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PARADOX AT TOYOTA…page 96

CLARITY AT IDEO…page 84

www.hbr.org

June 2008

60

The Secrets to Successful Strategy Execution
Gary L. Neilson, Karla L. Martin, and Elizabeth Powers

72

The Next Revolution in Productivity
Ric Merri?eld, Jack Calhoun, and Dennis Stevens

84

Design Thinking
Tim Brown

96

The Contradictions That Drive Toyota’s Success
Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu

106

The Multiunit Enterprise
David A. Garvin and Lynne C. Levesque

22 41

FORETHOUGHT HBR CASE STUDY

Why Are We Losing All Our Good People?
Edward E. Lawler III

DELIVER ON A GREAT PLAN
…page 60

HOW TO

53

FIRST PERSON

Business Basics at the Base of the Pyramid
Vikram Akula
123
MANAGING YOURSELF

How the Best of the Best Get Better and Better
Graham Jones
129
BIG PICTURE

Patent Sharks
Joachim Henkel and Markus Reitzig
138 144
EXECUTIVE SUMMARIES PANEL DISCUSSION

If there’s a 2-do for coupes, we
TXT
Text BMWHBR to 67463 to drive an ? X6 to your smartphone or iPhone.
?2008 BMW of North America, LLC. The BMW name, model names and logo are registered trademarks. iPhone is a trademark of Apple Inc.

or law just broke it.
The ?rst-ever BMW X6 Sports Activity Coupe.
TM

It’s a robust retort to all the preconceptions of what a coupe must be. The BMW X6’s four doors, high ride and V-8 twin-turbo make it a coupe outlaw. The formidable power of the 300-hp inline six-cylinder twin-turbo can also test the limits. New Dynamic Performance Control technology delivers Type A personality control at every turn. And with xDrive, intelligent all-wheel drive, it can handle any turn in the weather. The BMW X6 — a coupe above.

www.dow.com/hu
?? The DOW Diamond Logo and Human Element and design are trademarks of The Dow Chemical Company ? 2008

Life is chemistry in motion. When you look

at nearly 7 billion people on the move through the eyes of the Human Element, you see the need for this to take place in a way that is safe for man and safe for the planet. Solutions to vehicle fuel efficiency, safety and emissions control have become the job of chemistry. And whether it means engineering lighter components, safer passenger environments or cleaner emissions systems, innovation at The Dow Chemical Company is not only a fundamental part of human progress. It is an elemental one.

IT’S NOT JUST MONEY. IT’S PEOPLE’S MONEY.
The future isn’t what it used to be. Take the decline of pensions, add rising healthcare costs, factor in the changing landscape of employer retirement plans— and America’s investors are facing some formidable new challenges. What’s more, they’re facing them alone. Or are they? As a company founded on serving the individual investor, our focus has always been on providing help and guidance wherever people need it.

$1.4 trillion of client assets under total ?rm and $583 billion of client assets under Schwab Institutional, both as of 12/31/2007 Schwab Earnings Release. 2 million households under Schwab Investor Services, 5 million accounts under Schwab Investor Services, 5,500 independent advisors served by Schwab Institutional, 13,000 retirement and bene?t plans served by Schwab Retirement and Corporate Services, and $148 billion of employee assets under Schwab Retirement and Corporate Services, all as of 12/31/2007. Schwab Institutional leadership among independent Registered Investment Advisors as measured by market share. Source: Cerulli Quantitative Update—Advisor Metrics, 2007. Schwab Retirement Plan Services growth rate and industry growth rate as measured by compound annual growth rate of client assets. Sources: Cerulli Associates Quantitative Update—Retirement Markets, 2007, and Schwab Financials, 2003–2007. Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but af?liated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products are offered by Charles Schwab & Co., Inc., Member SIPC. Deposit products are offered by Charles Schwab Bank, Member FDIC.

