. Here's what new research says about "overchoice."
by Poping Lin

Traditional wisdom teaches that brands win market share by offering a wide variety of products, increasing the chance of appealing to a wider variety of customers. But how happy are you when trying to find a head cold remedy at the pharmacy amid an overwhelming number of competing formulas, each slightly different than the other? It's enough to give a shopper, well, a headache.

The belief that variety is good "is not always true," argues Harvard Business School professor John Gourville in "Overchoice and Assortment Type: When and Why Variety Backfires." The research paper, co-written by professor Dilip Soman of the University of Toronto's Rotman School of Management, demonstrates that sometimes offering too many choices prompts the confused consumer to defer a purchase or run to the arms of a competitor with a less cluttered product line.
In this e-mail interview, Gourville discusses the cause of "variety backfire" and gives practical advice to avoid it.

Traditionally, companies have followed the "more is better" route when offering customers choices. Your research suggests that sometimes too much choice will cause a customer to defer a purchase. Why is that?
There are actually two questions here. The first is, "Why have companies followed the 'more is better' route?"

It could be for several reasons. First, it may be that they truly have fallen into the belief that more is better, and have not adequately considered whether or when this is true. In a sense, they have a very blunt tool that they are overusing. Second, there is a constant battle for shelf space in most grocery stores. If you are Quaker Oats, you would like to have more shelf space than General Mills. One way of doing this is by adding more and more variety to your cereal offerings. Finally, there may be tremendous competitive pressure to expand your assortment. If your competition comes out with new sizes or flavors, you feel you have to keep pace. The end result is a constant proliferation of offerings.

The second question is, "Why might having too much choice be bad for a brand?" The research I have done with Dilip Soman shows that certain types of variety can actually overwhelm a shopper or make that shopper question whether they are choosing the right item from among that assortment. Sometimes this can lead to choice deferral; consumers simply give up and delay choice. Other times, we find, it can drive consumers toward another brand that offers a simpler assortment. In a sense, the consumer is saying, "I can't decide which product to choose from the many offered by Brand A, so I will choose from the one or two products offered by Brand B."
Q: You introduce the construct "assortment type" in the paper. What does the concept mean and how does it impact on brand share? What is an "alignable" assortment versus a "non-alignable" one?

A: Assortment type refers to the types of tradeoffs an assortment demands of a consumer. An alignable assortment is one where products vary along a single dimension—such as size or speed or capacity. Therefore, the tradeoffs are "within attribute" tradeoffs—do I want more or less of this dimension? This type of assortment tends to be good. For instance, when you go shopping for Levi's 501 jeans, the fact that there are hundreds of combinations of length and waist sizes allows a person to find the one that fits best.
The second type of assortment, non-alignable, involves tradeoffs across dimensions. An example would be laptop computers that vary in configuration, with one having a CD-ROM and another having a wireless modem. Entrees in a restaurant would be another example. In these cases, choosing one alternative provides you with some features, but forces you to forego other features. This type of variety tends to be bad. You can think of this as the cold-medicine problem. You have a cold, go to the store, and are faced with twenty different types of cold tablets from a single manufacturer: one for a cold plus sore throat, another for a cold plus nasal congestion, another to be taken only at night, another to be taken during the day. You are suffering and you just want to feel better, but you have to pick and choose what symptoms you have and don't have. We call this "overchoice."

Q: Could you provide some real-world examples where companies led their customers into overchoice and also examples of companies who understood this problem and created an effective product mix?

A: There are clearly domains where consumers face overchoice: analgesics, automobile options, mutual funds, upholstered furniture, etc. In these domains, fewer options could prove a lot more attractive to individuals. This is the wonder of something like the Vanguard Index 500. It reduces the potential for regret and it reduces the complexity of the choice. In general, however, I think that "overchoice" is more the norm than the exception. If your competition comes out with new sizes or flavors, you feel you have to keep pace.
There are examples of companies that have done a good job, however. For instance, at one point in time, Honda offered its popular Accord in only one of three models—the DX, the LX, and the EX—a good, better, best strategy. This greatly reduced the number of choices a consumer would need to make. Procter & Gamble, in recent years, has sought to reduce its offerings in many categories. And Titleist, in the past five years, has gone from an extremely large assortment of golf balls to only five.

Q: Were you surprised by any results from your three studies?
A: At one level, we were not surprised by these results. We had a strong sense that "overchoice" existed and it was more a matter of finding out when and why. At another level, however, we were surprised at how robust the effects were. In subsequent research, we have been able to replicate the effects across a bunch of different domains ranging from Web service to vacations to cameras.

Q: What is your practical advice to managers to avoid overchoice?
A: There are a couple of different ways to deal with overchoice. The most obvious is to simply reduce the number of alternatives you offer within a brand. Do you need seventy-five flavors of Snapple or will twenty-five do? Do you need twenty-five SKUs of toothpaste or can you get by on ten?
The question is which alternatives to eliminate and what the customer response will be. In the case of one online grocery retailer, by reducing their assortment in various categories by 20 percent to as much as 80 percent, they increased their revenues by 11 percent.
An alternative to reducing variety would be to help consumers navigate the variety that exists. Sometimes this can be done by identifying alternatives by their use rather than their features. For instance, Dell sometimes identifies their desktop computers in terms of who they are intended to serve. The result is a "gaming" desktop, a "home office" desktop, an "Internet ready" desktop, and so on. Rather than worry about what specs you require, you get the desktop that meets your profile.
An alternative to reducing variety would be to help consumers to navigate the variety that exists.
Other manufacturers take this a step further and actually work you through the decision process. At one point Titleist asked potential purchasers a series of questions, the answers to which would result in the recommendation of a particular golf ball. By saying you tended to hit far but off line, you'd have one ball recommended to you. By saying you tended to be good around the green but short off the tee, you'd have another ball recommended to you.
In all these cases, by either reducing the number of alternatives or helping consumers through the decision-making process, a company can reduce the complexity of the choice and reduce the consumer's feeling that they might be making the wrong choice.
Q: What are you working on now?
A: In recent years, I've been looking at innovations, trying to understand why and when seemingly promising innovations succeed or fail in the marketplace. Basically, I find that successful innovations tend to minimize the behavior change they demand of consumers. The hybrid electric cars, such as the Toyota Prius, would be a good example. In spite of great technological innovation, the Prius drives like any other car on the road. As a result, consumers don't need to change anything about the way they interact with their automobiles. Other innovations, like online grocery shopping or the Segway scooter, demand significant changes on the part of consumers. The end result is either marketplace failure or, at best, a very slow, painful adoption process
Telling the Numbers StoryHBSWK Pub. Date: Sep 6, 2005
Data continuously flows into the modern business, but many managers fail to effectively communicate to the troops what quarterly updates, analyses, and division reports really mean to their work. From Harvard Management Communication Letter.
by Roly Grimshaw
Understanding what numbers say is a core competency for senior managers. Communicating what they say should be as well. Unfortunately, this is a task that few do well. Time and again, leaders fail at conveying to employees just what the latest quarterly update, competitive analysis, or division report really means in terms of the work they'll do today and the challenges that await them tomorrow. Rather than motivating and inspiring employees with data, leaders end up boring and confusing them instead.
What causes the trip-up? From years of working with executives on their communication skills, my colleagues and I have identified a fundamental mistake they make: confusing the messages they want to deliver with the evidence that supports those messages. As a result, many put the cart before the horse by presenting the evidence before they present their messages or, worse, by presenting the evidence alone.
You wouldn't call up a friend, spew out a load of data about the weather forecast, and then suggest going for a walk, would you? No, you'd suggest going for a walk, mentioning that the weather promises to be fine. In other words, you would deliver your message—"Let's go for a walk"—before you'd offer evidence for why doing so would be a good idea. Despite how obvious this point is, we have all heard project managers, for instance, start a presentation with "a bit of background" or "an overview of the scope of the project." Such an opening hardly encourages the audience to stay tuned in!
Get it right, right from the startTaking a backward approach to communication is never more harmful than when a leader is trying to start off on the right foot in a new job. Recognizing this, an incoming CFO for a major international company asked me to work with him on his presentation and other communication skills. To give me a better understanding of the organization, he invited me to its annual results presentation. The new CFO was not performing this time but, like me, would be there to observe. We agreed to meet up afterward to discuss the impressions and messages we picked up and review what he should do in the first days of taking up his new appointment so that he would be able to, in his words, "get the figures across."
The current CFO started off by saying, "I'm going to go through the numbers and then hand [them] over to the chief executive." Painfully true to his word, he spent the next half-hour taking the audience through two or three dozen slides, each dense with numbers. Then he handed the presentation over to the chief executive, who took us through a review of last year, division by division, slide by slide.
When the question period finally arrived, it was clear that the audience hadn't listened to either speaker: Not one of the questions related to anything in the presentations! Yet, as the new CFO noted, by conventional standards, the presenters had performed well. They had plenty to say and delivered in a nice professional style with no "ums" or "ers." So why hadn't the audience paid attention? What could he do to ensure that he did a better job of communicating when he took over? What follows is the advice I gave him.
1. Identify the key points you want to make. Any communication can be divided into key points and evidence. Distinguishing between them is not difficult, you might think, but it is surprising how many presentations are designed around PowerPoint slides packed with an overabundance of evidence. Our consultancy has developed software, KeyPrep, which takes people through a methodical preparation process that helps them focus on addressing all the points they want to make, supported by slides only where they add value.
My client and I had listened to both presenters give the audience a lot of evidence. But after each section of the presentation was over, we found ourselves asking, "So what?" And when we sat down afterward to compare what we had gleaned from the talks, we couldn't even agree on what the key points had been. Both speakers failed to make any substantive points. As a result, all the numbers they trotted out had no effect on the audience.
A strong opening statement captures the audience's attention and sets a theme for what will be said. It doesn't need to be really grand or dramatic. A leader in a new role could open with something as simple as "I'd like to tell you why I am delighted to be here and what I intend to do as I take up this new challenge."
Of course, this advice doesn't apply only to executives in new roles. A division head might open a presentation to his marketing and sales team by saying:
Thank you for coming here this afternoon. I'm afraid the news isn't particularly good—our performance this quarter was weaker than expected. The numbers I'm going to put before you say one thing loud and clear: We need to redouble our efforts to identify and serve our core clients' needs.
By giving his audience a very clear context in which to view the data, the division head will guide their thoughts and ensure that his key messages get through.
2. Muster supporting evidence—and be selective. We often give the executives we're coaching on their presentation skills this piece of advice: The chances are good that you love numbers a lot more than most of your audience members do. As a senior manager, you "live" in them in ways most of your employees don't. So to choose the right evidence to present in support of your message, you're going to need to take a few paces back to look at things from your audience's perspective.
What tells a more compelling story? Two pie charts side by side, one showing market share a year ago and one showing market share today? Or a dense spreadsheet showing monthly sales broken out by product line and region? You may find the latter more compelling, but overloading your audience members with data is a sure way to guarantee they'll forget almost everything you say.
In most presentations, you don't need reams of data as backup, so choose as little as you need to make a compelling case.
While we more often see numbers-savvy executives make the mistake of presenting evidence before—or instead of—clear, specific messages, we sometimes see the opposite problem: delivering key points and then not substantiating them. In the absence of evidence, statements devolve into platitudes, and platitudes won't inspire anyone into action. People need proof.
3. Be consistent. Achieving consistency does not mean saying the same thing, the same way, over and over. If you're a new CEO introducing yourself to various constituencies, your messages should remain consistent from speech to speech, but your supporting evidence and illustrations should change to suit the audience. Your fellow board members, for instance, may not be impressed by the same examples that you might elect to use talking to the staff on reception.
Your choice of supporting evidence and illustrations should be informed by culture as well as rank. One new CEO at a large company went on a worldwide road show, repeating his presentation word for word wherever he went. His key point about service excellence was relevant to his listeners everywhere he spoke. However, he soon found that the chewing-gum example he had used to illustrate his point, though well received in the United States, wasn't well received in Singapore!
4. Follow up. The old story of the message "send reinforcements, we are going to advance" being passed down the line until it became "send three- and fourpence, we are going to a dance" is all too relevant to leadership communications.
My final piece of advice to the new CFO was to follow up. It's great that people walk away from a presentation with a clear recollection of its three or four central points, but will they remember them a month or two down the line? Unlikely. And if they don't remember them, those points will not be communicated throughout the organization.
This doesn't mean that your presentation should be transcribed and e-mailed to everyone or recorded and put on the company intranet; in fact, this would likely be a waste of time and money, as few would read it or listen to it. But it does mean using subsequent presentations to reinforce your key points. For instance, you might start a presentation by saying, "I told you six months ago that we would respond more quickly to customer requests, and this is the progress that we have made toward that goal."
Make your message heardWhether you're an incoming CEO or a veteran team leader, whether you're addressing an audience of hundreds or a group sitting around a conference table, your presentation will be effective if you remember to put your key points out front and center—and let your supporting evidence be just that
An Organization Your Customers UnderstandHBSWK Pub. Date: Jul 25, 2005
Defining your primary customer is an ideal “outside-in” approach to better designing your whole organizational structure. In this excerpt from his new book, Levers of Organization Design, HBS professor Robert Simons describes how to do it.
by Robert Simons
Imagine an organization made up of a variety of three-dimensional shapes. Rectangular blocks represent the functions: manufacturing, R&D, and sales and marketing. The spheres are regional offices. Pyramids represent product groups—one for, say, automotive, another for industrial, a third for consumer products. Finally, a series of cubes represents major customers.
The shapes lie scattered on your desk. Your job is to fit the pieces together. Do you place the spheres on top of the blocks so that functions report to the regions? Or should it be the other way around, with the regions subordinate to the functions? Maybe you should organize by product, with separate units set up to serve specific markets. You play with the different combinations in your hands. How to decide ...
This is the most obvious—and vexing—problem of organization design: grouping work units according to specific criteria. A study by the Conference Board came to the following conclusion:
There appears to be little evidence to suggest which of the [various] organizational formats would be best to assure the business's overall success, or even why it uses a specific format. This is largely due to the fact that the role of organization in regard to a business unit's success, or in the choice of which structure to use, is intertwined with a large number of other important factors. These include the strategy of the business, the quality of its leadership and work force, the excellence of its products, and its administrative heritage; also, the "fit" or alignment among important organization design elements such as structure, business systems, staffing, rewards, and tasks.1
In other words, the problem is too difficult. There is no clear pathway to a solution.
This [section] offers an approach to solve the organization structure problem. The solution will be derived through analysis of the first of our four Cs: customer definition. Using an "outside-in" approach, we will start by designing units that work most closely with customers and markets; then we will progressively move inside the firm to create subunits that define the operating core. As you will see, responsiveness is the critical objective for units close to the customer; economic efficiency and cost control are more important for units in the operating core.
Who is your customer?A great deal has been written in the strategy and marketing literature on the importance of creating customer value. In our everyday language, we think of a customer as someone who buys goods or services. But we have recently witnessed an explosion in the definition of a customer.
By labeling everyone a customer, the organization becomes confused about its purpose and whom it is designed to serve.
In popular marketing textbooks, students are taught that a customer is any person or organizational unit that plays a role in the consummation of a transaction with the organization. This definition includes buyers, users, and payers. For example, an office assistant may order office products to be used by fifty people in a department and paid for by a central accounts payable facility. All these entities are customers. The advice to managers: "Look at all your business relationships as if they were customers . . . By viewing everyone as a customer, you fundamentally change the nature of the value proposition that exists between you and the entities with whom you interact."2
This theme is echoed in another recent book, Everyone Is a Customer: "Today, the term customer not only means the traditional customer but every entity that interacts with you in a significant manner."3 This claim is repeated in the book The Customer Is CEO, which defines a customer as "the recipient of any kind of product or service provided by an organization, a recipient inside or outside."4 The author adds, "When thinking about which customers to pay attention to, the wisest choice is to cast the net broadly. They are all important."
According to these authors, everyone is a customer of someone else. There are internal customers and external customers: The manufacturing division is a customer of the R&D division, and the marketing department is a customer of manufacturing. In some accounts, employees are customers of management.
Although people may like being called customers—to foster their sense of importance and self-worth—following this well-intentioned fad can lead to an unintended, but insidious, outcome. By labeling everyone a customer, the organization becomes confused about its purpose and whom it is designed to serve. If everyone is a customer, then no one is—and focus on the real customer is lost.
We made this mistake at Harvard Business School in the mid-1990s when a new administration began telling our students that they were customers. In hindsight, the result was predictable: As paying "customers," students demanded that their professors respond promptly to their preferences. Professors and courses had become products that students were purchasing: If customers were unhappy, they reasoned, the product should be changed. Militant demands displaced an environment of mutual respect and shared learning. Needless to say, the practice of telling students they were customers was quickly stopped.
Managers must still segment the customer market and decide which segments to focus on.
In fact, the customer is too important to follow the practice of calling everyone a customer. As managers at GE have stated, "Customers are seen for what they are—the lifeblood of a company. Customers' vision of their needs and the company's view become identical, and every effort of every man and woman in the company is focused on satisfying those needs."5
Accordingly, the most critical decision in designing any organization is deciding who the primary customer is: the person or group that the organization is designed to serve. All significant structures and systems should be configured to ensure that the firm delivers superior value to these (and only these) customers. Making this critical decision involves two steps.
Step 1: Identify your constituentsThe first step is to identify all the constituents of an organization. From this set of constituents, managers must choose their primary customer—and organize accordingly.
A constituent is a person or group that receives utility from the value creation process of the organization and transacts routinely with the organization through markets. Note that I have limited the definition of a constituent (and ultimately a customer) to include only those who transact with the firm through markets. As a result, this analysis considers only organizations whose customers have choices. I include business firms, non-profit organizations, and universities; however, I exclude government agencies (in which service provision is mandated by law) as well as monopolies (in which customers have no real alternatives).6 Also excluded are internal business functions (e.g., human resources and information technology) unless they operate in a true market setting—that is, they are run as profit centers and users can choose to outsource or select an alternative service provider.7
Let's look at each of these conditions in turn.
The first condition states that a constituent finds value in the firm's outputs. Who satisfies this definition? Consider two firms providing products to a neighborhood pharmacy: a pharmaceutical company selling prescription drugs, and a consumer products company selling personal care products such as shampoo and beauty aids.
A consumer filling a medical prescription or purchasing face cream would certainly qualify as a constituent: Utility is received from the medication, which alleviates a health problem, or the face cream, which enhances skin care. But other individuals and groups also satisfy our definition: Pharmacy chains, distributors, hospitals, physicians, and research scientists all benefit in one way or another from the products of these two firms.
To meet the second condition, a constituent must transact routinely with the firm through the markets. Consumers clearly satisfy this condition. But do pharmacies, distributors, hospitals, physicians, and scientists also meet this second condition?
Responsiveness is the key objective for the design of market-facing units.
To answer this question we must recognize that there are several markets that are important to the success of organizations. Let's consider the pharmaceutical firm. In its product and service markets, the list of constituents includes consumers, pharmacists, retail pharmacy stores, wholesalers, and distributors. But we should also include clinical physicians and independent research scientists, who transact through knowledge markets. And we must also add shareholders and lenders, who participate through financial markets, and employees in labor markets. All these individuals, groups, and firms are constituents. But who is the primary customer?
Step 2: Based on your strategy, determine your primary customerOrganizations can be designed effectively to serve only one master. Accordingly, the pharmaceutical and consumer products companies are designed very differently to serve different customers. Other constituents, important as they may be to the firm's success, are treated differently.
The consumer products firm has identified retail consumers as its primary customer. As a result, the firm emphasizes consumer preference feedback, focus groups, product development, and intensive retail marketing programs. Hospitals, pharmacies, and research scientists are managed as constituents; efforts are made to ensure only that they feel fairly treated in their transactions with the firm.
The pharmaceutical company has chosen a very different path. Because its strategy focuses on basic scientific discovery, it has identified clinical physicians and scientists in the broad research community as its primary customers. Accordingly, the firm is organized to support pure and applied research and the interchange of ideas in the scientific community. Other groups, including retail consumers, are treated as constituents in the process and are managed accordingly.
Identifying the primary customer is not, of course, the end of the story. Managers must still segment the customer market and decide which segments to focus on. For the consumer products company, segmentation focuses on customer demographics: Will products be designed to appeal to wealthy, middle-market, or low-income customers? For the pharmaceutical business, segmentation is by therapeutic class: Will the firm focus on research related to oncology, psychotherapy, or cardiovascular drugs?
Alliance or Acquisition?HBSWK Pub. Date: Aug 30, 2004
Companies that use both alliances and acquisitions—rather than one or the other—may grow faster. Here's how to make the best strategic choice. A Harvard Business Review excerpt.
by Jeffrey H. Dyer, Prashant Kale, and Harbir Singh
Many companies believe that collaboration decisions are internal matters. They don't take into account external factors before picking strategies—and invariably fall victim to market forces. Companies should consider exogenous factors, like market uncertainty and competition, even if they can't control them.
Degrees of uncertainty. Executives know that collaborations between companies are inherently risky, but don't realize that they've become downright uncertain in a fast-changing world. Risk exists when companies can assess the probability distribution of future payoffs; the wider the distribution, the higher the risk. Uncertainty exists when it isn't possible to assess future payoffs. Companies are forced to decide how to team up with other firms, especially small ones, without knowing whether there will be payoffs, what they might be, and when the benefits might come their way.
Before entering into an acquisition or alliance, companies should break down the uncertainty that surrounds the collaboration's outcome into two components. First, managers must evaluate the uncertainty associated with the technology or product it is discussing with the potential partner. Can we tell if the widget will work? Is it technically superior to existing and potential rivals? Second, the company should assess if consumers will use the technology, product, or service and how much time it will take to gain widespread acceptance. Based on the answers—or lack thereof—the company can estimate if the degree of uncertainty that clouds the collaboration's end result is low, high, or somewhere in between.
When a company estimates that a collaboration's outcome is highly or moderately uncertain, it should enter into a nonequity or equity alliance rather than acquire the would-be partner. An alliance will limit the firm's exposure since it has to invest less money and time than it would in an acquisition. Besides, the company can sink more into the partnership if it starts showing results, and, if necessary, buy the firm eventually. If the collaboration doesn't yield results, the company can withdraw from the alliance. It may lose money and prestige, but that will be nowhere near the costs of a failed acquisition.
If there are several suitors, a company may have no choice but to buy a firm in order to preempt the competition.
That isn't exactly rocket science, but our research shows that few companies are disciplined enough to adhere to those rules. For instance, Hoffmann-La Roche spent $2.1 billion in June 1999 to acquire Genentech, which had developed a clot-busting drug, TPA, but hadn't completed effectiveness studies or sought FDA approval. Roche thought it could help the start-up get clearances for the drug quickly and then push it through its global distribution network. Six months later, a study found that TPA, which Roche had priced at $2,200 per dose, was only as effective at clearing clots as Hoechst's streptokinase, which sold at $200 a dose. That dashed Roche's hopes. TPA grew into a respectable $200-million-per-annum drug, but it never became the blockbuster Roche paid for. Given the high technical uncertainty in the drug development process, Roche should not have bought Genentech.
Not every company makes such mistakes. Bristol-Myers Squibb invested $1 billion to pick up a 20 percent equity stake in ImClone in September 2001 rather than buying the firm. In return, it bagged the marketing rights to ImClone's cancer-fighting drug, Erbitux, as well as 40 percent of annual profits. According to the deal, Bristol-Myers Squibb would invest $800 million more after ImClone got past key milestones in the drug approval process. In December 2001, when the FDA declined to review Erbitux due to "severely deficient" data, ImClone's share price plunged from over $60 to $25 within two weeks (and shook up offices on Wall Street and suburban homes in the U.S. in the process). The companies immediately renegotiated the alliance, and the giant will invest less in ImClone in the future. Had it chosen to acquire ImClone for the asking price of $5 billion, rather than allying with it, Bristol-Myers Squibb would have been gazing out of a $3.5 billion hole in its books instead of a $650 million one.
Forces of competition. There's a well-developed market for M&A in the world, so companies would be wise to check if they have rivals for potential partners before pursuing a deal. If there are several suitors, a company may have no choice but to buy a firm in order to preempt the competition. Still, companies should avoid taking over other firms when the degree of business uncertainty is very high. Instead, the company should negotiate an alliance that will let it pick up a majority stake at a future date after some of the uncertainty has receded.
Take, for instance, the manner in which Pfizer used an alliance with Warner-Lambert as a gateway to an acquisition. In June 1996, Pfizer offered to collaborate in the marketing of Lipitor, a new cholesterol-reducing drug that Warner-Lambert had developed. Lipitor was technically superior to competing products in some ways, but it was a late entrant in the market. Doctors and consumers were used to four other products in that category, and it wasn't clear if they would accept Lipitor immediately. Given the high technological and market uncertainty, Pfizer rightly believed that a contractual alliance made the most sense. Partly due to Pfizer's marketing acumen and distribution system, Lipitor's sales crossed $1 billion in its very first year, and by 1999, it had become a blockbuster drug with an annual turnover of $3 billion.
A company's experience in managing acquisitions or alliances is bound to influence its choices.
Even as Pfizer was exploring the possibility of working more closely with Warner-Lambert, archrival American Home Products and Warner-Lambert announced a surprise $72 billion merger in November 1999. The next day, Pfizer made an $80 billion counteroffer for its partner. Procter & Gamble jumped into the fray with a plan to acquire both AHP and Warner-Lambert but withdrew after investors reacted angrily. The battle between AHP and Pfizer for Warner-Lambert raged on for weeks, but it was a foregone conclusion. Pfizer's alliance with Warner-Lambert to market Lipitor, the cost-cutting opportunities it had spotted, and the possibility that Pfizer could combine one of its drugs, Norvasc, with Lipitor together gave Pfizer a distinct edge over American Home Products. By February 2000, Pfizer had won the battle for Warner-Lambert with a $100 billion bid.
Collaboration capabilitiesA company's experience in managing acquisitions or alliances is bound to influence its choices. Some businesses have developed abilities to manage acquisitions or alliances over the years and regard them as core competencies. They've created special teams to act as repositories of knowledge and institutionalized processes to identify targets, bid or negotiate with them, handle due diligence, and tackle issues that arise after a deal is made. They've learned the dos and don'ts from experience and created templates that help executives manage specific acquisition- or alliance-related tasks. In addition, they've developed formal and informal training programs that sharpen managers' deal-related skills. GE Capital, Symantec, and Bank One, among others, have created acquisition competencies, while Hewlett-Packard, Siebel, and Eli Lilly, for example, have systematically built alliance capabilities.
It's tempting to say that companies should use the strategy that they are good at because it does improve their chances of making collaborations work. However, specialization poses a problem because companies with hammers tend to see everything as nails. Since most firms have developed either alliance or acquisition skills, they often become committed to what they're good at. They stick to pet strategies even if they aren't appropriate and make poor choices.
Smart companies prevent such mistakes by developing skills to handle both acquisitions and alliances. That isn't as easy as it sounds. Take Corning. For decades, it had cultivated the ability to manage alliances. In the 1990s, however, the company used acquisitions to expand in the telecommunications business. Corning faced several challenges and much criticism because it had little experience in handling takeovers. While Corning made many mistakes, the company may have been on the right track when it tried not to let habit determine its choices. In fact, our research shows that companies that use both acquisitions and alliances grow faster than rivals do—as companies like Cisco have amply demonstrated.
Making the Cost-Migration Decision HBSWK Pub. Date: Jul 4, 2005
Executives see golden opportunities to move costs to low-labor-cost countries. But the decision making on what, how, and where to move is complex. Here is a framework for making those decisions effectively. From Supply Chain Strategy.
by Till Vestring, Ted Rouse, and Uwe Reinert
Companies today have unprecedented opportunities to move functions to low-cost countries and tap into the capabilities of overseas suppliers. But the plethora of options at their disposal poses difficult challenges. Managers have to determine which links in their supply chain—from materials supply to research and engineering to manufacturing and assembly—are best suited to relocation, and they have to weigh the various risks and benefits presented by different regions and countries. The danger is that the complexity of the decisions can lead to paralysis.
A recent Bain & Company survey reveals that the danger is not just theoretical. We canvassed 138 manufacturing executives in a range of sectors. While more than 80 percent of them believe that cost migration is a high priority in their industry, fewer than two-thirds have launched significant cost-migration initiatives. And even those making major efforts have focused on routine manufacturing and assembly processes. Only 15 percent, for example, are reaping benefits from relocating value-added activities such as research and development.
It's clear that the question for executives is no longer whether to move costs to low-labor-cost countries (LCCs)—that's now a given—but what to move, where to move, and how to move.
What many managers lack, however, is a framework for making these decisions, one that puts the relative benefits and risks of all the myriad options in the proper context and allows executives to make informed decisions that are consistent with corporate strategy.
The cost-migration imperativeWe categorized the companies in our sample according to their cost position. Twenty-five percent rated themselves as "cost leaders" in their markets, and 33 percent characterized themselves as "cost laggards," with the remainder falling somewhere in between. When we analyzed their operations, we found that the leaders were well ahead in pursuing cost migration, with more than two-thirds having already moved at least 20 percent of their supply chain costs to LCCs. In contrast, only 13 percent of the laggards had hit the 20 percent mark. The laggards, moreover, confessed to struggling with the practical aspects of overseas moves, while the leaders displayed a great deal of confidence and acumen in drawing on the resources of LCCs.
Consider the case of St. Louis-based Emerson Electric. A $15.6 billion conglomerate that competes in a wide variety of industrial markets around the world, Emerson has been a cost leader for many years. In the mid-1980s, recognizing a surge in global competition across its markets, Emerson embarked on a strategy to methodically and progressively shift sourcing, manufacturing, and engineering from its traditional bases in Western Europe and North America to LCCs. By 2002, LCCs had grown to account for 44 percent of Emerson's total manufacturing labor cost, a fourfold rise from a decade earlier. The company also made shifts of similar magnitude in material costs as well as engineering and development costs.