EVERYWHERE THERE’S PEOPLE’S MONEY, CHARLES SCHWAB WILL BE THERE TO HELP .
And over $1.4 trillion of it is getting our help right now.
We work directly with millions of people to help manage their money.
More than two million households invest with us through over ?ve million investor accounts. Wherever people choose to invest—via the Internet, over the phone or through our nationwide network of branches—more than 2,500 Investment Professionals are dedicated to managing those relationships. And whatever people need, from professional portfolio management to checking accounts through Schwab Bank, we’re doing what we’ve always done—helping individual investors look after their ?nancial well-being.

We support more independent Registered Investment Advisors than anybody else.
Over 5,500 independent advisors rely on us for custodial, operational and trading support. With over $583 billion in client assets, we give independent advisors the help they need so they can focus on what’s best for the individual investor. Being the #1 supporter of America’s fastest-growing channel is just one more way we’re making sure individual investors get the help and support they need.

We’re serving over 13,000 retirement and bene?t plans to help employees and employers alike.
For more than 20 years, we’ve been helping people—and their employers—make better retirement choices. Today, we provide recordkeeping and custody services for over $148 billion of employees’ assets, and our Retirement Plan Services business is growing by 24% annually, versus an industry average of 9.8%. From start-ups to Fortune 100 companies, employers are turning to Schwab to help employees make more informed retirement decisions. Because people have enough responsibilities at work without being left on their own to make big decisions about their ?nancial futures, too.

IT’S WHERE PEOPLE’S MONEY IS GOING.

For more information on The Charles Schwab Corporation, please visit www.aboutschwab.com
The Charles Schwab Corporation (Charles Schwab) provides services to retirement plan sponsors and participants through its separate but af?liated companies and subsidiaries, Schwab Retirement Plan Services, Inc., The 401(k) Companies, Inc. and its subsidiaries, Charles Schwab Trust Company, a division of the Charles Schwab Bank, and Charles Schwab & Co., Inc. Charles Schwab also provides equity compensation plan services and other ?nancial and retirement services to corporations and executives through Charles Schwab & Co., Inc.

Brokerage Products: Not FDIC-Insured ? No Bank Guarantee ? May Lose Value
?2008 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0608-4781) ADP41497-01

JUNE 2008

Features
60

The Secrets to Successful Strategy Execution
Gary L. Neilson, Karla L. Martin, and Elizabeth Powers
Restructuring and establishing proper incentives may improve your company’s ability to execute strategy, but not unless you ?rst clarify decision rights and unleash the ?ow of competitive information up the line and across the organization.
96

72

The Next Revolution in Productivity
Ric Merri?eld, Jack Calhoun, and Dennis Stevens
The frontier of ef?ciency is no longer “the process” but its component activities. Redesigning those activities so that they can be easily put together and disassembled could transform your entire business into a highly ?exible and focused plugand-play operation.
72

84

Design Thinking
Tim Brown
When designers are involved from the very beginning of the innovation process, startling new ideas can result – as a U.S. health care provider, a Japanese bicycle components manufacturer, and a system of Indian eye hospitals learned.

106

96

The Contradictions That Drive Toyota’s Success
Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu
The Toyota Production System may be one of the world’s most-vaunted management approaches, but it isn’t the only reason for the company’s success. A new study reveals that Toyota’s culture of contradictions generates innovative ideas and allows the company to pull ahead of competitors – sometimes incrementally, sometimes radically.

84

106

The Multiunit Enterprise
David A. Garvin and Lynne C. Levesque
Although the multiunit corporation abounds in many industries, management thinkers have all but ignored this organizational form – until now.

60

continued on page 8

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Cover Art: Jacob Thomas

Escape from Wi-Fi hotspots.
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With BroadbandAccess Built-In, you can browse the Internet, check email, and access company intranets when and where you need to on America’s most reliable wireless broadband network. Simply click to connect. No PC Cards or hotspots required.

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JUNE 2008

14

Departments
12 COMPANY INDEX 14 FROM THE EDITOR 94 STRATEGIC HUMOR 123 MANAGING YOURSELF

Tools for Change
It takes dirty hands and messy conversations to execute strategy.