The success of Emerson's long-term strategy of transferring costs to LCCs is clearly visible in its earnings statement; the company's operating margins have steadily improved in the past decade. Emerson continues to pursue new cost-migration opportunities aggressively. Its ambitious targets include doubling, yet again, the proportion of its material and engineering and development costs located in what it calls "best-cost countries" by 2007.
All the leaders take a systematic approach to cost migration, carefully prioritizing activities and sources based on the prospective gains available. In particular, they recognize that the need to move to LCCs varies dramatically across industries and even individual product categories. Where labor accounts for a high percentage of total costs and transportation costs are relatively low, the cost-migration imperative is strongest. The inverse is also true: maintaining production facilities in high-cost countries can make sense when labor is a minor cost component or transportation costs are high, as in high-value electronics or bulky appliances.
In other words, a decision to migrate costs is not an all-or-nothing proposition; it requires a careful analysis of each product line, focusing on issues such as relative labor costs, logistics costs, customer requirements, and time to market. Once a company has determined which costs to shift to LCCs, success hinges on its ability to determine what particular activities or sources to move, where to move them, and how to make the shift organizationally and operationally. It's in these areas that the cost leaders offer some of their most powerful lessons.
What to move: Think functions, not factoriesThe labor-cost savings offered by LCCs can be striking, and managers may be tempted to simply shut down an operation in a high-cost country and move it wholesale. But transplanting entire factories is not necessarily the best route, even where significant improvements in cost-competitiveness are critical to survival. The cost of closing down a manufacturing facility in a high-cost country can be considerable—as much as +200,000 per laborer in a country like Germany. Then you have to add in the cost of constructing a new plant in an LCC, plus various hidden "legacy" costs such as those related to disrupting relations with local suppliers. The price of shifting an entire production facility is often so high that it just doesn't make economic sense.
That's why cost leaders think in terms of functions, not factories. They realize that just by shifting certain carefully selected processes or activities, they often can approximate the savings of moving facilities without having to bear the shutdown and start-up costs.
Basic manufacturing processes are only the tip of the iceberg, however. The leaders recognize that the skill levels of LCC workforces are reaching or exceeding those of the developed countries of the West. Several Asian countries, such as Singapore and Taiwan, have in the last few years boasted education levels comparable to or higher than those of the United Kingdom or France. India alone is home to 350 million people who speak English, and it produces 1.5 million tech-savvy college graduates each year.
Companies that understand that "low-wage" no longer translates as "low-skill" take a broad approach to cost migration. They examine specific functions, such as finance or marketing, and components on a case-by-case basis, identifying those ripe for migration and sidestepping those that are not. Boeing, for instance, has a center that does design and technical work in Russia, a country with deep aerospace-engineering skills. Procter & Gamble has its payroll done in Costa Rica. General Electric has built an R&D center in India with a staff of 500, one-third of whom are PhDs. Our research shows that cost leaders are about twice as likely as cost laggards to reap benefits from shifting or adding knowledge-intensive activities such as R&D to LCCs.
In deciding which functions to move, the leaders also carefully take into account opportunities to build new markets in the host country. Emerson, for example, does $900 million worth of manufacturing and sourcing in China. But China is not only a key link in Emerson's global supply chain, it also accounts for more than $1 billion in annual sales of products ranging from industrial motors to network power systems. Emerson uses its operations in LCCs to gain access to and expertise in serving lucrative and rapidly growing new markets. And one of the key reasons GE sources extensively in China is because China represents a vast market for its offerings: a projected $5 billion this year. Like Emerson, GE is now selling more in China than it is sourcing—$1 billion more, in fact.
Where to move: Build a portfolioChina and India have been the leading targets for cost migration—and for good reason. Each offers an attractive combination of low costs, well-developed capabilities, business-friendly regulatory environments, and large domestic markets. But while China and India are the top two destinations cited by both leaders and laggards in our survey, we found that the leaders are far more likely to look beyond those two countries in evaluating LCCs. They recognize that each country has its own risk-and-benefit profile and that these profiles can and will change over time. Indeed, considering that a new facility may have an investment horizon of twenty to thirty years, historical trends and present conditions may be less important than future developments. To hedge their bets and gain greater flexibility, the leaders seek to build a portfolio of LCCs rather than concentrate all their activity in one or two of them. That way, they are better able to ensure security of supply and stable costs over the long run.
A successful portfolio needs to incorporate a range of decision criteria; it can't have just a one-dimensional focus on cheap labor. In China, for instance, companies face political uncertainty and weak enforcement of property rights, risks that could overwhelm the benefits of low labor costs.
To manage such concerns, the cost leaders think of their global supply chain in a way that balances low costs against political and economic risks and proximity to key markets. While China may be the most attractive location for many products on a simple cost-comparison basis, a portfolio approach may mean accepting higher unit costs in other Asian countries, Eastern Europe, or Latin America to protect against currency risks, political risks, or the impact of natural catastrophes. Hungary's labor cost, for example, almost quadruples China's, but because Hungary offers a highly educated workforce and relatively low political risk, it can be a better bet for Western European companies looking to migrate skilled manufacturing.
Of course, production diversity can be taken too far. Many industrial companies struggle with a legacy of fragmentation in their supply chains: subscale plants in dozens of countries, each focused primarily on local assembly. Cost-migration strategies should not be allowed to perpetuate this approach. Decisions about portfolios should be highly disciplined, balancing the risk advantages of diversification with the scale advantages of consolidation. Emerson, for example, concentrates its activities in four major production centers around the world, a portfolio that spans Eastern Europe, Asia, and Latin America but also provides the benefits of concentration.
How to move: Lead from the topA company's own organizational structure often presents the final hurdle to a successful cost-migration strategy. Here, again, we found a sharp difference between the approaches of leaders and laggards. The laggards tend to leave cost-migration decisions up to individual business units, which has two big drawbacks. First, it encourages incremental decision making rather than a strategic approach to cost management. Second, it prevents companies from reaping savings across business units by pooling sourcing, jointly developing new suppliers, or expanding economies of scale in LCCs.
The cost leaders, in contrast, drive their initiatives from the top down. According to our study, 82 percent of leaders use a companywide or centralized strategy for cost migration. Munich-based Siemens, for example, has announced its intent to shift more internal services and software development to India and other low-cost locations and is setting targets for manufacturing; its Osram division will increase LCC production from 15 percent to 33 percent.
The advantage? A top-down, centralized approach allows companies to use scale to their advantage as they build out their LCC presence, and, perhaps most important, it is often the only way to overcome deep organizational resistance to the redeployment of labor and resources.
Throughout the effort, executives need to guard against underestimating the challenges of such a large-scale initiative. When it comes to cost migration, there are no easy or ready-made answers. Success always requires a major organizational effort and strong leadership. But by taking a methodical, proven approach to making smart what, where, and how decisions, companies will be able to avoid many of the problems that can undermine even the best intentions. And they can sidestep perhaps the greatest roadblock of all: decision paralysis
Identify Emerging Market OpportunitiesHBSWK Pub. Date: Jul 18, 2005
Yes, you understand your company needs to compete in emerging markets. But which country is the best fit for you? A Harvard Business Review excerpt by Tarun Khanna, Krishna G. Palepu, and Jayant Sinha.
by Tarun Khanna, Krishna G. Palepu, and Jayant Sinha
Editor’s note: Companies are increasingly looking to emerging markets like China as a vital source of growth. The problem is these companies often lack an effective strategy for identifying which countries to do business with. In a June Harvard Business Review article, excerpted here, the authors present a “five contexts framework”—issues to consider, in essence—to understand institutional variations between countries. We excerpt a summary of the five contexts.
As we helped companies think through their globalization strategies, we came up with a simple conceptual device—the five contexts framework—that lets executives map the institutional contexts of any country. Economics 101 tells us that companies buy inputs in the product, labor, and capital markets and sell their outputs in the products (raw materials and finished goods) or services market. When choosing strategies, therefore, executives need to figure out how the product, labor, and capital markets work—and don’t work—in their target countries. This will help them understand the differences between home markets and those in developing countries. In addition, each country’s social and political milieu—as well as the manner in which it has opened up to the outside world—shapes those markets, and companies must consider those factors, too.
The five contexts framework places a superstructure of key markets on a base of sociopolitical choices. Many multinational corporations look at either the macro factors (the degree of openness and the sociopolitical atmosphere) or some of the market factors, but few pay attention to both. We have developed sets of questions that companies can ask to create a map of each country’s context and to gauge the extent to which businesses must adapt their strategies to each one. [...]
Political and Social Systems. Every country’s political system affects its product, labor, and capital markets. In socialist societies like China, for instance, workers cannot form independent trade unions in the labor market, which affects wage levels. A country’s social environment is also important. In South Africa, for example, the government’s support for the transfer of assets to the historically disenfranchised native African community—a laudable social objective—has affected the development of the capital market. Such transfers usually price assets in an arbitrary fashion, which makes it hard for multinationals to figure out the value of South African companies and affects their assessments of potential partners.
Executives would do well to identify a country’s power centers and figure out if there are checks and balances in place.
The thorny relationships between ethnic, regional, and linguistic groups in emerging markets also affects foreign investors. In Malaysia, for instance, foreign companies should enter into joint ventures only after checking if their potential partners belong to the majority Malay community or the economically dominant Chinese community, so as not to conflict with the government’s long-standing policy of transferring some assets from Chinese to Malays. This policy arose because of a perception that the race riots of 1969 were caused by the tension between the Chinese haves and the Malay have-nots. Although the rhetoric has changed somewhat in the past few years, the pro-Malay policy remains in place.
Executives would do well to identify a country’s power centers, such as its bureaucracy, media, and civil society, and figure out if there are checks and balances in place. Managers must also determine how decentralized the political system is, if the government is subject to oversight, and whether bureaucrats and politicians are independent from one another. Companies should gauge the level of actual trust among the populace as opposed to enforced trust. For instance, if people believe companies won’t vanish with their savings, firms may be able to raise money locally sooner rather than later.
Openness. CEOs often talk about the need for economies to be open because they believe it’s best to enter countries that welcome direct investment by multinational corporations—although companies can get into countries that don’t allow foreign investment by entering into joint ventures or by licensing local partners. Still, they must remember that the concept of “open” can be deceptive. For example, executives believe that China is an open economy because the government welcomes foreign investment but that India is a relatively closed economy because of the lukewarm reception the Indian government gives multinationals. However, India has been open to ideas from the West, and people have always been able to travel freely in and out of the country, whereas for decades, the Chinese government didn’t allow its citizens to travel abroad freely, and it still doesn’t allow many ideas to cross its borders. Consequently, while it may be true that multinational companies can invest in China more easily than they can in India, managers in India are more inclined to be market oriented and globally aware than managers are in China.
The more open a country’s economy, the more likely it is that global intermediaries will be allowed to operate there. Multinationals, therefore, will find it easier to function in markets that are more open because they can use the services of both the global and local intermediaries. However, openness can be a double-edged sword: A government that allows local companies to access the global capital market neutralizes one of foreign companies’ key advantages.
Openness can be a double-edged sword.
The two macro contexts we have just described—political and social systems and openness—shape the market contexts. For instance, in Chile, a military coup in the early 1970s led to the establishment of a right-wing government, and that government’s liberal economic policies led to a vibrant capital market in the country. But Chile’s labor market remained underdeveloped because the government did not allow trade unions to operate freely. Similarly, openness affects the development of markets. If a country’s capital markets are open to foreign investors, financial intermediaries will become more sophisticated. That has happened in India, for example, where capital markets are more open than they are in China. Likewise, in the product market, if multinationals can invest in the retail industry, logistics providers will develop rapidly. This has been the case in China, where providers have taken hold more quickly than they have in India, which has only recently allowed multinationals to invest in retailing.
Product Markets. Developing countries have opened up their markets and grown rapidly during the past decade, but companies still struggle to get reliable information about consumers, especially those with low incomes. Developing a consumer finance business is tough, for example, because the data sources and credit histories that firms draw on in the West don’t exist in emerging markets. Market research and advertising are in their infancy in developing countries, and it’s difficult to find the deep databases on consumption patterns that allow companies to segment consumers in more-developed markets. There are few government bodies or independent publications, like Consumer Reports in the United States, that provide expert advice on the features and quality of products. Because of a lack of consumer courts and advocacy groups in developing nations, many people feel they are at the mercy of big companies.
Labor Markets. In spite of emerging markets’ large populations, multinationals have trouble recruiting managers and other skilled workers because the quality of talent is hard to ascertain. There are relatively few search firms and recruiting agencies in low-income countries. The high-quality firms that do exist focus on top-level searches, so companies must scramble to identify middle-level managers, engineers, or floor supervisors. Engineering colleges, business schools, and training institutions have proliferated, but apart from an elite few, there’s no way for companies to tell which schools produce skilled managers. For instance, several Indian companies have sprung up to train people for jobs in the call center business, but no organization rates the quality of the training it provides.
Capital Markets. The capital and financial markets in developing countries are remarkable for their lack of sophistication. Apart from a few stock exchanges and government-appointed regulators, there aren’t many reliable intermediaries like credit-rating agencies, investment analysts, merchant bankers, or venture capital firms. Multinationals can’t count on raising debt or equity capital locally to finance their operations. Like investors, creditors don’t have access to accurate information on companies. Businesses can’t easily assess the creditworthiness of other firms or collect receivables after they have extended credit to customers. Corporate governance is also notoriously poor in emerging markets. Transnational companies, therefore, can’t trust their partners to adhere to local laws and joint venture agreements. In fact, since crony capitalism thrives in developing countries, multinationals can’t assume that the profit motive alone is what’s driving local firms.
Several CEOs have asked us why we emphasize the role of institutional intermediaries and ignore industry factors. They argue that industry structure, such as the degree of competition, should also influence companies’ strategies. But when Harvard Business School professor Jan Rivkin and one of the authors of this article ranked industries by profitability, they found that the correlation of industry rankings across pairs of countries was close to zero, which means that the attractiveness of an industry varied widely from country to country. So although factors like scale economies, entry barriers, and the ability to differentiate products matter in every industry, the weight of their importance varies from place to place. An attractive industry in your home market may turn out to be unattractive in another country. Companies should analyze industry structures—always a useful exercise—only after they understand a country’s institutional context
The New International Style of ManagementHBSWK Pub. Date: Jul 11, 2005
Today's transnational road warriors and the businesses they work for are forging an international style of business, say Harvard Business School faculty and alumni. Do you speak their language?
by Garry Emmons
At Dell Beijing, Andy Klump (HBS MBA '03) was excelling at his job—selling computer hardware and services solutions to multinationals—when the company's 360-degree performance-review process underwent a change. As part of the new approach, Klump was expected to make an assessment of his boss, a Chinese national, and deliver it to him in person. Recalls Klump, "I had achieved success, was enjoying rapid promotions, and worked well with my manager. When it came time for him to receive feedback, he encouraged direct communication from all team members, all of whom were local Chinese except me, in either a team or a one-on-one setting."
Continues Klump, "I understood enough of Chinese culture to know that you rarely, if ever, confront someone in a group setting, as maintaining face is important. So I waited to have a one-on-one session with my boss, in which I structured my feedback logically and 'toned down' my comments to show respect, while still providing constructive ideas. Initially, he seemed to take the feedback well. But then I gradually noticed a distancing in our relationship. Eventually, I realized that he did not support my further career progression as he had before."
When Klump discussed the matter with a fellow team member, she laughed and told him, "You are too American! No matter how toned down your comments might be, it's still too direct." The incident and its aftermath, Klump says, were largely responsible for prompting him to consider other options in China. "I have no regrets," he adds, "because I learned so much from that experience." Now working in strategic planning for Philip Morris International's China operations, Klump is part of a small management team whose eleven members hail from six different countries.
Klump's experience is a reminder of just how complicated, on a personal level, globalization and managing across cultures can be. On the one hand, the world seems small and interconnected, thanks to high-speed technology, travel, and communications. On the other hand, beneath a deceptive veneer of familiarity, cultural gulfs and local differences often remain hidden.
There is an increasingly international style of management.
— John Quelch, HBS
Amid these conflicting realities, however, Harvard Business School alumni report anecdotal evidence that a youthful and growing cosmopolitan business class is bringing these different worlds closer together. Despite national differences, these transnational road warriors frequently have a common grounding in education, professional background, and global popular and business culture. In the arena of international commerce, they share an expectation that differences will be set aside in order to advance with common purpose toward a larger goal—getting the task at hand done right.
Common groundThis convergence among a new generation of international business practitioners has a parallel at the institutional level: International businesses increasingly are conducting themselves on common ground in order to compete globally. They don't necessarily do business the same way—with identical processes, functions, and operations—while approaching this elevated stage; but by the time they attain it, successful companies do share certain qualities and practices not observed in firms that fall short.
Multinational firms have understood for some time that certain activities, such as marketing, must remain local in concept and execution to be successful. At the same time, the defining feature of globalization has been the push by multinationals toward organization-wide rationalization. Efficiencies and commonalities have emerged, particularly with certain production processes but also in backroom functions such as quality assurance and control. In addition, multinationals have been increasingly pressed to move toward international norms in the area of stakeholder relations (e.g., human- and workers-rights issues, and environmental matters). Thus, among its other ramifications, globalization is forcing companies to operate and conduct themselves according to certain international standards and expectations. This trend is inevitably reflected in the way these companies are managed.
"There is an increasingly international style of management," declares HBS professor John Quelch, an expert in international marketing and business development. He describes this style as an amalgam, built atop a U.S. model that has borrowed freely from others around the world. "With the United States accounting for approximately 30 percent of the world's GDP and as the home to 62 out of the 100 most valuable brands in the world, it's not surprising that America is in the driver's seat," Quelch notes. He characterizes the U.S. model of management as focused on immediate outcomes and results and generally accustomed to having its way. But it has an added feature that enables it to remain powerful even as it is transformed.
"When it's advantageous," Quelch explains, "the U.S. system can be very ecumenical, flexible, and open to new ideas and people. It learns from best practices in other countries, and it adapts accordingly. A prime example is America's absorption of Japanese manufacturing techniques in the 1980s." Over time, with this kind of ongoing cross-pollination, today's system of global management, to the extent it can still be called American, will look less like it used to and more like something "multinational."
People are willing to adjust their behavior to facilitate teamwork, but they expect others to make a similar effort.
— Irina Gaida, BCG
HBS professor Rohit Deshpandé has discovered that, in order to make themselves globally competitive, successful companies strive to achieve certain characteristics, even if those desired traits are not necessarily found in, or are contrary to, the native business culture of the firm's home country. Thus, while average companies in France, Germany, and Japan may all look quite different from each other, those countries' best-performing multinationals look quite similar. "When you consider the top-quartile companies across multiple sectors—such as B2B, B2C, services, political systems, or cultures—you'd be hard-pressed to tell their nationality," says Deshpandé. "Among other distinguishing characteristics, these firms tend to have intrapreneurial cultures that encourage and reward risk. They are quick to market and invest a lot in customer insight. A commitment to being customer-centric tends to be deeply embedded throughout the organization."
'Corporate culture trumps national culture'These findings suggest that excellence in global corporate competition demands certain success-enabling organizational characteristics, attributes that of course must be introduced and/or supported by management. Deshpandé's observation that in top international firms, "corporate culture trumps national culture," is in line with what other studies show. They indicate that as high-performing global companies implement transnational strategy and strive to achieve competitive advantage, decision making by those firms and their individual managers seems to rise above national influences and toward a commonality shared by other top firms in the international arena.
In their study of the software industry in India, HBS professors Tarun Khanna and Krishna Palepu detect signs that globalization in the product and labor markets can, in some cases, cause corporate governance to draw closer to international standards as well. Khanna and Palepu stress, however, that their research also indicates that there is a limit to such convergence and that national influences and systems remain powerful and distinct. With that caveat, Palepu observes, "In general, world-class companies facing global competition do appear to benchmark themselves with global best practices and performance standards." He defines those aspired-to benchmarks as sound corporate governance, transparency, an orientation to quality, and a performance-driven, high-standards organizational culture.
As the best international companies exhibit similarities in certain standards and practices, managers within these firms, despite national and cultural differences, are finding common ground where they can work together. "In a truly multicultural corporate environment, people strive to strike a balance between their own cultural core and being open to other value systems, communication styles, and decision-making processes," observes Irina Gaida (HBS MBA '03). Gaida, a Russian national who has worked in London with United Technologies (in a department whose fifteen members represented seven countries) and in Paris with Bain, is currently in Moscow with BCG (Boston Consulting Group). "People are willing to adjust their behavior to facilitate teamwork, but they expect others to make a similar effort," Gaida notes. "This mutual adjustment eventually becomes the norm within an organization."
At Philip Morris International's Beijing office, Andy Klump says, "There is an emerging international business style, but it varies dramatically by company. While Dell China's organization had American attributes, and while higher-level management interaction with international departments was common, its day-to-day management style was localized and gave limited international exposure to some managers. By contrast, at Philip Morris International, a Switzerland-based company, there is a high degree of regional and international interactions which, by default, require employees at many different levels to have an understanding of different styles and ways of conducting business. My management team members, from six different countries and a variety of educational experiences, have adopted a similar style that allows them to coexist with colleagues from vastly different backgrounds."
It's important to remember that one can be innovative in very different ways in Brazil, or Japan, or India, or the United States.
— Rohit Deshpandé, HBS
Mary Moses (HBS MBA '03) is an American who works for VASC, a state-owned Vietnamese telecom and media company. "The people who manage business well in a foreign environment do create a new style of doing business that blends the best of both Western and local practices," she says. "Unfortunately, this is more the exception than the norm. Far too many try to enforce a Western style upon the local culture or, even worse, adopt the most convenient, and often the worst, of both cultures."
Global standards for the workplaceHaving spent time previously in several countries as a Monitor and McKinsey consultant, Aaron Pempel (HBS MBA '98) has lived full time in Mexico for nearly two years as a Nike executive. "I absolutely believe there are emerging global universal standards for work, driven to a great extent by the large multinationals," says Pempel. For evidence of that, he need look no farther than his own place of employment. For its operations in Mexico, where the tradition of the two-hour lunch is still strong in many places, Nike switched to a one-hour lunch break. For some Mexican employees, the decision significantly altered lifestyles and custom. Working mothers, for example, could no longer use the extra hour to pick up children from school and share a meal with the entire family. Yet a majority of the company's employees voted to make the change. In moving closer to the international standard, Nike's corporate culture, in effect, trumped an element of national culture.
In the end, says John Quelch, "The integration of the global economy is such that no one anywhere is insulated. And one naturally wants to take what seems to be the best from wherever one can find it. That is what a multinational does—it leverages its status as an international corporation by taking the best ideas from everywhere it has a presence and implementing them worldwide throughout its entire system."
Rohit Deshpandé also sees local context as integral to the global big picture. "If an innovative, entrepreneurial culture benefits customers wherever they are in the world, it's important to remember that one can be innovative in very different ways in Brazil, or Japan, or India, or the United States," he declares. "In my view, globalization is not forcing an American model across the world. What globalization is doing is creating a successful business-practice model."
Should I Pay the Bribe?HBSWK Pub. Date: Mar 28, 2005
How should you handle corruption in your markets? On the heels of a recent Harvard Business Review fictional case study on corruption, HBS professor Rafael Di Tella lays out the not-so-black-and-white issues in this Q&A.
by Cynthia D. Churchwell
At Harvard Business School, one of professor Rafael Di Tella's areas of study is how political corruption and common crime can be controlled in a variety of contexts. So it was only natural that Di Tella would be asked to comment when the editors of Harvard Business Review created a fictional case around the topic of extortion.
"The Shakedown" looks at the conflicts faced by the owner of a software development center in Kiev. Pavlo Zhuk, the U.S.-based co-owner, is notified by his partner that their Kiev office has been visited by Ukraine Tax Authority agents demanding payment of late taxes. They have been given one week to pay. Zhuk himself was involved in paying bribes to expedite the establishment of phone lines for their business, shortening the process to a few weeks instead of years, and has even admitted he is amenable to paying "so-called facilitation payments to get bureaucrats to do their jobs, especially if that's what everyone else does." However, the promise of "serious consequences" if payment isn't made sounds more like extortion. Zhuk doesn't want to shutter the business, but also wants to act as ethically as possible.
Di Tella discusses the case and his own research.
Cynthia Churchwell: You have been studying the impact and workings of corruption for several years. What spurred your interest in this area?
Rafael Di Tella: I was born in Argentina, need I continue...? I think I was always interested in politics and somewhat frustrated by the "explanations" offered for the country's economic and social problems. One of the more standard arguments was that corruption was the cause of all our problems. It seemed that we could become rich by becoming good. Obviously, this coincidence was quite nice but also somewhat suspicious.
Q: What countries and corrupt activities have you studied? Have you been particularly surprised by anything you have learned? What trends are you seeing?
A: My research does not have a geographic focus, although the experiences of Europe and the U.S. as well as that of Latin America have been more salient than others.
Rafael Di Tella

I've been surprised by how little progress we have made with the standard economic model of incentives (to fight corruption). For example, I don't think we could have predicted the little use we have for strategies that would pay high salaries in bureaucracies to deter corruption.
The biggest trend I see is the increased interest in talking about corruption. This is not the same as saying that people are more interested in reducing corruption. I think there is quite a lot of evidence suggesting that they are not. But people are certainly interested in telling other people how worried they are about corruption. It's a bit like jewelry: It makes people feel distinguished.
Q: Do you have a sense of the overall impact corruption has worldwide and on local economies?
A: No. There are countries that can grow a lot with corrupt governments and others where corruption is quite detrimental to economic progress. It really depends on the form of corruption and how markets are organized.
Q: What negative impact could paying bribes have on managers, even in countries where bribery is common?
A: It really depends on the different cases. In general, I would say that corruption exposes the managers and the organizations they work for. But it may also be quite profitable. And, as I explain in the comment to the HBR case, it may sometimes be unavoidable.
Q: How can managers avoid paying bribes and still protect their business from extortion? Is there any middle ground between the options of pay or leave?
I've been surprised by how little progress we have made with the standard economic model of incentives.
A: Again, the answer depends on the cases. But in general, in some markets there is no way of avoiding payment of bribes, except by exiting the market.
Q: Please tell us about your initiative to create a joint center between Harvard and Yale to monitor corruption. What will its mission be and how will it operate?
A: In many countries corruption accusations are used politically. Thus, the judiciary system is often an instrument of influence rather than a source of justice. In some cases, the accusations are so ridiculous that they are laughable. In one case, a former official at the economy ministry was accused of using the Net Present Value method. Yes, that was a key part of the evidence that was cited in the sentencing.
Still, these accusations have a cost to the politicians, both in terms of the monetary cost of the legal defense efforts and in terms of the reduced esteem of the uninformed public at home and abroad.
My proposal is to have a group of former lawyers and former judges in the U.S. to review selected judicial sentences in other countries, and give them a grade. This would introduce some external checks on judicial systems that have become too politicized to be of any real use in the fight against corruption
Is Business Management a Profession?HBSWK Pub. Date: Feb 21, 2005
If management was a licensed profession on a par with law or medicine, there might be fewer opportunities for corporate bad guys, argue HBS professors Rakesh Khurana and Nitin Nohria, and research associate Daniel Penrice.
by Rakesh Khurana, Nitin Nohria, and Daniel Penrice
Repeated and, as of this writing, ongoing revelations of corporate wrongdoing over the past two years have eroded public trust in business institutions and executives to levels not seen in decades. A recent Gallup poll indicates that Americans now have no more trust in business leaders than they do in Washington politicians.1 Fairly or not, people have become willing to believe that executives, as a class, are greedy and dishonest.
However natural it might be to ask how so many executives—not to mention accountants, investment bankers, stock market analysts, lawyers, money managers, and others implicated in recent acts of corporate malfeasance—could have become so depraved, this is probably the wrong question. Given that human nature does not change much from age to age, the real issue is the effectiveness of the constraints that society places on the purely selfish impulses of individuals. In response to the recent scandals, politicians and government officials have stepped in to pass new laws and create new regulations, while prominent persons on Wall Street and elsewhere in the business community have issued their own calls for reform in such areas as accounting practices and executive compensation. Yet while laws, regulations, and policies have a clear role to play here, they are a relatively expensive and inefficient way for a society to promote responsible conduct and trustworthy business leadership.
In the case of bad behavior on the part of business executives, the reason that the issue of trust arises is that these individuals are expected to exercise judgment—based on specialized knowledge and methods of analysis that they alone are thought to possess—in areas in which their decisions affect the well-being of others. When the need for such judgment has arisen in other spheres that are vital to the interests of society (such as law and government, military affairs, health, and religion, to consider the classic examples), modern societies have responded by creating the institutions that we know as professions. One way of diagnosing the cause of the recent epidemic of business scandals would be to speak of a widespread failure among CEOs and other senior executives (along with board members, auditors, financial analysts, and others) to uphold their professional obligations.
To speak of the professional obligations of individuals such as CEOs and other executives is to imply that business management itself is a profession—but is it? Sociologists who study the professions have employed a wide range of perspectives and criteria for determining what makes an occupation a profession. For the purposes of our present inquiry, we have chosen four traits and practices out of the network of those that have been found to be associated with professions. We use these traits and practices both to set forth our own notion of the essence of professionalism and to enable us to compare management with what we take to be the bona fide professions, in particular law and medicine.2 Our criteria for calling an occupation a bona fide profession are as follows:
a common body of knowledge resting on a well-developed, widely accepted theoretical base;
a system for certifying that individuals possess such knowledge before being licensed or otherwise allowed to practice;
a commitment to use specialized knowledge for the public good, and a renunciation of the goal of profit maximization, in return for professional autonomy and monopoly power;
a code of ethics, with provisions for monitoring individual compliance with the code and a system of sanctions for enforcing it.
In comparing management with the more traditional professions of law and medicine along these criteria, one inevitably finds it wanting.3 (We say this despite the inroads made by market values at the expense of traditionally professional ones that have been observable in both law and medicine in recent years.) This shortcoming, we believe, has a direct bearing on society's ability to demand and obtain responsible conduct from executives, as well as on management's ability to maintain the public trust required for the optimal functioning of our economic institutions. While not intending to idealize what we have called the bona fide professions, we believe that the comparison we undertake in this paper has merit as a way of suggesting how management as an institution might be reformed, other than through the blunt instruments of law and regulation on the one hand and well-meaning but ultimately toothless calls for greater individual integrity and ethics on the other.
To speak of the professional obligations of individuals ... is to imply that business management itself is a profession—but is it?
The sociology of the professions is too large a body of theoretical and empirical analysis to be more than sketched in this paper. It is also a field that has not yet taken management as a central subject of empirical study. We shall therefore deal only with some of the central problems of the structure of management. Even then, for lack of space, our objective in this essay is not to make an airtight case about the state of contemporary management, but rather to raise important questions. By comparing management with the legal and medical professions, we hope to stimulate discussion and debate that can lead to a deeper understanding of the current state of management.4
We have listed four criteria for determining whether management can be considered a genuine profession. Let us consider how management in its present institutional state matches up against each of these criteria.
Common body of knowledge resting on well-developed, widely accepted theoretical baseThe traditional professions of law, medicine, and the clergy all have deep historical roots in another major institution of Western society: the university. Roman and canon law, medicine, and theology, in fact, constituted three of the four faculties of the medieval European university, and they survive to this day—in schools of law, medicine, and divinity, respectively—in the modem American university. The study of law in America today remains rooted in the centuries-old traditions of Roman and Anglo-American law, as systematized and interpreted by the discipline of legal philosophy, or jurisprudence. Law students now learn the law not as a collection of statutes but rather as a set of principles, doctrines, and rules that have evolved over the course of centuries and are said to constitute legal reasoning itself. The study of medicine, for its part, has been continually transformed since the Middle Ages by the rise and ongoing progress of modern science. The development of the germ theory of disease in the nineteenth century, for example, and of the science of genetics in the twentieth, have gone into the formation of a theoretical structure that undergirds the body of knowledge every medical student is now required to master. The medical school curriculum proceeds from the premise that in order to diagnose and treat disease, the would-be physician must have a firm grounding in what science (or, perhaps more accurately, what is generally accepted as science) currently understands to be its causes.
Turning to the body of systematized knowledge underpinning the claim that business management too is a profession, we find important differences between management as a science and the knowledge bases of the traditional professions. It is not just that the study of management was a latecomer to the university—which, since the creation of the modem American research university in the last three decades of the nineteenth century, has gained an effective monopoly on professional education 5 (the first university-based business school in America, the University of Pennsylvania's Wharton School of Finance, was not founded until 1881 6). For even as management was being gingerly accepted as a subject deserving of inclusion within the university, the discipline of management—following close behind the occupation itself—was having to be invented ex nihilo. The professionalization of management, which was what business schools were founded to undertake, began as a quest to delve beneath the practice of business, with its rule-of-thumb approach to business problems, to discover a set of underlying principles that could explain effective practice. These basic principles were by no means evident to the pioneers of academic business education—and, as we suggest, they remain by no means evident today.7
During the time that the first business schools were being constituted, at the beginning of the twentieth century, "scientific management" was in the air, as Frederick Taylor's application of scientific methods to the study of physical labor had begun to be extended to the organization of industry as well as to spheres such as higher education and government.8 While Taylorism was quickly jettisoned as the core of the business school curriculum, it made scientific reasoning and method appear to be applicable to business, thus helping to legitimate the study of business as an activity within the university. Yet what exactly a "science" of management should study would be puzzled over and debated for a great many years. Three curricular models emerged and competed with one another in the early decades of university business education. The first was a simple aggregation of courses taught elsewhere in the university and covering such obviously useful (if intellectually circumscribed) subjects as accounting and business law. The second model attempted to organize business education around specific industries such as banking, transportation, merchandising, mining, and lumber. The third model—increasingly adopted by the 1930s, and still the basis of the business school curriculum today—was the functional approach, as the grouping of courses began to mirror the differentiation of finance, administration, operations, and marketing as the major activities of the firm. Thus, the curricular structure evolved as a pragmatic response to the challenge of turning out graduates who could perform the tasks that would be required of them by employers.9
It is not that no attempts were made, in the meantime, to discover an underlying general theory that would inform the tasks of a manager. But the search for a theoretical model capable of explaining effective business practice—which was actually a search for an existing discipline or set of disciplines from which such a model could be produced—foundered for many years on disagreements about the nature of business firms and the ultimate purpose of business. The decision (made very early in the history of university-based business education) to remove the study of business from economics departments stemmed from the recognition that economics, at the time, had no interest in one of management's most pressing concerns—namely, the internal organization of the firm. When experimentation with various disciplines—including sociology, psychology, and even (at Harvard Business School's Fatigue Laboratory, from the 1920s to the 1940s) physiology—yielded results that were either too politically radical for the university's guardians and patrons (as happened at the Wharton School during the Progressive Era) or simply lacking in explanatory power and practical applicability, the resulting void at the center of the business school curriculum eventually caused business educators to take a second look at the discipline of economics.
Economics, in the decades prior to World War II, had occupied a relatively weak position in the disciplinary pecking order. Yet as the growing acceptance of Keynesian theory in the post-war years gave the subject greater prestige, and the 1958 reports on the state of business education in America by the Carnegie Corporation and the Ford Foundation led to a greater emphasis on the social sciences and quantitative method in business schools,10 economics began to move into the position of dominance that it enjoys in the MBA curriculum today. Building on the foundational work of Adolf Berle and Gardiner Means on the separation of ownership and control in the large corporation, and of Ronald Coase on the significance of transaction costs, economists such as Michael Jensen and Oliver Williamson began, in the 1970s, to develop a new theory of the firm that treated it not as a "black box" that converted inputs into outputs but rather as an institution requiring and rewarding economic analysis.11 It is undeniable that these and other recent economic theorists have contributed important insights into the internal workings of firms that are applicable to managerial practice. Yet they have also left business education with a dominant theory that, in adhering to many of the individualist assumptions and methodologies of neoclassical economics, is unable to account for much of the social environment of business—including the social and cultural factors that make themselves felt within organizations, as well as other essential aspects of the phenomenon that it purports to explain.12
System of certificationBesides having failed to develop a body of knowledge and theory comparable to those of the true professions, management differs from these other occupations in lacking a set of institutions designed to certify that its practitioners have a basic mastery of a core body of specialized knowledge and can apply it judiciously. In medicine and law, for example, there are institutions that specify the educational requirements (i.e., the MD or JD degree) that anyone desirous of practicing the profession must obtain. Beyond these educational requirements, aspirants to membership in these and other recognized professions must obtain a license to practice by passing a comprehensive exam designed to test mastery of the knowledge ostensibly acquired in professional school. Once the aspiring professional passes that exam, he or she must invest in a certain amount of continuing education in order to stay abreast of evolving knowledge in the profession and to maintain a license to practice.
Management differs from medicine, law, and other recognized professions in having neither a formal educational requirement nor a system of examination and licensing for aspiring members. Although the MBA has been the fastest-growing graduate degree for the past twenty years, it is not a requirement for becoming a manager.13 It is true that for those seeking access to senior executive positions or work in the fields of investment banking or consulting, an MBA has become a de facto requirement. Yet even in these cases, there is no requirement of passing a standard exam before being admitted to practice, nor are senior managers, investment bankers, or consultants required to participate in continuing education. There is no explicit obligation, for example, for experienced, high level managers to know anything about investing in innovative new financial derivatives or special-purpose vehicles, even if they serve on boards that are required to approve such potentially risky transactions. In fact, data on enrollment in executive education programs offered by business schools suggest that those who already possess an MBA are the least likely to pursue continuing education.14
How would having a formal educational requirement and a system of certification and mandatory continuing education advance the practice of management? Although such barriers to entry would have the effect of closing managerial positions to some who now aspire to them, all true professions are, almost by definition, closed systems that tightly control and carefully restrict access to their ranks. Closure in professions need not, as some might fear in the case of management, stifle innovation and progress. In the field of medicine, for example, the pace of discovery and creative progress rapidly accelerated in the wake of professionalization. In an open society, moreover, there will always be room for "rogue" entrepreneurs to challenge the existing order, as practitioners of alternative medicine are challenging the medical profession today. Meanwhile, from society's point of view, meanwhile, professional closure offers distinct benefits when the privilege of closure is granted in return for the commitments that true professionals make to serve the public good and to forgo certain forms of self-interested behavior.
Commitment to specialized knowledge as a public good; renunciation of profit maximizationTo be able to set and enforce standards of admission to a profession, determine how professional work is to be done, engage in self-regulation rather than be subjected to extensive regulation from without, and reap the economic benefits of a monopoly position in the marketplace—these are all privileges that society grants to professions in return for certain social benefits. The creation of these social benefits, in turn, places certain constraints on professionals. Because they possess specialized knowledge in areas of vital concern to society, genuine professionals are expected to place that knowledge at the disposal of all who require it and to provide services in a way that places the maintenance of professional standards and values ahead of the securing of individual advantage. The renunciation of unabashed self-interest that society expects of true professionals takes a very particular form: unlike actors in the marketplace, as envisioned by classical and neoclassical economics, professionals engage in work out of more than merely economic motives, and they eschew profit maximization (as opposed to profit making) as a goal.15 Indeed, because of the exemption they have been granted from certain laws of market exchange, professionals are specifically enjoined from using the laws of the market to reap economic gain at the expense of their professional obligations.
Implicit in this aspect of professionalism is the idea that, even when serving private clients, professionals are providing a public good. In economics, the provision of public goods has been widely recognized as a case that creates exceptions to the rules governing the provision of goods for purely private consumption. Lawyers serve private clients (be they individuals, corporations, or other private entities) but are understood to be providing a public good—if not justice in every case, then at least the implementation of the rule of law. Likewise, physicians serve private individuals but are understood, in so doing, to be providing the public good of health for the general population. That the advocacy system in American jurisprudence or the structure of the healthcare market in the United States (with its convoluted system of both private and public third-party payers) can tempt lawyers and doctors, respectively, to lose sight of professional obligations beyond serving the interests of particular clients does not invalidate this more general truth. Once a professional loses sight of the larger social benefit that his or her work is intended to provide, the line between professional services and commerce becomes dangerously blurred.
The notion that those who lead and manage our society's major private economic institutions might provide, or be responsible for providing, a public good is quite foreign to our customary way of thinking about management. Yet this idea was often voiced by those who led American business schools in the early decades of their existence. For example, in a speech titled "The Social Significance of Business," delivered at Stanford University's School of Business shortly after its founding in 1925 (and subsequently published as an article in the Harvard Business Review), Wallace B. Donham, the second dean of Harvard Business School, declared that the "development, strengthening, and multiplication of socially minded business men is the central problem of business." As Donham went on to say:
The socializing of industry from within on a higher ethical plane, not socialism nor communism, not government operation nor the exercise of the police power, but rather the development from within the business group of effective social control of those mechanisms which have been placed in the hands of the race through all the recent extraordinary revolutionizing of material things, is greatly needed. The business group largely controls these mechanisms and is therefore in a strategic position to solve these problems. Our objective therefore, should be the multiplication of men who will handle their current business problems in socially constructive ways.16
Haunted by a belief that scientific, technological, and material progress was outstripping society's capacity for moral self-governance, and that the professions that had traditionally provided social and moral leadership (i.e., law and the clergy) were no longer up to the task, Donham looked to a new "profession of business" for nothing less than saving modern, industrial civilization from itself. As the professionalization project that had provided the agenda for American business education from its founding up until the outbreak of World War II was abandoned in the postwar decades, expectations of what managers should contribute to society became rather more modest, to say the least.
Today, in place of such notions as the "socializing of industry from within" and the concept of the business executive as an expert capable of, and responsible for, solving some of the most urgent problems facing modern societies, we find American business schools propagating the doctrine of shareholder primacy and the paradigm of the manager as the mere agent of the company's "owners". Taken in combination, these two concepts—both outgrowths of the intellectual domination of American business education by economics during the past three decades—make managers anything but disinterested experts oriented toward the needs of society that we take to be part of the essence of professionalism. The doctrine of shareholder primacy has legitimized the idea that the benefits of managerial expertise may be offered for purely private gain and that this is equivalent to advancing societal interests. Having given rise to the notion of making managers "think and behave like owners" through equity-linked compensation, agency theory can now be seen to have led directly to many of the worst profit-maximizing abuses unmasked in the recent wave of corporate scandals.17
Now that the traditional professions have come under attack for providing refuge from the disciplining forces of the market, it is worth noting that a great many American business leaders who have enriched themselves spectacularly in recent years without engaging in actual malfeasance have managed to do so by insulating themselves from such fundamental market imperatives as "pay for performance"—meanwhile declining to accept the constraints that prevent legitimate professionals from engaging in profit maximization. If the traditional professions are to be asked to accept a greater role for market forces, is it too much to ask businesspersons who enjoy exemptions from market discipline to accept a greater role for professionalism?18