How the Best of the Best Get Better and Better
Graham Jones
What separates elite performers from the rest of the pack? According to a noted sports psychologist turned executive coach, it’s a special form of mental grit.

22 FORETHOUGHT
Companies can stop the female brain drain in science…Get a panel of experts to advise your ?rm on social issues…Government subsidies are the key to Chinese ?rms’ low costs…Online business scams are on the rise…How companies can pursue their “deep future”…A guide to China’s new tax incentives…Tying CEO pay to performance with integrity…Thorough preparation is the prerequisite to success…The roadblock between women and the C-suite.

22

129 BIG PICTURE

Patent Sharks
Joachim Henkel and Markus Reitzig
Attacks by patent sharks – ?rms with hidden intellectual property that surface, threatening to sue, when their rights are inadvertently infringed – are on the rise. To escape intact, you’ll have to turn your R&D processes inside out.
41

41 HBR CASE STUDY

Why Are We Losing All Our Good People?
Edward E. Lawler III
Several talented employees have recently left the architecture and engineering ?rm Sambian Partners – and the CEO has no idea why. How can she ?nd out what’s wrong and prevent more employees from jumping ship? With commentary by Anna Pringle, F. Leigh Branham, Jim Cornelius, and Jean Martin.

134 LETTERS TO THE EDITOR 138 EXECUTIVE SUMMARIES 144 PANEL DISCUSSION

Strategy Paradox
Don Moyer
Investing in the big opportunity invariably brings along a chance for the big catastrophe.
53

53 FIRST PERSON

Business Basics at the Base of the Pyramid
Vikram Akula
The founder and CEO of SKS Micro?nance does business with some of the world’s poorest people in a way that lifts them up and makes money for the ?rm. His formula: Stick to for-pro?t principles while truly placing customers’ interests ?rst.
123

129

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XL is a registered trademark of XL Capital Ltd. *Rating as of February 1, 2008.

The strength to cover the world’s largest Telecommunication, Infrastructure and Business risks.

INSURANCE I REINSURANCE
The XL Capital group is rated A (Excellent) by A. M. Best.* Visit www.xlcapital.com

HBR.org
On our website this month

JUNE 2008

> From the
Front Lines
This new blog from HBR’s senior editorial team provides discerning commentary on today’s management issues and invites you to contribute your own insights. Go to editors.hbr.org.

> An Inside Look > Why Are We Losing All Our Good People?
What should you do when you can’t keep your top talent? Tell us at LosingGoodPeople.hbr.org. Thomas Stewart, the editor of HBR, shares his thoughts on articles in this issue and discusses how the ideas in them can shape your business. To listen to this podcast, go to editorspreview.hbr.org.

> Stopping the Exodus of Women in Science
Go to BrainDrain.hbr.org to download a free preview of the new research report, “The Athena Factor: Reversing the Brain Drain in Science, Engineering, and Technology,” by Sylvia Ann Hewlett and colleagues.

ALWAYS AT HBR.ORG SUBSCRIBER ACCESS PREMIUM SUBSCRIPTION HBR IN OTHER LANGUAGES HBR ANSWERS

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The editors of HBR have posted questions that managers ask about their biggest challenges, along with select articles that address each one. Readers can suggest questions or topics by clicking on “E-mail Us” on the HBR Answers page.

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?2008 Land Rover North America, Inc. landroverusa.com

RANGE ROVER DESIGNED FOR THE EXTRAORDINARY

COMPANY INDEX

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June 2008

Organizations in this issue are indexed to the ?rst page of each article in which they are mentioned. Subsidiaries are listed under their own names.
Alcoa ......................................................................................... 22 Amazon ..................................................................................... 72 Aravind Eye Care System ........................................................84 Asure Software ......................................................................129 Bank of America.......................................................................84 Blackstone Group ..................................................................... 22 Borders ...................................................................................106 Boston Scienti? c ....................................................................129 Bristol-Myers Squibb .............................................................. 41 Burger King............................................................................... 22 Caterpillar ................................................................................60 Cisco ......................................................................................... 22 Costco .....................................................................................106 FedEx ........................................................................................ 72 Forgent Networks ..................................................................129 General Motors ........................................................................96 Harvard Pilgrim Health Care ................................................... 72 Home Depot............................................................................106 Honda .......................................................................................96 IDEO ..........................................................................................84 Intel .........................................................................................129 Intergraph ...............................................................................129 Internal Revenue Service ........................................................ 22 IPCom .....................................................................................129 J.C. Penney .............................................................................106 Johnson & Johnson.................................................................. 22 Kaiser Permanente ..................................................................84 McDonald’s .............................................................................. 22 Microsoft ...................................................................... 22, 41, 72 Motorola ................................................................................... 72 New United Motor Manufacturing .........................................96 Nissan .......................................................................................96 Nokia ................................................................................22, 129 NTP .........................................................................................129 P? zer ......................................................................................... 22 Rambus ...................................................................................129 Research in Motion................................................................129 Robert Bosch ..........................................................................129 Safeway.................................................................................... 22 Shimano ....................................................................................84 Siemens ..................................................................................129 SKS Micro?nance ....................................................................53 Staples....................................................................................106 Target ......................................................................................106 Toyota .......................................................................................96 Toyota Motor Sales, U.S.A. .....................................................96 TXU ........................................................................................... 22 University of Cambridge .......................................................... 22 U.S. District Court for the Eastern District of Texas............129 U.S. Supreme Court ...............................................................129 Victoria’s Secret.....................................................................106 Wal-Mart ................................................................................106 World Trade Organization ....................................................... 22 Yale University ......................................................................... 22 Columbia University ................................................................ 22 Corporate Executive Board’s Corporate Leadership Council ............................................................... 41 Ernst & Young........................................................................... 22 General Electric ....................................................................... 22 Grant Thornton ......................................................................... 22 Grant Thornton International .................................................. 22 Harvard Business School.......................................................106 Harvard Law School................................................................. 22 Harvard University’s John F. Kennedy School of Government ...................................................................... 22 Hitotsubashi University’s Graduate School of International Corporate Strategy ........................................96 IDEO ..........................................................................................84 Keeping the People .................................................................. 41 Lane4 ...................................................................................... 123 London Business School ........................................................129 Microsoft ........................................................................... 41, 72 Milano the New School for Management and Urban Policy ................................................................... 22 Munich University of Technology .........................................129 New York University ................................................................ 22 Nokia ........................................................................................ 22 SKS Micro?nance ....................................................................53 Synaptus................................................................................... 72 University of California San Francisco’s Women’s Mood and Hormone Clinic.................................................... 22 University of New Haven ........................................................ 22 University of Southern California’s Marshall School of Business............................................................................ 41 University of Wales ............................................................... 123

AUTHOR AFFILIATIONS
Accelare.................................................................................... 72 Blackstone Group ..................................................................... 22 Booz & Company ......................................................................60 Bristol-Myers Squibb .............................................................. 41 Burger King............................................................................... 22 Center for Work-Life Policy ..................................................... 22

“Ferguson, our new consultant, will help us navigate around the ethics thing. ”