Code of ethicsThe fourth and final dimension on which, in our view, management differs significantly from the true professions is that its members are not governed by a shared normative code that is reinforced by institutions that promote adherence to it. Such a normative code, whether known as a code of ethics or a code of conduct, is a central feature of almost any occupational group that desires to be seen as a profession. Though normative codes exist among "professions" as diverse as librarianship and plumbing, the true professions go farther than simply having a written code by which members are encouraged to abide voluntarily. They teach the meaning and consequences of the code as a part of the formal education of their members. They test and verify this understanding through licensing exams. Once licensed, members are required to adhere to the code in order to maintain a license. A governing body, composed of respected members of the profession, oversees adherence to the code by establishing monitoring mechanisms, reviewing complaints, and administering sanctions—including the ultimate sanction of revoking an individual's license to operate as a professional.
Professions establish these codes, and the institutions to enforce them, as part of their implicit contract with society. "Trust us to exercise jurisdiction over an important occupational category," these professions essentially state. "In return, we will make every effort to ensure that the members of our profession are worthy of your trust, that they will not only be competent to perform the tasks with which they have been entrusted but will also adhere to high standards and conduct themselves with integrity." The privilege of self-regulation is granted out of society's recognition that in cases involving the use of highly specialized knowledge, laypersons may not be in a position to pass accurate and fair judgment on the conduct of specialists.
Most normative codes, like the ancient Hippocratic Oath for doctors, clearly articulate a profession's higher aims and social purposes and the manner in which these purposes must be pursued. Such role definitions have many benefits; one is that by establishing a normative standard for inclusion, they create and sustain a sense of community and mutual obligation among the members of a profession, as well as a sense of obligation to the profession as an abstract social entity. These bonds of membership create the social capital of a profession, which builds trust and significantly reduces transaction costs among members of that profession and between the profession and society. As we observed at the beginning of this paper, trust in management as an institution could not be much lower than it is in American society today. In light of that, the benefits of a true profession of management adopting a formal normative code would appear to be obvious—particularly in comparison with a regulatory regime that could all too easily stifle the innovation and risk taking that have contributed so much to the success of American capitalism.
A self-interested, self-indulgent corporate leadership is not inevitable.
Legal and regulatory overreaction to the crisis currently afflicting American business and management, however, is only one of the dangers that we now face. Another danger is that business education and its supporting institution of management—in heeding the cries for integrity and ethics that have gone up on all sides in the wake of the recent corporate scandals—will succeed in allaying the public's skepticism through such measures as new ethics curricula and corporate ethical codes (Enron famously possessed one of the latter while its top managers were busy destroying the wealth of their shareholders and the livelihoods of their employees) that merely create an appearance of reform without delivering the genuine article. As we have recently learned from such phenomena as the weak link between executive compensation and firm performance, and the impotence of so many corporate boards, American managers have become quite adept at decoupling the formal structures and symbols of their "professionalism"—those features that give them legitimacy in the eyes of the public—from their actual work activities.19
Our speculations about a genuine professionalization of management as a remedy for the crisis of legitimacy now facing American business may strike some as radical. But assuming, once again, that increased regulation is not the whole or the best answer to the problem at hand, we believe that our idea of making management into a bona fide profession has the virtue of asking a group that has seriously abused the public's trust to make a serious commitment to restoring it.
One way of looking at the problem with American management today, we would argue, is that it has succeeded in assuming many of the appearances and privileges of professionalism while evading the attendant constraints and responsibilities. Although it is now fashionable in some quarters, as we have suggested, to denigrate professionals as elites enjoying shelter from the rough-and-tumble of the marketplace, do we as a society really wish to surrender the benefits that we rightfully demand of professionals in return? And given the inevitable existence of elite knowledge workers, such as managers, in complex modem societies, ought we not to be concerned with producing elites who are motivated by something beyond the pursuit of self-interest under the laws of the marketplace, or the fear of punishment under the laws of the land? A self-interested, self-indulgent corporate leadership is not inevitable, and a model for something better lies at hand. We can find it in the flawed but durable institutions that serve society by meriting the label "profession."
Executive Comp: Pay Without PerformanceHBSWK Pub. Date: Dec 6, 2004
Out-of-control executive compensation schemes are “widespread, persistent, and systemic,” and new reforms won’t clean up the mess, argue law professors Lucian Bebchuk and Jesse Fried. Q&A and book excerpt.
by Mallory Stark
In the new book Pay Without Performance: The Unfulfilled Promise of Executive Compensation, Lucian Bebchuk and Jesse Fried make the case that the executive compensation system in the U.S. is fundamentally broken. We like to think that executive pay is the product of arm's-length negotiation, that the executive bargains in his or her own best interest, while the board of directors bargains for the best interests of the shareholders. Bebchuk and Fried argue that, in fact, soaring executive pay is the result of management power.
"Compensation arrangements have often deviated from arm's-length contracting because directors have been influenced by management, sympathetic to executives, insufficiently motivated to bargain over compensation, or simply ineffectual in overseeing compensation," the authors write. "Executives' influence over directors has enabled them to obtain "rents"—benefits greater than those obtainable under true arm's-length bargaining."
The book opens with a quote from Harvard Business School Dean Kim Clark asking the fundamental question about executive scandals: "Is it a problem of bad apples, or is it the barrel?" For Bebchuk and Fried, the problem is in the barrel, and to an extent, well underplayed.
In this interview, Bebchuk and Fried discuss their book and their ideas for how executive pay and corporate governance could improve.
Bebchuk is Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. Fried is professor of law at the University of California at Berkeley.
Mallory Stark: Why did you write Pay Without Performance?
Lucian Bebchuk: Although there is now widespread recognition that many boards approved executive pay packages that did not serve shareholder interests, there is still insufficient understanding of the scope, source, and severity of the problems. We wanted to provide a full account of the widespread flaws in compensation arrangements and the resulting costs to shareholders. Studying pay arrangements also enabled us to identify some more basic problems with our system of corporate governance. Finally, we wanted not only to improve recognition of existing problems, but also to contribute to solving them. The book puts forward proposals for improving both executive compensation and corporate governance more generally.
Q: How important are executive pay problems in the grand scheme of things?
Bebchuk: The problems of executive pay are of real practical significance for investors and the economy. The amounts paid to executives are significant even relative to the large market capitalization of public firms. In a recent study with Yaniv Grinstein, we find that the aggregate compensation paid by public firms to their top-five executives during 1993-2002 was about $250 billion. Aggregate top-five compensation was equal to 10 percent of aggregate corporate earnings in 1998-2002, up from 6 percent of aggregate corporate earnings during 1993-1997. Thus, if compensation could be cut without weakening managerial incentives, which we show it could, the direct gains to investors would have real practical significance.
Moreover, the excess pay obtained by executives is not the only, and probably not even the primary, cost of flawed pay arrangements. Executives' influence has produced pay arrangements that provide diluted and sometimes perverse incentives. These distortions might well have been the biggest costs arising from executives' influence on their own pay; eliminating them could produce substantial benefits.
Q: In what ways have the problems of executive pay been under-appreciated?
Jesse Fried: There are many who believe that concerns about executive pay have been exaggerated. Some hold the "rotten apples" view that flawed compensation arrangements have been limited to a small number of firms. In contrast, we conclude that problems have been widespread, persistent, and systemic.
We conclude that problems have been widespread, persistent, and systemic.
— Jesse Fried
There are also those who accept that flaws in compensation arrangements have been common but maintain that these flaws have resulted from honest mistakes and misperceptions on the part of loyal boards that can be expected to fix the problems on their own. But the problems we identify have stemmed not from transient lapses that boards can be expected to self-correct; rather, they have stemmed from basic defects in the underlying governance structures that enable executives to exert considerable influence over their own pay.
Finally, there are some who maintain that recent reforms, which strengthen director independence, would fully address past problems. We show, however, that the problems are ones that cannot be expected to go away merely by strengthening the independence of directors. Directors, we argue, must be made not only independent of insiders, but also more dependent on shareholders.
Q: What are the problems you identify in the pay-setting process?
Fried: We show that directors have persistently failed to negotiate at arm's length with the executives whose pay they set. We identify a myriad of factors that lead directors to go along with pay arrangements favorable to executives. Executives' influence on pay setting can explain a wide range of compensation practices and patterns, including ones that have long been viewed as puzzles by economists assuming arm's-length contracting. The role of managerial influence also explains why pay is higher and less sensitive to performance in firms in which executives are more entrenched or have more power vis-à-vis the board.
The flaws in the pay-setting process have resulted in substantively flawed outcomes. Pay has been insufficiently linked to performance. And pay schemes have been designed in ways that camouflage both the amount of compensation and its insensitivity to performance.
Q: Do you agree with the view that increasing pay levels is necessary to provide managers with powerful incentives to enhance shareholder value?
Bebchuk: No, we don't. Pay schemes fail to provide incentives in a cost-effective way, and shareholders have been receiving much less bang for their buck than possible. Indeed, pay is far less sensitive to performance than is commonly recognized. To begin, there is evidence that cash compensation, including the large amounts paid in bonuses, is little correlated with managers' own performance. In addition, much value is delivered to executives through what we call "stealth compensation"—forms of pay whose dollar amount is not included in publicly filed compensation tables—and this stealth compensation also isn't tightly linked to performance.
Even with respect to equity-based pay, the link between pay and performance is much weaker than possible. Most of the payoffs from executives' equity-based compensation come from market-wide and industry-wide movements, as well as from short-term fluctuations in stock prices, rather than from managers' own long-term performance.
Furthermore, compensation contracts and provisions provide executives with substantial downside protection that further decouples pay from performance. Compared with other employees, executives receive an unusually large fraction of their full-term compensation in the event they leave due to under-performance.
Finally, current compensation arrangements not only fail to provide incentives to enhance shareholder value in a cost-effective way, but also provide perverse incentives. For example, broad freedom to unload options and shares has provided executives with incentives to produce short-term stock price increases that come at the expense of long-term value.
Q: You talked about the camouflaging of pay. Can you give an example of how pay has been camouflaged?
Fried: Firms have used retirement benefits, for example, to provide executives with substantial amounts of stealth compensation. Given the lack of tax subsidy, firms' substantial use of nonqualified pension and deferred compensation arrangements is difficult to explain on efficiency grounds. But such arrangements can serve an effective camouflage role, providing executives with large amounts of performance-insensitive pay below investors' radar screen. Under current disclosure requirements, firms do not have to place a monetary value on retirement benefits and include it in the compensation tables that companies file and outsiders follow. Indeed, the executive compensation figures used by the media and researchers, as well as the figures of aggregate compensation Lucian noted earlier, do not include these retirement benefits.
Q: How can pay arrangements be improved?
Bebchuk: We would like to see pay arrangements designed to serve shareholders' interests, not managers' interests. Institutional investors could use our findings to pressure boards more effectively on executive compensation. Our analysis identifies the types of pay arrangements that institutions should resist as well as those that they should encourage. Investors should, for example, urge firms to use equity-based schemes that filter out windfalls, to tie pay tightly to managers' own performance, to substantially limit managers' freedom to unload equity incentives, and to avoid contractual provisions that provide executives with soft landings in the event of failure.
To constrain boards' ability to camouflage executive pay, the SEC should ensure that firms make the total amount of an executive's pay and its sensitivity to performance transparent to a wide range of outsiders. It is not enough for information about compensation to be public; it must be accessible to investors. We propose various changes in disclosure requirements that would increase transparency. For example, firms must be required to place a monetary value on all benefits given or promised to executives and to include them in the compensation tables.
We would like to see pay arrangements designed to serve shareholders' interests, not managers' interests.
— Lucian Bebchuk
Finally, the most promising remedy, but also the one most difficult to obtain politically, would be to adopt reforms that make boards more attentive to shareholder interests. If directors can be relied on to focus on shareholder interests, the pay-setting process, and board oversight of executives more generally, will be greatly improved.
Q: Why aren't recent reforms sufficient to address problems of board unaccountability?
Fried: Recent reforms, primarily the new stock exchange listing requirements, seek to improve board oversight by strengthening the independence of directors. Even though these reforms are beneficial, they fall far short of what's necessary. We show that the new listing requirements weaken executives' influence over directors, but do not eliminate it. Moreover, there are limits to what independence can do by itself. Independence does not ensure that directors will have incentives to focus on shareholder interests or that directors will be well selected. In addition to becoming more independent of insiders, directors also must become more dependent on shareholders. To this end, we should eliminate the arrangements that currently entrench directors and insulate them from shareholders.
Q: Do you support the SEC proposal to permit shareholders to place director candidates on the corporate ballot?
Bebchuk: We support it as a step in the right direction. Shareholder power to replace directors is now largely a myth. In a recent study, I provide evidence that, outside the hostile takeover context, the incidence of electoral challenges to directors has been practically negligible in the past decade. To make directors more accountable, this power must be turned from a myth into a reality. Although the SEC proposal is thus a step in the right direction, it is a very mild step that should be supplemented with other changes.
Q: What else should be done to make boards more accountable to shareholders?
Bebchuk: It would be desirable to get rid of staggered boards, which most public companies now have, and have all directors stand for annual election. Staggered boards provide a powerful protection from removal in either a proxy fight or a hostile takeover. In a recent empirical study, [my colleague] Alma Cohen and I found that staggered boards bring about an economically significant reduction in firm value.
In addition to being able to remove directors, shareholders should have the power, which they lack under current rules, to initiate and adopt changes in governance arrangements. Under current rules, shareholders can pass only nonbinding resolutions, and boards often ignore these resolutions. Allowing shareholders to set governance arrangements would contribute to making boards more accountable to shareholders.
Q: What do you hope to accomplish with this book?
Fried: We believe that it is important to bring about recognition of the flaws in current compensation arrangements and in the governance processes that produce them. With better understanding of these flaws, institutional investors will be able to pressure companies to make desirable changes. Furthermore, the regulatory reforms we advocate would not be possible unless investors and public officials come to fully understand how pervasive and costly existing flaws are. Pay Without Performance, we hope, will help bring about a better understanding of both the existing problems and how they could be solved
Mapping Your Board's EffectivenessHBSWK Pub. Date: Aug 30, 2004
To be effective, board members must understand their company’s strategy. Professor Robert S. Kaplan offers methods for using the Balanced Scorecard and strategy maps to increase board power. From Strategy & Innovation.
by Robert S. Kaplan
In the aftermath of such highly public and grossly damaging business debacles as Enron, Tyco, and WorldCom, much attention and plenty of criticism have been directed at those companies' corporate boards. Traditionally, board responsibilities have been to oversee the company's overall strategy, hire and monitor the CEO, scrutinize the performance of the company's leadership team, oversee financial reporting and disclosure, and ensure compliance with laws and regulations.
The recent failures triggered regulatory and legislative responses, including the Sarbanes-Oxley Act and new Securities and Exchange Commission-approved NYSE and Nasdaq governance listing standards. The risk now is that boards will become overly focused on regulatory compliance and not perform their broader and more managerial responsibilities adequately.
Can companies—especially those that value innovation as a key corporate strategy—create value by becoming known for better governance and greater transparency to external providers? Can they lower their cost of capital and perhaps get a valuation premium based on the reputation and performance of their governance processes? And is there a way that companies can get "more bang for their buck" from their board members' time?
The answer to all three questions is yes—if what a company expects of its board members is redefined and if the meeting process is redesigned so that the board's time is primarily spent on helping the CEO design and align the corporation's business strategy.
Mapping board performanceCurrently, prior to a typical board meeting, members receive reams of paper that are difficult to wade through and make sense of. Once the meeting is in progress, board members typically spend much of their time sitting passively and nodding, asking an occasional question or offering an occasional comment to show that they are doing their due diligence.
Extending the Balanced Scorecard and strategy map framework to board members will enable them to perform more effectively and efficiently.
To engage board members' expertise much more around the strategic direction that the company is taking would require giving different types of information to board members and having different discussions in board meetings, but the effort to revamp the meeting process and agenda would be well worth the trouble.
With only limited time available to review the information before the meetings and to perform their monitoring and governance functions, board members must receive the information that is most relevant to their governance responsibilities and that will enable them to more effectively participate in board meeting discussions. They should receive strategic, forward-looking information, rather than information that just summarizes the past, such as quarterly and annual financial statements. While boards still need to review past performance, that information should not take up 90 percent to 95 percent of a board meeting agenda as it so often does today. What's more, company executives should make fewer, shorter, and more targeted presentations to board members and spend more time engaging them in interactive discussions.
For the board to monitor strategy, it first must understand and approve the proposed strategy. Subsequently, it needs information on how well the strategy is being implemented and what results the strategy is delivering. Directors cannot infer from quarterly financial statements whether the company has selected a sensible customer value proposition, is focused on the critical processes to meet customer and shareholder expectations, and is investing well in its people and information resources.
To help companies ensure that the board receives the right information about company strategy and performance, as well as feedback about the board's own performance, we have integrated the Balanced Scorecard performance management system into corporate governance processes.
The Balanced Scorecard strategy map portrays, on a single page, a company's strategy. It includes the financial outcomes expected; performance with targeted customers and the organization's differentiating value proposition; the critical internal processes that will create and deliver the value proposition; and whether the organization has the right people and systems in place and the right culture for its strategy to be successful.
Extending the Balanced Scorecard and strategy map framework to board members will enable them to perform more effectively and efficiently. First, the board should use the corporate strategy map and Balanced Scorecard, which together describe the company's strategy, as prime information sources. Second, it should produce a board scorecard to make clear board responsibilities and accountabilities. This provides a mechanism for the board to set objectives and subsequently review its performance. The Balanced Scorecard strategy map provides a framework to illustrate how strategy links intangible assets and value-creating processes to customer and financial outcomes. The financial perspective portion of the map describes the tangible outcomes of the strategy in traditional financial terms, such as ROI, shareholder value, profitability, revenue growth, and cost per unit. These financial outcomes can be achieved only if targeted customers are satisfied. The customer value proposition in the customer perspective section describes how to generate sales and loyalty from targeted customers.
The financial and customer perspectives illustrate the desired outcomes from the strategy. How does the organization create these desired outcomes? The internal perspective identifies the critical few processes in clusters, such as operations management, customer management, innovation, and regulatory and social processes, that are expected to have the greatest impact on the strategy.
The learning and growth perspective identifies the intangible assets that are most important to the strategy. The objectives in this perspective identify which jobs (the human capital), which systems (the information capital), and what kind of climate (the organization capital) are required to support the value-creating internal processes. These assets must be bundled together and aligned to the critical internal processes. Consistent alignment of capabilities and internal processes with the customer value proposition is the core of any strategy execution.
Keeping the board strategically involvedTake the experience of First Commonwealth Financial, which operates in central and southwestern Pennsylvania. The map it developed for its new strategy (First Commonwealth Financial strategy map) called for the company to become more client-focused by offering its customers a tailored mix of financial solutions. While it was cascading the scorecard down to its operating units, the company also started to train its board in the Balanced Scorecard so that the strategy map and associated Balanced Scorecard of measures, targets, and initiatives could serve as the primary document for board reporting and deliberations. This enabled the board to approve the new strategy and remain continually engaged in the discussion of issues and actions required to support it.
Robert S. Kaplan