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Harley Schwadron

FROM THE EDITOR

Tools for Change

“W

HEN IN trouble…reorga-

Thomas A. Stewart

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Robert Meganck

nize.” Using those words, spoken with a Solomonic confidence, a long-ago boss of mine opened a meeting. For the next two hours, he prepared the ground for an extensive plan to impose a degree of centralization on three business units, obtaining some economies of scale while leaving each with certain critical dimensions of independence. When the deed was done, though, everything had changed but nothing was different. Several layoffs, a few months, and many resentments later, the company righted itself and continued on the path that led to its being sold. It wasn’t until last fall, when senior editor Ellen Peebles and I met Gary Neilson of Booz & Company, that I fully understood what had gone wrong. My old boss’s sin was to rely on reorganization as the primary vehicle by which to carry forward a strategic decision. All his savings were dissipated because the new organization seemed almost inherently unable to make smart decisions about inventory, which left us short of items that were selling and oversupplied with things that were not. As management scholar Robert Burns noted, “the best-laid schemes o’ mice an’ men gang aft agley.” In a multiyear study, Neilson and his colleagues Karla Martin and Elizabeth Powers have learned the most effective ways to keep such plans on track. This month’s lead article, “The Secrets to Successful Strategy Execution,” presents their ?ndings, and, as you’ve gathered, reorganization doesn’t lead their hit parade. The trio studied 17 kinds of behavior – centralizing versus decentralizing, changing incentives, and so on – and clustered them into four areas, depending on whether they primarily affect structure, decision rights, information ?ow, or motivation. The two in the middle matter most. Notably, those are the least subject to corner-of?ce diktats. They involve dirty hands and messy conversations. The picture is complex, however. For one thing, factors interact; for another, interventions that galvanize one corporate culture might paralyze another. You can see how this works at

www.simulator-orgeffectiveness.com, where you can diagnose your organization’s effectiveness at strategy execution, design a change program – and then grade the decisions you make to carry it out. The 2004 HBR List of breakthrough ideas included “The MFA Is the New MBA,” in which Daniel Pink argued for the importance of an aesthetic sense in business. Time has proven Pink’s prescience. Apple’s resurgence owes everything to the elegance that suffuses every aspect of its business. Our friends at BusinessWeek have taken up design almost as if it were a moral crusade. Procter & Gamble’s CEO, A.G. La?ey, hired 150 designers and has made sure their voices are heard by having the head designer report directly to him. Behind this activity is a revolutionary approach to business called “design thinking.” That’s also the title of this issue’s brilliant article by the CEO of IDEO, Tim Brown, a leading proponent of the movement. Where new products are concerned, design thinking begins not at the drawing board but with an anthropological devotion to what customers do and want to do. Service design isn’t so much about making a hotel lobby look fab as it is about crafting every interaction between a company and its customers in a way that gives them the experience the company intends. Even strategy, one might say, is the residue of design. IDEO has designed well-known products such as TiVo’s video recorder and the updated Zyliss salad spinner. But Brown has become an adviser to many other chief executives (La?ey among them), because they recognize that the process of design thinking offers a powerful new way to make choices – especially those involving customers.

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A NOTE TO READERS

ADVANCED MANAGEMENT PROGRAM > September 21–October 24, 2008 > May 31–July 3, 2009 STRATEGIC THINKING AND MANAGEMENT FOR COMPETITIVE ADVANTAGE > September 15–19, 2008 > December 8–12, 2008 HIGH-POTENTIAL LEADERS: ACCELERATING YOUR IMPACT NEW! > September 21–26, 2008 THE LEADERSHIP JOURNEY: CREATING AND DEVELOPING YOUR LEADERSHIP > October 19–24, 2008 > May 17–22, 2009

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A survey of ideas, trends, people, and practices on the business horizon

GRIST

Stopping the Exodus of Women in Science
by Sylvia Ann Hewlett, Carolyn Buck Luce, and Lisa J. Servon

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James Yang

Business leaders in the U.S. wring their hands over the country’s shortage of scientists, engineers, and technologists, often citing it as the biggest constraint on growth. As they’ve sought to improve the situation, much of their focus has been on lobbying for a relaxation of H1-B visa norms so that foreign nationals can ?ll the gap. Employers seem not to realize that the talent they need is already here – if only they can retain it.

Female scientists, engineers, and technologists exist in large numbers (contrary to popular belief) but are abandoning their chosen professions in droves. With the support of a vanguard of concerned ?rms, the Center for Work-Life Policy recently examined this brain drain. (The complete ?ndings of our study “The Athena Factor: Reversing the Brain Drain in Science, Engineering, and Technology” are contained in a

Harvard Business Review special report, accessible at BrainDrain.hbr.org.) First, we con?rmed the scale of the problem, which echoes but far exceeds the overall tendency among women to “opt out” of full-time work at a higher rate than men do. Our research ?ndings show that on the lower rungs of corporate career ladders, fully 41% of highly quali?ed scientists, engineers, and technologists are women. But the dropout rates are

huge: Over time 52% of these talented women quit their jobs. Most strikingly, this female exodus is not a steady trickle. Rather, there seems to be a key moment in women’s lives – in their mid to late thirties – when most head for the door. (See the exhibit “Intervening at the ‘Fight or Flight’ Moment.”) Stop for a moment and let these statistics sink in. Can you imagine the dustup in the boardroom if 50% of a company’s most promising products were abandoned midstream? And yet companies routinely invest large sums of money in developing female talent, only to see half of that talent walk out. The scale of the loss is enormous. And of course the pain of lost potential is particularly acute for the individuals themselves. So why do women leave science, engineering, and technology careers? The answer comes in ?ve parts. First and foremost, the hostility of the workplace culture drives them out. If machismo is on the run in most U.S. corporate settings, then this is its Alamo – a last holdout of redoubled intensity. Second is the dispiriting sense of isolation that comes when a woman is the only female on her team or at her rank – a problem exacerbated for others when she in turn leaves. Third, there is a strong disconnect between women’s preferred work rhythms and the risky “diving catch” and “?re?ghting” behavior that is recognized and rewarded in these male-dominated ?elds. Two more factors round out the set. “Extreme jobs,” with their long workweeks and punishing travel schedules, are particularly prevalent in science, engineering, and technology companies. (See “Extreme Jobs: The Dangerous Allure of the 70-Hour Workweek,” HBR December 2006.) Because women in two-income families still bear the brunt of household management, few are able to sustain those pressures. Finally, many women we surveyed bemoaned

the “mystery” around career advancement. Isolated and lacking sponsors, they cannot discern the pathway that will allow them to make steady progress upward. The result is that women tend to ?nd themselves shunted into roles as executors or helpers – without ever understanding why – while men occupy the more illustrious creator and producer roles.

Intervening at the “Fight or Flight” Moment Cutting female attrition yields huge gains.
220,000 highly quali?ed women would return to the labor market.

65% 60% 55% 50% 45% 40% 35% 30%

25–34 yrs

35–44 yrs

45–60 yrs

Current % of quali?ed female scientists, engineers, and technologists working in their ?elds Projected % if attrition were reduced through interventions

None of this is good news, but the fact that we have surfaced these problems certainly is. Because we can map the point of highest attrition, for example, ?rms can be more targeted in their interventions. And because we know the worst pressures women face, organizations can begin to relieve them. Indeed, the companies that are part of our research consortium have already launched 14 initiatives to do so. Cisco stands out, perhaps, for the boldness of its new Executive Talent Insertion Program. Having determined isolation to be one of the most serious problems facing female executives,

hbr.org Cisco decided to Preview the related report, develop a “game “The Athena Factor: changer.” Designed Reversing the Brain Drain in Science, Engineering, to ensure that and Technology,” at BrainDrain.hbr.org. within 18 months, women will come to represent 25% of the senior management team, this program will create a critical mass of senior women in one fell swoop. Johnson & Johnson and Microsoft have focused on the “?ght or ?ight” moment. In a new program called Crossing the Finish Line, J&J is providing leadership development to young, highpotential multicultural women and strengthening their connections with senior managers who can act as their sponsors down the road. In a similar vein, Microsoft has created a group of interlocking “mentoring rings” with an eye to giving female talent better access to and mentoring from senior managers – especially at career stages when support is most needed. Alcoa has targeted the issue of attracting more women into operating management roles. Through its Women in Line Roles initiative, the company is offering high-potential women who might be interested in production or technical roles the chance to try them out through temporary assignments and help staying on track through carefully crafted career development plans. Finally, P?zer has a creative approach to mentoring female scientists. Working with Yale University, P?zer’s Women’s Leadership Network launched a student mentoring program, which both stems losses among highly quali?ed female graduate students and increases their awareness of the private sector. It will be a long time before initiatives like these, dispersed and targeted as they are, add up to systemwide change. But this is the only form in which that change will come: real work by leading companies to sel?shly address their own