Next, First Commonwealth helped the board develop its own scorecard (First Commonwealth Financial's board strategy map). A board scorecard articulates clear objectives for the company's shareholders and stakeholders; identifies the critical processes the board and its committees must perform to meet these external objectives; and highlights the board's composition and skills, the information packages, and the meeting dynamics that enable the board to perform its critical processes effectively and efficiently. The board scorecard allows a company and its board to monitor themselves against predetermined objectives and targeted measures. Among the questions asked to measure board effectiveness: Are the meetings engaging and interactive? Rather than being passive and merely reactive, are board members actively getting involved in the discussions, challenging managers when necessary, and raising questions? Do board members have access to strategic information?
Developing a reputation for an effective board, one that actively monitors and guides strategy, one that ensures that corporate financial and nonfinancial communication to investors highlights key value and risk drivers, and one that holds senior executives accountable for successful strategy formulation and implementation will give investors more confidence that the company is well positioned for future success. Such confidence in an effective governance process should enable a company to enjoy a higher valuation and earnings multiple because investors will see the future earnings stream as more sustainable and less risky.
Getting New Managers Up to SpeedHBSWK Pub. Date: Jul 4, 2005
The usual employee-orientation process needs to be retired. In this article from Harvard Management Update, savvy companies explain how to jump-start the success of new managers. Tip: Set up meetings, use technology, and coach newcomers.
by Lauren Keller Johnson
When Jacqueline Lopez, a new program manager at Intel's Mobile Platforms Group, arrived for her first day on the job, Jessica Rocha, her boss, handed her a calendar bursting with already-scheduled meetings. These meetings had nothing to do with the usual employee-orientation process, through which new hires learn about Intel's values and HR procedures. Rather, Rocha had scheduled face-to-face interviews with people across Intel who had the technical expertise, cultural lowdown, and political "juice" Lopez would need to accomplish her work.
Thanks to Rocha's foresight, "I ramped up quickly," Lopez says. "I accomplished strategically important work"—such as developing key training initiatives—"and provided my deliverables faster." Lopez also swiftly built trust and established credibility with people throughout Intel. "My boss set me up for success," she says.
A vital new toolAs Lopez's story reveals, new managers who are rapidly "onboarded" are poised to generate value for their organizations much more quickly than colleagues who follow a slower or more casual orientation path. Rapid onboarding has become particularly vital as workplace turnover rises. Citing the U.S. Department of Labor, Keith Rollag, Salvatore Parise, and Rob Cross write in "Getting New Hires Up to Speed Quickly" (Sloan Management Review, Winter 2005) that "more than 25 percent of all workers in the United States have been with their company less than one year." In addition, internal restructuring, new competitors, and technological advances are reshaping workplace roles and responsibilities—further pressing new managers to learn the ropes quickly.
Without some initial support and a framework for learning, many managers find it difficult to reach out to new colleagues themselves.
But despite the increasing importance of a fast start, new managers face daunting obstacles in getting connected. For one thing, many senior executives assume that new managers have the social skills and understanding to tap the organizational network themselves, so they invest little time in introducing new managers around. But without some initial support and a framework for learning, many managers find it difficult to reach out to new colleagues themselves.
Greater cultural and generational diversity in the workplace often presents additional challenges, says Vincent Brown, a managing partner of Global Lead Management Consulting in Cincinnati. For example, "an older manager who's just starting out at a new company may hold the traditional belief that you only go to higher-ups for advice and information." Thus she misses out on making connections with knowledgeable peers and subordinates. And managers of all ages "worry that by asking certain questions, especially about [things such as] marketing processes, accounting practices, and budgeting, they'll be seen as incompetent," Rollag says.
Many new managers feel they simply don't have time to cultivate a broad network of contacts—forging relationships with their direct reports is time-consuming enough.
Stymied by these obstacles, new managers often don't establish the networks they need to excel. To address this problem, senior executives must play a more active role—accelerating new managers' onboarding enough to get them started, with the understanding that they will build on those early contacts themselves later. The most effective executives apply these rapid-onboarding practices:
Provide jump-start coachingOne way to get managers off and running is by providing intensive feedback and coaching, says Leigh Branham, author of The 7 Hidden Reasons People Leave (American Management Association, 2005). During the manager's first week, executives should provide detailed expectations for the first 90 days and ask him to summarize these objectives and measures in a performance agreement.
In a similar vein, Branham suggests conducting "entrance interviews" with new hires to help uncover their strengths and learn which talents they are most interested in developing.
Map out your new manager's network"Managers' effectiveness derives directly from their web of relationships," says Rollag. With that in mind, "map out" your new manager's network before she starts the job. Ask yourself whom she needs to know to carry out her responsibilities. Think about work processes: From whom will she need certain types of information? To whom will she need to provide information? Also consider organizational history: Who has always known how to move projects forward and solve thorny problems?
Managers' effectiveness derives directly from their web of relationships.
— Keith Rollag, Babson College
Some executives also emphasize company values when mapping out a new manager's network. For example, retailer Limited Brands (Columbus, Ohio) holds understanding the customer experience as a central value. To that end, newly hired leaders get assigned to educational stints in retail stores and call centers. There, they see how merchandise flows through the system and how cross-selling works, as well as other aspects of the customer experience. "These assignments immerse our executives in our corporate culture," says Sandy West, the company's executive vice president of human resources. With this immersion, executives can better formulate strategies that support those values.
Also consider network members' tenure as you build your map. The best networks comprise a blend of longstanding and newer employees, explain Rob Cross and Andrew Parker in The Hidden Power of Social Networks: Understanding How Work Really Gets Done in Organizations (Harvard Business School Press, 2004). Why the blend? You want new managers to benefit from seasoned employees' wisdom and recent hires' fresh perspectives.
Finally, set the stage for meetings between your new manager and network members. For example, while scheduling Lopez's meetings, Rocha explained to the interviewees what Lopez most needed to learn from them. She also explained how they could benefit from Lopez's background and expertise. For instance, Lopez had extensive experience in developing retention initiatives, which Rocha encouraged her network members to leverage.
Follow upOnce the new manager has met all the people you've recommended, reinforce these relationships through follow-up. "Build discussion about the network into regular conversations and status updates," Rollag says. "Ask, 'Who have you talked to? What have you learned from these people? How have you helped them?'" If the manager has failed to sustain a connection with an important network member, ask why and develop a plan for restoring the link.
During Lopez's first weeks on the job at Intel, her boss sat in on her networking meetings—making formal introductions and observing. Then Rocha suggested that Lopez begin meeting one-on-one with interviewees. Rocha followed up on these early meetings, regularly recommending additional people for Lopez to contact and asking her to document what she learned from each meeting in monthly status reports.
As another follow-up strategy, invite the new manager to meetings outside his work responsibilities. Through these encounters, he'll gain a sense of the organization's political dynamics and see how the company operates as a whole. "Encourage him to notice who gets mentioned most often during these meetings," advises Patti Hathaway, CEO of The Change Agent, a consultancy in Westerville, Ohio. "These are often the doers—the people who make things happen but who aren't on the org chart."
Take advantage of technologyIn global organizations, ensuring that your newly hired manager forges connections with the right network members can be especially difficult. Technology can help. When you bring on a new manager, use e-mails to announce his expertise and interests to others. Sign him up for the online discussion groups and mailing lists he'll need as he ramps up. Show him how to use expertise locators. "Sure, face-to-face meetings are magic moments," says Chris Newell, vice president of knowledge and learning at Boston-based IT solutions provider Keane. "But in a global company, you also need technology to connect people."
Keane has fifty-seven locations in the United States and more overseas. To sustain conversations among newly hired managers and geographically dispersed members of their networks, Keane uses a "high-touch, high-tech" strategy. For example, new managers will soon use an online discussion forum and expert locator link to find individuals whose insights they need to solve a problem or move a project forward. People who have met face-to-face or online soon after starting their jobs—and who might hail from any of Keane's locations—can use online forums to be reminded frequently of one another's existence and share their knowledge.
Use social bonds to fuel collaborationWhen new hires discover that they share interests with others in the organization, they often collaborate more effectively on professional matters. For that reason, when introducing your new manager to members of her network, consider including some personal information about her that she's comfortable sharing, advises Rollag. "Emphasize outside interests or hobbies that might interest other people who aren't in her group and who do very different jobs."
San Francisco-based biotechnology firm Genentech created cross-functional "diversity groups"—each focused on a specific interest—to encourage socializing among staff at all levels. At quarterly networking gatherings for new employees, it encouraged participants to join one or more groups that were of interest to them.
In a global company, you also need technology to connect people.
— Chris Newell, Keane
The social bonding in Genentech's diversity groups has inspired valuable work-related collaboration. For example, when participants in one group learned of an innovative mentoring process developed elsewhere in the company, they implemented a similar process in their own team.
If you're tempted to assume that the sharp manager you just hired can handle his own onboarding, remember the unique obstacles he'll face. Though he should—and will—eventually shoulder the responsibility for his own networking, you can vastly accelerate the process. Your reward? A leader who generates better business results faster—and who can strike out on his own sooner.
Asian and American Leadership Styles: How Are They Unique?HBSWK Pub. Date: Jun 27, 2005
Business leadership is at the core of Asian economic development, says HBS professor D. Quinn Mills. As he explained recently in Kuala Lumpur, the American and Asian leadership styles, while very different, also share important similarities.
by D. Quinn Mills
Editor's note: Political connections and family control are more common in Asian businesses than in the United States. In addition, says HBS professor D. Quinn Mills, American CEOs tend to use one of five leadership styles: directive, participative, empowering, charismatic, or celebrity. Which styles have Asian business leaders adopted already, and which styles are likely to be most successful in the future?
In a talk in Kuala Lumpur on June 15 at the invitation of The Star/BizWeek publication and the Harvard Club of Malaysia, Mills explained the differences and similarities between American and Asian leadership. Below is the transcript of his talk, "Leadership Styles in the United States: How Different are They from Asia?"
The rapid economic development of Asia in recent decades is one of the most important events in history. This development continues today and there is every reason to anticipate that it will continue indefinitely unless derailed by possible but unlikely international conflicts. At the core of Asian economic development is its business leadership—managers and entrepreneurs who sustain and create Asian companies. Do they exhibit the same leadership styles as top executives in the West?
There are important differences. Are differences attributable to different cultures or to different stages of corporate development?
But first, what are we talking about?
Roles in organizations involve more than just leadership. It is useful, but not yet common in our literature and discussion of business, to distinguish among leadership, management, and administration. They are in fact very different; each is valuable and has its place. Briefly, leadership is about a vision of the future and the ability to energize others to pursue it. Management is about getting results and doing so efficiently so that a financial profit or surplus is created. Administration is about rules and procedures and whether or not they are being followed. These distinctions are very important to clear communications among us about how organizations are run—when they are not made, we become very confused, as is much of the discussion around our topic.
Briefly, running an organization effectively involves:
Leadership:VisionEnergizing
Management:EfficiencyResults
Administration:RulesProcedures
Our focus today is on leadership: how an executive sets direction and energizes his organization to pursue the direction. This is appropriate because managerial techniques are being spread fast by imitation, adoption, and MBA education. Administrative techniques were generalized around the world decades ago. So what is much different now is leadership.
Family and political connectionsCultural differences are important, but primarily as a matter of emphasis. For example, family leadership of business enterprises, including large companies, occurs in very similar ways in both [regions], but is more common in Asia.
Li Ka-shing [of the Hong Kong-based Hutchison Whampoa and Cheung Kong holding group], for example, runs his companies closely and is planning to pass the leadership of his firms to his two sons. Similarly, the heads of some of America's largest firms, both publicly held and private, are the scions of the families that founded the firms.
There is less freedom of action for executives and boards in America than in Asia.
But more common in America are firms that are run by professional managers who are replaced by other professional managers, either as a consequence of retirement or of replacement by the board of directors of the firm. The better companies have sophisticated programs for developing executives within the firm, and ordinarily choose a next chief executive officer from among them. American CEOs average about thirty years with their firms and own less than 4 percent of its shares. There is a small number of firms, which get a great deal of publicity and so seem more numerous than they are, that hire CEOs directly from the outside, with no previous experience with the firm. These CEOs are driven by a need to excel in a competitive environment (they want to win), and they insist that money is less important to them than professional achievement; but it's hard to credit that given the enormous inflation of top executive compensation packages in America in the last decade.
Many American firms, especially most of the large ones, are more dependent on capital markets for their capital (equity and debt) and so pay much more attention to Wall Street than is yet common in Asia. Wall Street has strong expectations about the behavior and performance of executives and about succession. There is less freedom of action for executives and boards in America than in Asia.
In Asia, succession usually is passed on to the siblings. In Li's case, he is handing it to his two sons, while Jack Welch developed a talent machine to groom CEOs for General Electric.
To a significant degree, large American firms are at a later stage of development than many Asian firms—they have passed from founders' family leadership to professional management and to capital obtained from the capital markets (rather than obtained from government—directly or indirectly—or from family fortunes). In this transition they have adopted particular styles of leadership responsive to boards (often led by outside directors) and to Wall Street.
It is possible, but not certain, that Asian firms will follow this evolutionary path. The political connections so important for top business leaders in Asia, whether in democracies or one-party states, are not unknown but are much less important in America. It is a characteristic of Asian top executives that they have such connections that are important to their businesses. In America, the chief executive officers of very large firms often have virtually no direct connections to top politicians—the government is treated at arm's length and business is done by business people. There are, of course, exceptions, and deep political involvement is still a route to business success in America, but it is much less common than in Asia.
Leadership styles in AmericaLeadership styles are more varied in America today than in Asia. In America there are five:
Directive
Participative
Empowering
Charismatic
Celebrity (superstar)
The first four reflect how an executive deals with subordinates in the company; the final one is directed at people outside the firm.
Directive leadership is well known in America, but is declining in frequency. It stresses the direction given by executives to others in the firms. The leader is very much in charge. This style is very common in Asia.
Participative leadership, which involves close teamwork with others, is more common in Europe, where it is sometimes required by law (as in northern Europe, especially Germany) than in America. It is also common in a variant colored by national cultural norms, [as] in Japan.
Empowering leadership is relatively new, and stresses delegation of responsibility to subordinates. American companies that operate with largely autonomous divisions employ this style of leadership. A few younger Asian business leaders now espouse this style (for example, the CEO of Banyan Tree Resorts).
At the core of empowering leadership is the ability to energize the people in a company. Jack Welch commented, "You may be a great manager, but unless you can energize other people, you are of no value to General Electric as a leader." Energizing others is the core of the new leadership in America.
Adaptability is ... less common and less valued in Asia and Europe. It will be needed everywhere soon enough.
Charismatic leadership is the leader who looks like a leader. People follow such a leader because of who he is, not because of good management or even business success; nor because [the people] are offered participation, partnership, or empowerment. Human magnetism is the thing, and it is very different in different national cultures. What looks like a charismatic leader to Americans may appear to be something very different to people from other societies.
Celebrity leadership is very different. It looks outside the company to the impact on others—customers and investors. The CEO becomes a star and is sought after by the media like a screen star. Ordinarily it requires good looks, a dramatic style, and an ability to deal effectively with the media. It is in a bit of a slump in the United States right now due to the corporate financial reporting scandals, which have focused attention on CEOs with the ability to get things done right in the company; but celebrity leadership will make a recovery. Boards looking for top executives to revitalize a firm look for superstars; they seek outgoing personalities.
Corporate governance in the West means oversight from regulators, boards of directors, even institutional shareholders. While Asia now has most of these institutions, they are ordinarily not as well established and not as significant in the minds of top executives. Asia is bedeviled by official corruption that reaches far into business. America has less of this, but has in its place considerable financial reporting fraud. Both are very dangerous to the economic success of the nations involved. Graft tends to destroy an economy first by undermining the trust that is required for transactions to occur, and by distorting the economic calculus that underlies sensible business decisions. As it continues, graft destroys the national political entity. Long-established graft is a way of life that is very hard to root out. Politicians promise to eliminate it, but are unable or unwilling to do so.
The role models available for business leadership in the different regions of the world are significant. In America, with its longstanding experience with professional business leadership, the most readily available role model for the head of a company is the corporate CEO. In China and Chinese-related businesses it is the head of the family. In France it remains the military general. In Japan it is the consensus builder. In Germany today it is the coalition builder.
There are nine key qualities that research shows people seek in a successful leader:
Passion
Decisiveness
Conviction
Integrity
Adaptability
Emotional Toughness
Emotional Resonance
Self-Knowledge
Humility
The emotionalism that goes with passion is more common in America than elsewhere. Europeans see it as a sort of business evangelicalism and are very suspicious of it. Decisiveness is common to effective executives in all countries: In this regard European and Japanese chief executives are the most consensus-oriented, and Chinese and American top executives are more likely to make decisions personally and with their own accountability.
Conviction is common to all.
Integrity is a complex characteristic very much determined by national cultures. What is honest in one society is not in another, and vice versa.
Adaptability is a pronounced characteristic of American leadership generally. It is less common and less valued in Asia and Europe. It will be needed everywhere soon enough.
Emotional toughness is common to all top executives; Americans spend more time trying not to show it.
Deep political involvement is still a route to business success in America, but it is much less common than in Asia.
Emotional resonance, the ability to grasp what motivates others and appeal effectively to it, is most important in the United States and Europe at this point in time. It will become more important in Asia as living standards improve, knowledge workers become more important, professional management gets greater demand, and CEOs have to compete for managerial talent.
Self-knowledge is important in avoiding the sort of over-reach so common in America; it is less common a virtue in America than in Asia, and is a strength of the Asian executive.
Humility is a very uncommon trait in the American CEO. It is sometimes found in Asia. It is often a trait of the most effective leaders, as it was in the best-respected of all American political leaders, Abraham Lincoln. Once, when the Civil War was not going well for the Union side, a high-ranking general suggested that the nation needed to get rid of Lincoln and have a dictatorship instead. The comment came to Lincoln's ears. Lincoln promoted the general to the top command in the army anyway and told him, "I am appointing you to command despite, not because, of what you said. Bring us victories, and I'll risk the dictatorship."
What's next for AsiaThe "New Asian Leader"? There are three prototypes:
1) Li Ka-shing of Hutchison Whampoa-Cheung Kong: old Chinese leadership in transition like Li Ka-shing. Rags-to-riches in one generation; handing over his business empire to his two sons who are Western-trained. There are many such examples in Asia. Li Ka-shing is in different areas of business—telecommunications, security, and high-end IT—and is very interested in becoming a contractor in the emerging homeland security construct in America. With Li Ka-shing, the threat to success is his reliance on an international concern to be a significant contractor in the establishment of the U.S. homeland security hierarchy. Li's personal story is an amazing tale of success. After the death of his father, Li—at age twelve—went to work in a plastics factory. Within a decade he started his own plastics company, which he later leveraged into a real estate and investment concern. It then was an early entrant into China's telecom and IT wave of the early 1990s, and became a market leader.
Li is a man who seeks to establish a positive legacy. He created a foundation in 1980 to help young Chinese students have the educational and other opportunities he had to make for himself at age twelve. He also started his own university, Shantou University, in 1981, with a similar purpose.
2) William and Victor Fung of Li & Fung: old traditional Chinese family-owned companies now run by the third generation of the family, Western- and highly-educated, who use Western technology extensively to face globalization and succeed. Very much Western-centric in approach yet Asian in practice, the Fungs of Li & Fung have mastered techniques of getting maximum efficiency out of the supply chain, taking raw materials and making low-cost, high-demand consumer goods, particularly clothing, much more cheaply than in the United States.
What the Fungs have accomplished is similar to what Japanese automakers accomplished a generation ago. By strictly adhering to principles of quality control—principles that were espoused by American business consultant Edward Deming—Nissan and Toyota made cheaper, better cars than the Americans did, eventually causing the big three U.S. automakers to follow suit. William and Victor Fung are interested in being business consultants, teaching others how to do what they've done. Both men are Harvard-educated and have a desire to be open and forthcoming about their business model.
As Asian companies seek access to world capital markets, they will move toward professional managers who will employ leadership styles more akin to those now used in the United States.
The main threats with Li & Fung are these: driving down labor costs, and concerns about relying on suppliers who potentially abuse the human rights of workers or pay less than a standard living wage. Victor and William Fung are the new type of Asian leaders—will they soon be the only type?
3) New Economy business leaders. Information technology and the Internet are bringing out a high-tech type of leadership that is common in America's high-tech sector. Entrepreneurial, innovative, hard-driving, very flexible, ambitious, optimistic, visionary in the technology and business aspects, they will play a good, but not dominant role. N. R. Narayana Murthy of India's Infosys and Stan Shih of Acer are good examples. They have adopted an almost entirely Western style of leadership and are succeeding in Asia.
What is the conclusion? Styles of leadership are currently different between Asia and America. Culture colors the way things are done, but less so what is done. The differences in styles most markedly reflect the stage of development of the economies and companies of Asia. As Asian companies seek access to world capital markets, they will move toward professional managers who will employ leadership styles more akin to those now used in the United States.
As Asian companies rely more on professional employees of all sorts, and as professional services become more important in Asian economies, the less autocratic and more participative and even empowered style of leadership will emerge. Asian leadership will come to more resemble that of the West. But significant cultural differences will remain—economic and geopolitical rivalries within Asia and between Asian countries and the West will continue and perhaps grow. Economies will retain characteristic national features. Convergence in a leadership style does not guarantee likeness of results nor even peace. We will continue to have to work for economic progress and peace; it will not come automatically
Don't Listen to "Yes"HBSWK Pub. Date: Jun 6, 2005
It's essential for leaders to spark conflict in their organizations, as long as it is constructive. A Q&A with Professor Michael Roberto, author of the new book Why Great Leaders Don't Take Yes for an Answer.
by Martha Lagace, Senior Editor, HBS Working Knowledge
If people smile, nod, and say "yes" at your company, maybe it's time to start an argument. According to HBS professor Michael Roberto, the lack of good conflict—constructive conflict—within an organization makes it that much harder to accurately evaluate business ideas and make important decisions.
But conflict does not mean browbeating. In his new book, Why Great Leaders Don't Take Yes for an Answer: Managing for Conflict and Consensus (Wharton School Publishing), Roberto describes the toll on organizations when leaders fail to create an atmosphere that invites dissent. He then outlines concrete steps that managers at all levels can take to spark positive conflict and make sure that all views get a fair hearing, and he outlines as well a fair and open process for making more effective decisions.
"Keeping conflict constructive helps to build decision commitment, and therefore facilitates implementation," says Roberto, who teaches in the School's General Management unit. An e-mail interview with HBS Working Knowledge follows.
Martha Lagace: Why should a leader be concerned when he or she hears the answer "yes"?
Michael Roberto: Leaders need to recognize that expressing dissent can be very difficult and uncomfortable for lower-level managers and employees. Therefore, leaders cannot wait for dissent to come to them; they must actively go seek it out in their organizations. In short, they must search for people willing to say no to them. The mere existence of passive leadership constitutes a substantial barrier to candid dialogue and debate within organizations.
Leaders can and should take concrete steps to build conflict into their decision-making processes. For instance, they might ask a set of managers to role-play the firm's competitors in a series of meetings so as to surface and test a set of core strategic assumptions. Or they might assign someone to play the devil's advocate so as to ensure that a thorough critique and risk assessment of a proposal has been conducted before moving forward.
By inducing vigorous and open debate, leaders avoid the guessing game of trying to discern whether or not people truly agree with a choice that has been made.
Q: In your book you discuss three cultures of indecision that typically appear in organizations: the cultures of yes, no, and maybe. How should a leader recognize his or her organizational culture and identify its barriers to decision making?
A: Indecision can cripple an organization, and it comes in several different forms. Lou Gerstner coined the phrase "culture of no" to describe the situation he inherited at IBM in the early 1990s. In this type of culture of indecision, dissenters essentially have veto power in the decision-making process, particularly if those individuals have power and status. The organization does not employ dissenting voices as a means of encouraging divergent thinking, but rather it enables those who disagree with a proposal to stifle dialogue and close off interesting avenues of inquiry. Such a culture does not force dissenters to defend their views with data and logic, or to explain how their objections are consistent with the organization-wide goals as opposed to the parochial interests of a particular division or subunit. A culture of no enables those with the most power or the loudest voice to impose their will.
Leaders need to develop and employ a variety of forums for encouraging people to express their views.
When Paul Levy embarked on a turnaround of the Beth Israel Deaconess Medical Center in Boston, he discovered a "culture of yes." Levy described the dynamics: "People will not tell the truth during meetings about how their department would react to a given proposal…. They will sit there quietly and you won't find out until a week later that they object to something…. This behavior had become standard practice. If you object to a proposal, you get quiet during the meeting. Then later, when you leave the room, you undercut the consensus that appeared to have emerged." Many organizations have similar patterns of behavior, and the tell-tale signs are quite similar to those described by Levy.
Finally, a "culture of maybe" exists when companies are highly analytical, yet also quite uncomfortable with ambiguity. They go to great lengths to gather more information and to perform additional formal analysis, in hopes of reducing the ambiguity associated with various options and contingencies. They strive for certainty in an inherently uncertain world—to turn every maybe into a simple yes or no. Indecision and a lack of closure result if managers cannot recognize the costs of trying to gather a more and more complete set of information.
Q: What are the guidelines you've identified for (1.) sparking constructive conflict; and (2.) devising a decision-making process that will be fair and effective?
A: To be effective, leaders need to ensure that conflict remains constructive. That is, they must stimulate task-oriented disagreement and debate while trying to minimize interpersonal conflict. Leaders can accomplish this by taking concrete steps before, during, and after a critical decision process.
Before the process begins, they can establish ground rules for how people should interact during the deliberations, clarify the role that each individual will play in the discussions, and build mutual respect, particularly with regard to differences in the cognitive styles of each team member.
During the deliberations, leaders can intervene in several ways when debates get heated. They might redirect people's attention and recast the situation in a different light, present ideas and data in novel ways so as to enhance understanding and spark new branches of discussion, and revisit basic facts and assumptions when the group appears to reach an impasse.
Finally, after a decision process ends, leaders should try to derive lessons learned regarding how to manage conflict constructively, and they must attend to hurt feelings and damaged relationships that may not have been apparent during the process itself.
Keeping conflict constructive helps to build decision commitment, and therefore facilitates implementation. But, to build buy-in, leaders also need to devise a fair process. During a decision-making process, some individuals will have their views accepted by the group, while other proposals garner little support. Leading a fair process does not mean trying to satisfy everyone in terms of the ultimate decision that is made. Instead, it means creating a process in which leaders have demonstrated authentic consideration of others' views. For people to believe that a process is fair, they must:
Have ample opportunity to express their views and to discuss how and why they disagree with other group members.
Feel that that decision-making process has been transparent, i.e., that deliberations have been relatively free of secretive, behind-the-scenes maneuvering.
Believe that the leader listened carefully to them and considered their views thoughtfully and seriously before making a decision.
Perceive that they had a genuine opportunity to influence the leader's final decision.
Have a clear understanding of the rationale for the final decision.
Q: Could you expand upon the role of communication in decision making? Examples in your book describe the power of e-mail in undercutting decisions that were made in face-to-face meetings. In addition, since meetings have a start and finish time and are usually expected to be run very efficiently, everyone has probably experienced a "checklist" atmosphere.
A: Leaders need to be careful about trying to maximize the efficiency of their meetings. In so doing, there may be a pernicious unintended consequence. Agenda overload, coupled with the quest for efficiency, often works against a leader's best efforts to stimulate debate. Why does efficiency crowd out debate? For some dissenters, it takes some time to gather the courage to express their views or to determine precisely how they would like to articulate their point. For others, they may want to listen to others and gain a better understanding of the issues before offering their views. The rapid pace of the discussion may become discouraging to those who aren't comfortable "shooting from the hip" as soon as a new topic opens.
To not get bogged down during meetings, leaders need to develop and employ a variety of forums for encouraging people to express their views. E-mail represents one such vehicle, but there are others as well. E-mail provides a wide range of employees with access to the leader, but of course, the danger is that people can easily be misunderstood.
Q: Assuming that a decision has been made that everyone will accept, how can the "rules of engagement" be sustained going forward so that old habits won't return?
A: It is very important for leaders to be clear about the way in which they want people to contribute and behave during decision-making processes. People need to understand what is expected of them, as well as what to expect of the leader. But perhaps more importantly, leaders need to maintain discipline over time, holding people accountable if they violate the accepted norms and rules of engagement. If someone clearly engages in personal attacks or withholds a dissenting view only to obstruct the implementation later, they need to be held responsible for such dysfunctional behavior. Leaders may find that such moments are developmental opportunities, where they can help their managers and employees learn and improve from situations of poor performance.
Q: What is the importance of a specific leader in the whole process? Can an organization retain these more-effective behaviors even after a particular leader leaves?
A: Naturally, the individual leader has an enormous impact on the type of decision process they employ, as well as the outcomes of that process. However, when leaders establish a climate of openness, and they make constructive conflict a habit in the organization, such behaviors can be sustained over time. For instance, Chuck Knight [former chairman and CEO of Emerson Electric Co.] made conflict a fundamental element of his firm's strategic planning process, and while he has now retired, the process retains the same atmosphere of vigorous debate that it had for many years under his leadership. For this type of sustainability to occur, leaders need to ensure that they not only change the way they make decisions, but they must develop a pipeline of leaders who approach decision making differently. They have to teach the attributes of good process, model those attributes, and coach future leaders in their implementation.
Q: How should managers, even those who are not the top leaders in their organization, use these ideas?
A: The ideas in the book very much apply to leaders at all levels. While many of the cases described in the book focus on CEOs, the concepts of constructive conflict, consensus building, procedural fairness, and the like are applicable to leaders of any group or organizational unit. In many ways, the ideas regarding how to build commitment and shared understanding are even more important for leaders at lower levels, who have far less power and formal authority than the CEO
The Zen of Management Maintenance: Leadership Starts with Self-DiscoveryHBSWK Pub. Date: May 9, 2005
Are you successful or a "success fool"? According to HBS alum and leadership expert Jagdish Parikh, the most effective leaders realize they must first learn the skill of leading themselves.
by Jagdish Parikh
Editor's note: Jagdish Parikh (HBS MBA '54), was a recent guest of the HBS Leadership and Values Committee in the Distinguished Speakers Series. We asked him to write about the subject of his talk, "Leading Your Self," based on his book Managing Your Self.
How can the concept of leadership be so rich in knowledge yet so poor in performance? Hundreds of books and "models" purport to suggest the best way to become a leader. Yet many people, asked to name a leader they would consider a role model, struggle to identify even a few individuals.
The gap between what we learn about leadership and what we actually implement exposes a fundamental flaw in most of the leadership models today. These models focus mainly on competencies required for leading an organization, but do not explain how to cultivate those core competencies. Therefore we face, in a sense, a crisis of leadership.
Actually, this is more a crisis of courage than of leadership, because what is lacking today is not knowledge about leadership, but the courage to convert such knowledge into actual performance. But courage does not come just by wishing—it only happens as a consequence of one's level of consciousness, one's inner experience, one's self identity. In this sense, what we are witnessing today is actually a crisis of consciousness. To cope with this, one needs an understanding and experience of a deeper level of consciousness and a higher level of self identity, as a precondition for cultivating the competences for leading others.
This is what Leading Your Self is all about.
Unless one knows how to lead one's self, it would be presumptuous for anyone to be able to lead others effectively. And, if you don't lead your self, someone else will! Leading one's self implies cultivating the skills and processes to experience a higher level of self identity beyond one's ordinary, reactive ego level. This facilitates the journey from reactive constraints to proactive courage leading to creative consciousness—a synthesis of intellectual, intuitive, and emotional intelligence. This enables one to effectively manage relationships with people, events, and ideas, which is the essence of leadership.
In these days of accelerating change and complexity, every manager needs to keep their physical, mental, and emotional dimensions in the fittest condition. This can be done through simple processes for minimizing stress, cultivating creativity, rebalancing emotions, and shared vision building, including Yogic exercises and meditation. "Leading Your Self" is the program that offers these with a unique synthesis of western and eastern, modern and ancient, concepts and processes.
Is stress good for you?Does stress bring out the best in us? Many executives seem conditioned into believing that stress is beautiful—it pushes us into higher performance, they believe. Surprisingly, they even declare you should never be satisfied with your performance because satisfaction will dampen the drive to do more and better.
Leadership is not just a personality trait, strategy, or tactic
I, too, took on this mindset as an MBA student at HBS. I went to Bombay and became successful as a businessman practicing these tenets but began to suffer negative physiological and psychological symptoms of stress after just a few years.
At this stage, I seriously began to wonder if there was another way to be successful while also remaining satisfied and happy at the same time. After deep reflection and a PhD, I discovered that the missing link between success and happiness was lack of awareness of one's "inner dynamics."
It is essential to understand and learn to manage and lead one's own inner dynamics, one's own self, in order to achieve sustainable peak performance and a continuing experience of inner fulfillment. Often many people do perform at a peak level, but this is largely through a fear of losing—losing what one has accomplished now and what could be accomplished in the future. Fear creates peak performance by generating adrenaline, which is very energizing and addictive. But adrenaline is also self-consuming and not sustainable.
To achieve sustainable peak performance, learn to transform your motivation from fear of losing to joy of doing, which is a different chemistry—that of endorphins. I believe there are three fundamental laws of High Performance Dynamics:
1. One never does anything unless one feels like doing it, either through negative motivation, fear of losing or positive motivation, the joy of doing.
2. Unless you feel good within your own self, you can never bring about good results on a sustainable basis.
3. Feeling good is a skill: cultivating a deeper awareness of one's self. It can be learned like any other skill.
This becomes most relevant when understanding that the essence of leadership is recognizing, discovering, and identifying with one's true self. The issue is that leadership implies functioning with proactive and creative attitudes. The fact is that mostly we function with reactivity. Why is this so? Because we normally identify ourselves with our body, mind, and emotions, which is a very narrow identity, described as the Ego identity. By its very nature Ego identity is bound to be self-centered and reactive.
How do we alter or expand our self identity? This can be experienced through a three-minute exercise called Performance Enhancing Process. PEP enables one to experience a sense of distancing, detaching from one's body, mind, and emotions and positioning one's awareness and experience deeper in one's "Inner Space," the "Inner Self," or the "Centered Self," which is also the "Proactive and the Creative Self."
The exercise is not only relaxing but also brings a positive, joyous feeling. In this way, one can function from that deeper, joyous, and proactive self through the ego, and not with the reactive Ego Self.
Each person, in a sense, is the owner/manager and observer/experiencer of his or her body, mind, and emotions. The simple metaphor of a chair, taken as representing one's body, mind, and emotion dynamics, can explain this clearly:
As long as I am sitting in the chair, (identifying with body, mind, and emotion), I cannot observe the whole chair nor "manage" the chair. In fact, the chair manages me! To observe the chair, I must get out of it. For this, I must first accept that I'm not the chair. The moment I can accept that, I can get out of it, and then I can manage, move, and lead the chair the way I want to. I become a master, a leader, of the chair.
This enables one to focus on developing the functionary dimensions of the self, namely, keeping the body healthy and energized, making the mind more open and creative, and preventing negative emotions.
That is why effective leadership is not just a personality trait, strategy, or tactic—not just a package of competencies. It is a transformative way of thinking, feeling, and functioning, a way of life, a way of being.
You can't lead something you yourself identify with. The paradox is that detachment (not withdrawal, escape, or indifference) coupled with involvement (not addiction)—in other words, detached involvement—enables mastery. Leadership then "happens" to you!

How to Choose the Best Deal

2006-01-19T22:36:00.000+05:30

Time v/s Performance

2006-01-19T22:26:00.000+05:30

: "Time Pressure and Creativity: Why Time is Not on Your Side
HBSWK Pub. Date: Jul 29, 2002 "

Customer Focus

2006-01-19T22:23:00.000+05:30

: "What Customers Want from Your Products
HBSWK Pub. Date: Jan 16, 2006 "

Adam Smith Behavioral Economist

2006-01-19T22:20:00.000+05:30

BPM Best Practices

2006-01-10T15:34:00.000+05:30

Pranav Gautam - Profile

2005-10-15T16:43:00.000+05:30

Pranav Gautam
Sector-14, B-152, Noida 201301
Pranav@pranavgautam.com; pranavgtm@rediffmail.com
Phone: (011) 22717145, Mobile: 9350185512, 9891700799


RANGE OF EXPERIENCE
Management Consultant with rich cross functional experience over 9 years (with 6 years in IT Industry), across different domains and management positions, including responsibilities as a Practitioner, Consultant, Project Manager, Service Delivery Manager, Business Analyst, and Manager Strategic Initiatives, with both project leadership and technical experience.  With high Emotional Intelligence Quotient, Team Management and Proactive approach, successfully managed all phases of the technology solutions lifecycle from planning through implementation. Possess In-depth expertise in the areas of Corporate Strategy, Business Analysis, Project Management, Capital Budgeting & Project Financing, IT methodologies, systems management, Business Intelligence, Change Management, Conflict Resolution, Business Risk Management & Contingency Planning, Information planning, and business process management.

KEY PROFFESSIONAL QUALIFICATIONS

IIM Calcutta
PDSS (Program for Development of Strategic Skills)
IIT Delhi
CPM (Certificate in Project Management)
IMT Ghaziabad
MBA (Finance & Systems)

Enrolled for Phd (Management) from Jivaji University, Gwalior; (Research Domain: Knowledge Management and Business Intelligence)

CORE SKILLS

Strategic IT Planning & Governance               IT Service Management
Project Management                         Business Continuity & Disaster Management
Business Process Management                    Business Intelligence
Customer Relationship Management               Balance Scorecard Techniques
Decision Support Systems                    Knowledge Management

PROFESSIONAL AND BUSINESS EXPERIENCE

                         CMC LTD
                         A TATA Group Company (previously a public sector company) – CMM Level 5
                         (http://www.cmcltd.com/about_us/corporate_profile.htm)
Consultant  (Corporate Strategy):       since September 2004
- Monitoring critical projects,, Design , develop and launch new programs and process improvement techniques,
- Coordination with the SBU heads to Create and service new accounts, geographic areas and lines of business and provide customized service deliverables
- Analyze company's marketing programs and find ways to increase effectiveness
- Coordinating across different verticals managing multiple projects for North India region
Responsibilities include the advisory support to the VP and GM secretariat.
- Managing meeting targets, revenue and market share growth, profitability and human resource development for all the Strategic Business Units & functions in the biggest region at CMC (9 States).
Highlights:

Thrived amid TCS acquisition and key contributor to Successful implementation of new Organizational Model (Tata Code of Conduct) and Management Information System (Ultimatix).

Rich cross functional experience spanning Commercial, Business Development, Human Resource, Financial, Operations and Project Management initiatives in sectors like Insurance, Banking, Education & Training.

Conducted and moderated meetings of different SBU’s, Projects, Functional Managers in critical situations during major organizational revamps

Facilitated lasting strategic business networks across all levels and categories ~ professionals, bureaucrats, corporates & leaders of different constitutional bodies

Senior Project Manager (Insurance)     Feb 2003 – Sep 2004
Software customization & implementation project "Genisys", for about 500 operating offices North India of leading insurance companies, with team of more than 100 engineers. Incharge of six technical support centres located at New Delhi, Bhopal, Lucknow, Jaipur, Indore and Pune.
Business Configurator at Reliance Insurance Company Ltd, Delhi
Web Interface and business solutions for Insurance brokers & TPA’s.

Key Responsibilities
Established Project Management Office (PMO) at Delhi, using delivery processes adhering to the standards of Project Management Institute. This included: development and implementation of procedures/processes for Project Management Delivery Methodology, Quality Improvement, Communication Management Plan, Risk Analysis Plan, Problem Escalation procedures, Scope Management Plan (WBS, SOW etc.), and continuous quality improvement Plans.


     Nov 2000 – Jan 2003          Project Manager (Genisys - Maharashtra)

Consider as one of my best performance and achievement as this project was single handedly executed and successfully completed; Implementation of Software solution (Genisys) in vast area of Maharashtra, at more than 125 operating offices of India’s top three Insurance Companies i.e. New India Assurance Ltd (NIA), United India Insurance Company Ltd (UIIC), National Insurance Company Ltd (NIC).

Establishing office for Technical Services

Manpower Recruitment, Training, Team Building

Client Meetings, Site Visits, Infrastructure (Technical) guidance

Software Testing, Rollout & Implementation, Manpower Deployment

Technical support service network in other cities (Kolhapur, Nashik, Nagpur)

Software Configuration, Version Control, Problem analysis, assessment & escalation

Software Quality Assurance, Business Requirement Analysis, Change Requests

Manpower Optimization, Online Offline support models,

Feedback, Assesment & Appraisals, Mentoring Team Leaders & Project Leaders

Client Satisfaction Metrics, Manpower transfers, Asset Relocation

Completing all contractual obligations, Project Closure & Sign-off

Formally closing / shutdown the operations

Acievements

Recognized as Project Manager of the Year, incidentally the youngest project manager.

Before time, Under Budget completion of project with highest customer satisfaction ratings

Handled all responsibilities HR, Administrative, Financial (Revenue Receipts from customer, salary disbursement and payment office expenses), Inter-region Revenue sharing,

Infrastructure & Logistics (taking premises on rent, signing lease agreements, machines on rent for Technical support centres in different locations, accommodation assistance for support engineers)

     CMC Ltd
     July 1999 – Oct 2000          Business Analyst, Manager – Strategic Initiatives

     Job Description
     Technical Support Centre Management, Team building, Software Problem Analysis

     Technical Responsibility     :
Database creation and configuration, Database Security (Roles and Privileges), Devising backup strategies using cold backups as well as export dumps, Database recoveries (various complete and incomplete)
Refining of procedures and database queries for optimal performance, Performance Tuning and Troubleshooting.


     Somani Swiss Industries Ltd
     April 1997 – July 1999          Assistant Manager

     Key Responsibilities
     Portfolio Management, Financial Analysis, Working Capital Management
Significant contribution and active involvement in Corporate Financial Management including public issue 1996 for raising funds through capital markets BSE.

     Apex Telecom Ltd
     April 1996 – April 1997          Management Executive
     Business Development, Financial Analysis (Cash Flows),
                    Technical Qualifications
     Engineering (Computer Science), B.Tech University
     Advanced Diploma in Software Engineering, (ADSE) Aptech
     Diploma in Systems Management, (DSM) NIIT

     Online Business Research & Collaboration
     Published, contributed, commented various management articles and participated in online business forums:
     Harvard Business Review Working Knowledge (HBSWK)
     McKinsey Information and Technology Management Online
     Knowledge @ Wharton, The Wharton School of the University of Pennsylvania
     IT Business Edge Forum

     Technical skills
     Databases     ORACLE, 8i, 9i, MS Access, SQL Server, dBase
     Languages     SQL, MS Visual Basic, C, Developer 2000
     Operating Systems     UNIX, Windows, Windows NT
     Methodologies               SDLC, SLC, SDM

     Software Proficiency :
     MS Office 2003 Suite (Outlook, Word, Excel, Infopath, OneNote, Powerpoint, Publisher),
     MS Visio 2003, MS Project 2003, Windows XP (SP2).


     Other Professional Engagements
     (Academic interest with permission from the management)

     Consultancy assignments

     Kamtech (P) Ltd: (2004-2005)
     Profile: Software company foraying in Mobile Device Computing and Applications.
     Business Segment: Software applications and business solutions Smart-cards, Biometrics & other hi-tech devices.
Deliverables: Project Plan for Venture funding and Bank Finance, Strategic Analysis (Market, Industry, Competition) Strategic Options and Business Valuation.
     Educare Consultants  (2003-2004)
     Profile: A small venture in booming Education Industry. Providing Guidance, Counseling, and placement services.
Career Management “Career Mahotsav” in Pune, broadcasted at Doordarshan & Akashvani; Institutional Management, Infrastructural Development. (Year 2003-2004)

          Teaching, Training and Mentoring (2001 – 2003)
          PGDBM, PGDTM  and other final year management students
          Sinhgad Institute of Management, Pune
          Suryadutta Management Institute, Pune

     Professional Memberships :
     Project Management Institute (PMI),
     Quality Assurance International (QAI),
     British Standards Online (BSI)
     Indian Institute of Management, (IIM Calcutta) – Alumni Association

     Contributed papers & articles at several prestigious international forums in India like Network World, Business Edge, Forbes.com, and various online webinars

     Participated Panel discussion on New Competencies in Information & Technology, (IT Business Edge Webinar 24th May 3005)

     Attended various seminars and conferences conducted by CII, ASSOCHAM, FICCI, AIMA & Hughes Escorts.

Implementation of Balanced Score for Excellence in Project Management

2005-09-09T06:31:00.000+05:30

Implementation of Balanced Score for Excellence in Project Management

Introduction
The Balanced Scorecard methodology has evolved in the 90’s and matured as a proven framework for driving strategy in organizations. It is found that though in many corporations a defined strategy exists at the corporate level, the deployment of the same at the operational level is not uniform and in many cases absent. This causes misalignment of organizational strategy and hampers achievement of organizational goals due to poor deployment. The cascading of strategy becomes yet more difficult in a consulting I IT organizations where unlike the manufacturing organizations, as there are no fixed departments, infect they are replaced by Project Teams. These Project Teams are selected, based on the competencies required and formed, based on business requirements for a particular client, with specific deliverables and timelines. It is observed that though many organizations have excellent business strategy there are severe lapses in the execution at the operational level. Cascading business strategy as appropriate to Projects becomes a great challenge. The Balanced Scorecard has specific focus on four perspectives — Financial, Customer, Internal and Learning. It also has a focus on balancing long term and short term goals of an organization. It is observed that organizations, which do not have a robust framework to deploy a “Balanced” set of goals at the Project level, fail to achieve organizational alignment and integration. With the challenges of deploying strategy at operational level and with my experience specifically in IT I Consulting organizations, I started working on a framework for implementing Balanced Scorecard methodology at the Project — level. The objective of developing such a framework was the following: > Create a sustainable strategic position at the project level > Focus on Financial as well as non-financial goals at the Project- level > Balance short-term and long-term organizational objectives Create a Learning organization
Balanced Scorecard Methodology Harvard Business School professor, Robert Kaplan, and management consultant, David Norton, conceived the Balanced Scorecard in 1992. Subsequently the theory matured through the last twelve years as one of the most powerful and influential management tool.
The history of a journey — how Balanced Scorecard has evolved Initially adopted by a few selected organizations, the idea has spread very rapidly worldwide. Bain and company reported that 55% of the surveyed companies in the United States and 45% in Europe claimed to be using Balanced Scorecard.
“By the year 2003, at least 50% of the Fortune 500 will have implemented a Balanced Scorecard.” — Gartner Group
The Balanced Scorecard is a multidimensional framework for describing, implementing and managing strategy at all levels of an enterprise by linking objectives, initiatives and measures to an organizational strategy. The scorecard provides an enterprise view of an organization’s overall performance by integrating financial measures with the other key performance indicators around customer perspectives, internal business processes and organizational growth, learning and innovation.
The Balanced Scorecard Perspectives
The conventional governance, management and performance review systems have focused only on the measures of financial performance at the organization level. Mostly the process measures are limited at the project I department level. The learning and growth targets predominantly remain purely targets for the HR department. The Balanced Scorecard approach begins with the premise that financial measures are not sufficient to manage an organization. Financial measures tell the story of past events, they are not helpful to guide the creation of future value through investments in customer, suppliers, partners, employees, technology or innovation. The Balanced Scorecard complements measures of past performance( lagging indicators) with measures of drivers of future performance ( leading indicators). The objectives and measures of the scorecard are derived from the organization’s vision and strategy. These objectives and measures provide a view of an organization’s performance from four perspectives.
Financial Perspective- focuses on the strategy for growth, profitability and risk viewed from the perspective of the shareholder. Customer Perspective — focuses on the strategy for creating value and differentiation from the customer viewpoint. Internal Perspective- focuses on the strategic priorities for various business processes, which create customer and shareholder value. Learning and Growth Perspective — focuses on the strategic priorities to create a climate that supports organizational change, innovation and growth.
Through the measures on the Balanced Scorecard, organizations can focus on how their business units create value for current and future customers. They can also learn what investments in people, systems and procedures are necessary to improve future performance.

Balanced Scorecard — Key implementation features In order to understand how a balanced scorecard drives strategic performance, let us walk through the broad steps involved in constructing and implementing a scorecard across all levels in an organization. 1. Build a shared vision and strategy — it starts with building a shared vision and strategy at the corporate level 2. Synthesize strategic objectives — based on the corporate strategy, a set of strategic objectives are synthesized under each of the four balanced scorecard perspectives 3. Prepare a strategy map — it is important to understand the cause-effect relationship between various strategic objectives to effectively align and implement the action plans across the organization. To facilitate this, a “Strategy Map” is constructed using the strategic objectives in the four perspectives. 4. Selecting the performance measures — a set of measures is selected to manage performance against each of the strategic objectives. The measures should have a balance of outcome measures(lagging measures) and performance driver measures( leading measures). Against each of the selected measures, targets, future projections and comparative performance is tabulated for all the four scorecard perspectives. 5. Select Strategic Initiatives — in order to achieve the targets determined against the strategic objectives, the organization has to undertake a set of strategic initiatives 6. Cascading the balanced score — based on the corporate scorecard, SBU, divisional and functional scorecards need to be evolved.
Cascading the Balanced Scorecard in an IT environment Traditionally, appropriate cascading of the scorecard has been one of the biggest challenges that organizations have faced. In an IT environment the challenges of cascading the scorecard is more challenging, simply because of the dynamic structure of this organizations. The operational units of an IT organization are “Project teams”. These Project teams are formed based on client requirements, with specific project charters( goals and targets), team members are selected based on required competencies and they deliver solutions! services to the client , in many occasions may be at a remote client site. The challenge of cascading strategy is quite different from a traditional manufacturing organization, because in this industry you may not get a static department with more or less fixed set of employees. On a lighter side, I always compare the IT organization structure with the Hollywood. In a movie, you have a producer, director, actors, actresses, editor, music director coming in making the movie and then disbanding for yet another movie, which may have a new set of actors, actresses and so on. In many cases the same thing happens in an IT project — the key factors in these projects are agility , focus on creating customer value in specified time. However, it is observed if we do not have appropriate cascading of the organizational scorecard or SBU scorecard at the project level, this may hamper the long term strategic objectives of an organization. It may so happen that though we satisfy customers at the short-term perspective and achieve profitability at the short-run but long —term organizational goals such as building strategic competencies, process- orientation and orientation for knowledge management and innovation may be missed out.
Project Balanced Scorecards Faced with the challenges discussed above I started working on a methodology which is termed as a “Project Balanced scorecard”( Project BSC5). The philosophy of this Project BSC is to shift the IT projects from just carrying some operational goals and targets as traditionally found in the “Project Charters” to also introduce some strategic goals of the organization I SBU at the project level. The methodology used here is termed as a KPM tree methodology to derive the appropriate key performance measure(KPM) that is cascaded from the organization level to the SBU level to the Project BSC. It was found that ultimately most of the KPM5 , which we take at the organizational level can be appropriately cascaded using the KPM tree analysis to an IT Project level. Special focus is given here in the hternal business perspectives and the Learning and growth perspectives to ensure that even at the stringent pressures of short term profitability and delivering to customer requirements, the projects stay as much focused on process adherence and also on developing the key competencies that are strategically important to the organization. As an illustration in the learning and growth perspective typically a Project BSC takes targets on improving competency I skill levels of team members through project I on the job exposure, giving opportunity to members through “shadowing” the experienced members. At the same time monitoring motivation level of the project team through KPM5 like Project attrition level, measuring employee satisfaction level at the project team and conducting “Peer feedback”( 360 deg feedback) for project teams. Since we are using the overall framework of the balanced scorecard methodology, the KPM5 and initiatives at all the perspectives are linked and the cause-effect relationship is already established. Thus the KPM5 I objectives at the Internal business process and learning and growth can be easily scrolled up and impact analysis is established on how they enhance customer satisfaction and profitability at the project level and ultimately at the organizational level.
Setting up a Strategic feedback and Review system Improvements in organizational I project performance can only be achieved if performance is reviewed continuously using the balanced scorecards. One of the most effective methodologies is the “dashboard” methodologies, where we can set up for the “green” space, “yellow” space and “red” space for each of the KPM5 at the project level. Where green denotes- KPM on target, yellow denotes- acceptable level of deviation and red denotes- that the performance deviation needs immediate recovery plan. The dashboard methodology helps the executive management to focus on the vital few which needs focus and act on them.. The green, yellow and red spaces are set up based on past benchmarks and comparative data.
Caution!
Simple as it may sound, it is important that we take care of certain important aspects while implementing the Project BSCs.

The Project Balanced Scorecard is not a set of KPM5 as perceived to be important on a gut feel; it is a set of carefully chosen measures which drive strategic performance
The Project Balanced Scorecard is not a set of measures in four perspectives; it represents the relationship( cause & effect) between the various perspectives in light of current strategy
The Project Balanced Scorecard is not a one-time event, but a continuum. You don’t construct a Balanced Scorecard and let it R.l.P( rest in peace). To be effective, it has to become a part of daily decision-making.
The Project Balanced Scorecard should not end up measuring what can be measured conveniently. It should measure what needs to be measured to highlight aspects of performance important for decision making.
Key benefits
Thus to summarize, the implementation of the project balanced scorecard, may bring about the following benefits:
Facilitate communication across the entire organization and enhance the understanding of vision and strategy
Ties the vision and strategy to the goals and objectives of the project teams and individuals concerned
Ensures that the right data is gathered and input is provided for effective measurement of objectives
If an objective is not achieved, it facilitates a clear understanding as to why it could not be attained
Acts as an effective basis for resource allocation with focus on managing current business(operational) and focus on changing the business(strategic)

To summarize
“Knowing about the knowing-doing gap is different from doing something about it. Understanding causes is helpful because such understanding can guide action. But by itself this knowing is insufficient — action must occur” - The Knowing — Doing Gap, Jeffrey Pfeffer and Robert I. Sutton
References > Translating Strategy Into Action: The Balanced Scorecard, Robert S Kaplan and David P. Norton, Harvard Business Press > The Strategy Maps. Robert S Kaplan and David P. Norton, Harvard Business Press > SAP Strategic Enterprise Management: Translating Strategy into Action: The Balanced Scorecard. SEM Product Management, SAP AG

Quelling Your Inner Jerk

2005-09-09T06:22:00.000+05:30

Quelling Your Inner Jerk
Tough, blunt, sure-handed and successful--that is how the chief executive saw himself in his role at a famed financial services giant (anonymous here). Until June. Then Marshall Goldsmith, a Zenlike, gentle soul who makes $1.5 million a year coaching some of the most powerful senior executives in the world, stepped in with the shocking truth.

The boss' dozen lieutenants do indeed see him as "smart, gifted and dynamic," Goldsmith told him, citing comments gleaned in confidential interviews. But they nonetheless feel their boss is "disrespectful, intimidating and arrogant," Goldsmith said in soft, soothing tones. His client was wounded: "I'm an asshole," he blurted out. "This is like a knife in the gut."

Goldsmith is a rock star in the inward-looking, sometimes backbiting world of executive coaching. In the past 28 years he has counseled the brass at Boeing, Northrop Grumman, General Mills, Toyota and elsewhere.He culls comments from his clients' colleagues to let the bosses "find out how other people perceive them," aiming to "develop a tightly structured program of more acceptable behavior," he says.

Business is booming in this post-Enron era, when corporate chieftains are prone to atone and tone down. In the 1990s chief executives were capitalism's heroes, celebrated for a can-do, stab-'em-in-the-chest style. Now they are encouraged--by experts who can charge upwards of $10,000 a day--to drop that pose, rev down and look inside themselves for traits they need to change.

A key component of this pricey navel-gazing is peer pressure, in the form of "360-degree"reviews with the underlings. They are conducted anonymously by the coach and are aimed at a peculiar pursuit:trashing the boss. It is enough to stir paranoia in any thin-skinned, insecure leader (which arguably covers most of corporate America).

"CEOs are waking up to the new reality that they can't be SOBs and get away with it," says Goldsmith, 56, an inveterate optimist and self-promoter who meditates, believes in the curative spirit of Buddhism and has worked with 40 or so chief executives in the past five years. But the brass hats are "so damned busy and always facing a crisis," he says, that they need an outsider like him to deliver a needed smack upside the head.

So in one gig Goldsmith got personal--he called in for help from the client's wife. The swaggering boss of a brokerage firm got lousy reviews from his peers; essentially, they said he was a jerk. But he rejected that view and vowed to make no changes. Goldsmith suggested the exec call his wife, with Coach Goldsmith on the line, to ask what she thought of her husband; she, too, said he was a jerk.

A little skepticism is in order. Can chief executives (or anybody) truly change themselves all that much? Coaching is, let's face it, a fad, drawing into the act academics, business consultants, psychologists, even ex-journalists. "We've gone overboard. There are more dilettante coaches than good ones. You can only modify behavior within bounds," says Warren Strickland, a partner at McKinsey & Co.

Even Goldsmith has reservations. "I'm not a believer in instant religious conversion," says he. (Slow conversions, perhaps. Raised a Southern Baptist, he switched to Buddhism in 1975, drawn by its focus on letting go of the past to concentrate on the now.) "I'm very skeptical about the process."

Marshall Goldsmith was born and bred in Valley Station, Ky., an only child. His father worked in a gas station; his mother was a first-grade teacher. He graduated from Rose-Hulman Institute of Technology in Terre Haute, Ind., then got an M.B.A. at Indiana University and a Ph.D. in organizational behavior at UCLA. As a consultant he first worked for Paul Hersey at the Center for Leadership Studies in Escondido, Calif. He started his own practice in 1979.

These days Goldsmith, who is married with two grown children and based in Rancho Santa Fe, Calif., earns about $500,000 a year coaching eight executives one-on-one, and he has a waiting list. He brings in another $850,000 a year from other stuff--one-day seminars at companies, each of which pays him $17,000 a gig; fees from up to 50 coaches in the Marshall Goldsmith network, who get referrals thanks to his prominence; and writing and coediting books (18 so far).

Goldsmith preaches four golden rules: Care about what your colleagues say and feel about you; don't try to prove you are always right; ask, listen and follow up; and solicit appraisals from your associates. Goldsmith polls an executive's associates every three months to measure whether his behavior has changed, passing on the results to the executive. "Without the feedback, there's no incentive to change," he says.

He also preaches vulnerability. At a big drugmaker, an executive hoping to one day succeed the chief executive managed to rankle the boss by trying too hard to impress with all he knew when he should have listened more to what the boss knew. Goldsmith's advice:Don't be such a show-off all the time, ask for help from your mentor--and be willing to learn.

Too many chief executives don't know how to listen to others, the coach says. "If people start listening to others, they learn the value of listening. To become a successful listener, you have to keep listening," he says mystically, channeling Deepak Chopra.

"Marshall forces you to have awkward conversations with co-workers that are easy to postpone," says one current client, George Borst, who runs the U.S. financial services arm of Toyota, with assets of $50 billion. "He holds a mirror to your face and reminds you to put the needs of the organization first."

Borst's 360-degree review said he was impatient, had not properly united his team and needed to clarify standards for high performance. Goldsmith managed to shroud this in a softer message: Your people need more guidance. So Borst has scheduled his individual meetings with all of Toyota Financial Services' nine vice presidents to give them "the coaching they have requested of me," Borst says.

When a recalcitrant client relapses, Goldsmith steps in like a drug counselor at a family intervention. Jonathan Klein, the South Africa-born boss of Getty Images, a global photo distributor, was known for sarcastically debating his colleagues, making some of them feel inferior. He was arguing with his people instead of leading them. In a group meeting with 75 of his employees in Getty Images' Seattle offices, Klein took a question and engaged in a debate rather than answering it. Goldsmith later called him on his behavior.

Klein began to "listen to others, learn to shut up, think before he talked and open a healthy dialogue about Getty Images' direction," says Coach Goldsmith. Sounds a little syrupy, but Klein himself, now rehabilitated, says Goldsmith "helped me become a more effective leader, as judged by the people who are the most important: our employees."

Alan Mulally, who runs Boeing's airplane division, changed after learning he was so hard-driving that he had no room in his head for other people's ideas. He met one-on-one with colleagues to thank them for their input, express gratitude for their involvement and ask them for ideas in the assembly of the new Boeing 787 Dreamliner jet.

"We took the intensity of talking to each other to another level," Mulally rhapsodizes. The feedback showed 85% of Mulally's lieutenants gave him a high rating.

At General Mills, Executive Vice President James Lawrence became a client amid complaints that he berated some of the 28 people who worked alongside him, Goldsmith says. Lawrence denies this characterization. Nonetheless, client and coach met every other month for a year and a half, followed up by monthly phone calls "to remove the roadblocks from Lawrence's ability to bring out the best in people," says Kevin D. Wilde, General Mills' chief learning officer. Later 26 of the 28 colleagues agreed that Lawrence had modified his behavior positively, and he was rewarded with more authority.

At times such efforts fail. One chief hired Goldsmith to coach the chief financial officer to succeed him; the CFO made marked improvements but was passed over anyway. Goldsmith believes it was a setup. At another company one top exec went along with coaching, only to confide that he was hoping to bail out of the company altogether.

Goldsmith says he forgoes billing a company if his methods fail to change a dysfunctional boss for the better; this occurs in one in eight cases, he says. He declares success when the final feedback from co-workers is overwhelmingly positive. But in this fed-up age of the diminished chief executive, this amounts to leadership by popularity contest, doesn't it? No way, he insists.

Broadband

2005-09-02T03:41:00.000+05:30

Broadband: How much bandwidth do you need?

Bandwidth will soon be available on tap and there are a plethora of broadband connectivity solutions. But are enterprises using bandwidth-hungry applications yet? by
In the recent past there has been talk about India being a bandwidth-starved nation, and about how much we could lose if we fail to upgrade capacities on broadband networks. That consensus might change.
Considering the rate at which private sector companies are deploying fiber optic or HFC (Hybrid Fiber Coaxial) networks across the nation, we'll soon have surplus bandwidth. The question is, what are we going to do with all that bandwidth, and what are the applications that are really going to drive bandwidth requirements?

REQUIREMENTMarket research organizations have projected the country's broadband requirements for the first half of this decade.
Nasscom projects 300 Gbps Internet bandwidth demand in India by 2005. Market researcher Frost & Sullivan predicts growth rates of over 93.6 percent for Internet bandwidth, between March 2000 and March 2005. Industry reports indicate India could loose out on $22.5 billion in business earnings if it fails to address its bandwidth requirements.
While Internet access may be the main driver for bandwidth demand, the high requirement on enterprise networks is debatable. A clearer picture emerges when one examines global trends and the demand drivers.
Enterprises deploy broadband networks for Internet access/international connectivity, or for internal LAN/WAN point-to-point connectivity.
Traditionally, exporters and software development houses have been big bandwidth consumers. But now certain factors are prompting corporates to upgrade capacities on internal networks.
Typical applications running on corporate LAN/WANs are messaging, ERP, CRM, SCM, databases, and customized applications. We asked vendors, IT-Heads and network consultants whether these applications are bandwidth hungry, and got mixed responses. While some felt 64K and 2Mbps links are adequate, others feel applications like ERP are driving bandwidth requirements.
“Applications like VPN, ERP, CRM, and SCM don't require high bandwidth. These are all low-bandwidth applications that are manageable within 128Kbps.”
“at present everyone uses 'thin' bandwidth. Ninety percent of VSATs use 64Kbps or less. Hindustan Lever for instance uses very low VSAT bandwidth and NSE uses 64Kbps. Bandwidth requirements are low because companies have not yet combined video, audio and data on their networks.”
Though bandwidth requirements have not grown at the projected rate, enterprises certainly feel the need to go in for additional bandwidth. "One of the reasons for this is that enterprises want to have backup links,"
bandwidth will continue to be in short supply and corporate applications are the main demand drivers. "If corporates adapt to applications like ERP, then there will be a need to connect. Similarly, Web-based applications around SCM (Supply Chain Management), Sales Force Automation and Intranet/extranet based workflow require bandwidth for fulfillment." enterprise users, consumers, service providers and even the government demands bandwidth on tap. He says investment from private players has seen India record a phenomenal increase in both incoming and outbound traffic. "There is clearly a demand for broadband what has changed however is the supply situation. Network i2i recently announced the opening up of its undersea submarine cables with capacity to carry 8.4 Tbps of traffic out of India. From mere Gbps India is now entering the TB (Terabyte) space. Even India's regulatory framework has turned favorable for telecommunications bandwidth vendors and resellers."

DRIVERSMany feel the real driver for bandwidth is multimedia applications. Years ago there was talk of "rich multimedia content" and video being the real drivers. In reality this isn't happening yet in Indian enterprises. However, organizations are increasingly using their IP networks for voice communications in closed user groups.
Some consultants say voice isn't a bandwidth guzzler as voice streams are compressed before transmission on data networks.
"VoIP will be a big driver for bandwidth, It may seem that VoIP does not hog bandwidth, because voice can be compressed from 64K to 14K. But to use multiple voice channels on a network you do need adequate bandwidth. Even if the routers are configured to prioritize voice traffic, latency will come in."
Many also talk about network convergence. When voice, video and data are pushed along the same pipe, bandwidth requirements can soar. As connectivity costs drop more enterprises will consider a common network for voice, video and data. The real attraction here is the huge cost-savings.
Another driver is business growth. Enterprises, especially in the banking and finance sector, are opting for more bandwidth to fulfill growing business requirements. IDBI Bank for instance, is upgrading its bandwidth by 50 percent this year, as it introduces more ATMs, branches, and new applications.

TECHNOLOGY ENABLERSNew connectivity options at lower costs are also prompting many companies to consider broadband connectivity for business operations. For instance Optical Ethernet technology enables businesses to connect their existing Ethernet LANs to DWDM-based optical backbones.
Transmission speeds are boosted as optical components replace silicon in switching equipment.
The cost of wireless equipment is falling and it's also becoming easier to set up wireless networks.
Radio Frequency links and IP-VPN are becoming popular because of the features and benefits they offer.
What's more, all this new technology is available right here in India from vendors like Nortel Networks, Cisco, Avaya, Unisphere Networks, Motorola, Texas Instruments and others.

CONCERNSService providers have moved quickly to address corporate bandwidth requirements, and many types of broadband solutions are available today. Network consultants say CIOs/CTOs have certain concerns while choosing these solutions. Some carelessly neglect certain issues.
"When a business is heavily dependent on broadband connectivity, it's not enough to have firewalls or expensive security systems in place," says Frank. "What is needed is skilled manpower. The management of those networks and their security is most crucial."
ISPs feel corporate customers are most concerned about throughputs and uptime.
CONCLUSIONWhile throughput and uptime top many a CTOs wish list, it is important to carefully consider the features of each connectivity option and understand the environment it is best suited to. Though bandwidth is available from many service providers, managers must study their applications, monitor network performance and then determine their bandwidth requirements.

Oil Shock

2005-09-01T18:45:00.000+05:30

Misleading Oil shock

THE price of oil affects the cost of almost everything. It helps determine not just the cost of driving to work or flying off on holiday, but also the cost of furniture, food and anything else which has to be transported from factory to shop floor. The past three global recessions were all triggered by a jump in oil prices. Thus, it should be alarming that oil prices have more than tripled since late 2001. So far, though, the world economy has held up remarkably well: global GDP growth is strong and inflation remains modest. How long can this continue? The optimists point to a host of reasons for why “this time is different” and why high oil prices will not trigger a global downturn. For example, it is claimed that in real terms, adjusted by consumer prices, oil is still cheap. Most businessmen reckon that is tosh: relative to producer-output prices, real crude oil prices are now close to a record high (see article). In any case, the notion that rising oil prices have no economic impact until they hit the previous peak in real terms is ridiculous. The main reason why high oil prices have so far not kiboshed the world economy is that cheap money has supported spending sprees and housing bubbles in many countries, notably America, which have offset the impact of dearer oil. The two main engines for the world, the United States and China (also the two biggest oil consumers), have both had their growth boosted by lax monetary conditions in the past couple of years. Indeed high oil prices can partly be seen as a consequence of low interest rates. The two most important prices in the world economy are the price of oil and the price of money, and they are linked. If interest rates are abnormally low (in bond yields as well as short-term rates), then as global demand increases in response, oil prices should rise—especially if production capacity is tight, as it is today. So referring to the recent climb in oil prices as a “shock” is misleading. The market is simply responding to stronger oil demand on the back of a strong world economy. The increases in both global GDP and global oil consumption last year were the biggest for almost 30 years. Rising oil prices may even be read as a signal that global economic growth has been more rapid than existing output capacity can sustain. Normally, bond yields would perform that role. But the bond market has been behaving mighty oddly, with yields falling over the past year. The rising oil price is thus taking some of the job of constraining the world economy away from higher interest rates. From this point of view, a high oil price is quite healthy, a way of helping to prevent the global economy from overheating. A much more efficient solution would be tighter global monetary conditions. But tighter money now risks pushing the housing and borrowing booms into reverse, tipping economies into recession. Moreover, even if rising oil prices are a natural market response to rising demand, they can still have nasty consequences for slower-growing economies, such as EuropeTs. Excessive growth in demand in America and China is, in effect, imposing a tax on others by pushing world prices higher than they would otherwise be. Even more serious, with little spare capacity in the oil industry, such rapid growth in consumption leaves the market vulnerable to any supply disruption, like those that initiated previous oil shocks. This effect is exacerbated by the fact that the economies that are currently growing the fastest tend also to be the least efficient users of oil. To produce one dollar of GDP, emerging economies use more than twice as much oil as developed economies. Many emerging economies, including China and India, subsidise oil. Insulated from the reality of rising world prices, consumers guzzle more oil than if they had to pay full market prices. This, in turn, pushes global oil prices higher. Such pressures are likely to grow. The IMF forecasts that over the next five years emerging economies could account for almost three-quarters of the increase in world oil demand. China has single-handedly accounted for one-third of the growth in global oil demand since 2000. With ChinaTs oil consumption per person still only one-fifteenth of that in America, it is inevitable that its energy demands will increase over the coming years if its income does too. But China’s consumption is also being inflated because domestic petrol prices have not been allowed to rise as fast as crude prices. It is time for governments to scrap price controls and subsidies to allow the marketTs price signals to get through to consumers. It is easy to point a finger at ChinaTs growing oil demand (which has in fact cooled off this year), but America remains the biggest consumer, using one-quarter of the world’s output of the black stuff. America uses 50% more oil per dollar of GDP than the European Union, largely because consumers pay less. As petrol prices have hit $3 a gallon in some cities, there has been an outcry from motorists. Even so, petrol remains dirt cheap in America, compared with Britain or Germany where prices are above $6 a gallon. AmericaTs heavy dependence on oil not only leaves the economy more vulnerable to a supply shock, it also pushes prices higher for the rest of the world. Time for a cure The best long-term solution—for America as well as the world economy—would be higher petrol taxes in the United States. Alas, there is little prospect of that happening. America, unlike Europe, has preferred fuel-economy regulations to petrol taxes. But even with those it has failed abysmally. These regulations have been so abused that the oil efficiency of its vehicles has fallen to a 20-year low. This week, the Bush administration announced proposals for changing the fuel- economy rules governing trucks and sport-utility vehicles, but failed to close loopholes that allow these gas guzzlers to use more petrol than normal cars, a shameful concession to carmakers. America and China, in their different ways, are drunk on oil consumption. The longer they put off taking the steps needed to curb their habit, the worse the headache will be. George Bush once learned that lesson about alcohol. It is time for him to wean America off oiloholism too.

Global Strategic Analysis of Technology & Management

2005-08-31T09:05:00.000+05:30

Win the battle before it begins.
Strategy, Redefined.
Over the years, the concept of strategy has been
repeatedly redefined in an attempt to maintain
validity in an ever-changing business world.
Dramatic changes experienced over the past three
decades, culminating in the explosion of the Internet,
have invalidated one by one all traditional
approaches. As a practice, the reliance on
environmental stability is loosing ground because the
competitive landscape is becoming increasingly
difficult to define. The belief that ownership of a
core competence will lead to a sustainable strategic
advantage is no longer widely accepted, as individual
ownership is quickly being diluted by informational
leakage. Across the board, the root cause of these
dismissals is an accelerated free circulation of
information. A more interesting observation is the
common characteristic that these theories share: they
all focus heavily on competition. The underlying
reason for their existence is to defeat the competition,
overlooking the customer as the main driving force
behind the evolving marketplace.
This article will introduce a new approach to strategy
that is built around the customer. By focusing on
what the customer is trying to accomplish, and
treating all offerings as solutions* to their inherent
* Note that throughout this paper the term solution
refers to offerings in general. Why solution and not
simply offering? Because, the term offering maintains
an inside-out perspective from which we are trying to
depart, while the term solution emphasizes the
issues, the new theory advises on positioning relative
to the customer, as opposed to positioning relative to
the competition. While competition remains a very
important factor in strategy, rather than defeating the
competitors in direct combat, this technique shows
the way to win the battle before it actually starts.
I. UNDERSTANDING SOLUTIONS
Analyzing The Customer’s Issues
Years of research have revealed a pattern in the way
customers solve problems. It was observed that
complex issues are being broken down into more
easily addressed subordinate issues. Dependent upon
their complexity, these new subordinate issues are
further disaggregated (e.g., computer network into
computers, which are further disaggregated into
components like microprocessor, hard-disk drive,
etc.). This cascading process often continues until
the lowest level of subordinate issues is addressed
with common, easily defined offerings (e.g., for a
computer buyer the disaggregation process stops at
essence of this theory which states that every offering
is in fact a solution to a customer’s issue. Traditional
definitions of solutions as bundles of products and
services, and not offerings in general, are being
disregarded for their arbitrary character.