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talent requirements. Based on today’s data, our research ?nds that if we could, as a nation, cut female attrition in science, engineering, and technology by 25%, we would add 220,000 highly quali?ed workers to the labor market. In a global economy where such talent drives the competitiveness of nations, that’s a goal worth rallying around.
Sylvia Ann Hewlett is an economist and the founding president of the Center for Work-Life Policy in New York. She also heads up the Gender and Policy Program at Columbia University. Carolyn Buck Luce leads the global pharmaceutical practice for Ernst & Young in New York. Lisa J. Servon is an associate professor at Milano the New School for Management and Urban Policy in New York. Reprint F0806A

STAKEHOLDERS

Getting Sound Advice on Social Initiatives
by Steven Grover

Companies today face a common challenge: how to develop workable programs that will help them move forward strategically on corporate social responsibility initiatives that matter to customers and employees.

One of the CSR issues I’m deeply involved with at Burger King is animal welfare. Obviously, a corporation like ours could do many things on that front. So we need help choosing the right initiatives. But where can we get it? Should we tap activists as advisers, as McDonald’s did with environmentalists on the issue of packaging? Should we seat activists at the decision-making table, as the new owners of TXU have done? Burger King has chosen a different path. It’s a deliberative, low-key approach, but it has given us con?dence that we’re going about our animal-welfare initiatives in the right way. And lately it has given us unexpected bene?ts. We set out on this path a decade or so ago, when animal-rights activists began to generate concerns among consumers. (Admittedly, we had a rather bad relationship with some activist groups at the time.) We chose to establish an advisory panel to generate, ?lter, and analyze ideas for how the company could promote animal welfare. (We aren’t the only food company with such a panel – Safeway, for instance, also relies on an animal-welfare advisory committee, and McDonald’s has a panel, too.) Our advisory panel helps us sort through the sometimes con?icting suggestions we receive and provides a stringent academic review so that we

know our policies are based upon sound science and make sense. The panel also weighs costs against bene?ts and takes into account our supply-chain issues – the Burger King system is so large that we could virtually cause the country to run out of a particular product if we decided to ?ll our pipeline with it. The advisory panel members are volunteers, and most are academic experts; the well-known author and researcher Temple Grandin of Colorado State University is a member. Sometimes we have disagreements, but after we put all the facts and science on the table, in every case we have been able to come up with recommendations that have moved the company forward and addressed the relevant concerns. On the panel’s advice, last year we announced a new goal for the amount of egg product from cage-free chickens that we use throughout our entire restaurant system. We now aim to have the equivalent of 5% of the egg volume of our company-owned restaurants be cage-free. (The company owns 10% of our restaurants – the rest are franchised.) We also set a goal of obtaining 10% of the pork in the entire system from sows raised without gestation crates. The panel hoped these moves would encourage the spread of humane practices within the poultry and pork industries. We were surprised by the large number of positive calls and letters we received from consumers in response to our efforts and the favorable press coverage. We’ve undertaken other animal-welfare initiatives that were considerably more expensive and comprehensive, but they’ve never generated this level of positive public response. The public approval has given us a certain external validation for a process that previously we had kept under the radar. My experience suggests several success factors for setting up and using an outside panel on CSR initiatives: Recruit top experts and leaders in their ?eld who are willing to take the time to work through their differences and create solutions. Identify a staff adviser from the company who is an expert in the ?eld and can be the company and industry

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resource. This person will schedule meetings, set agendas, and give the panel frequent updates about how its advice is being implemented. Don’t parade the panel around just to get publicity. The goal is to make informed, science-based changes that have an impact, not to create media sound bites. Furthermore, publicity seeking may alienate the panelists and waste their valuable time. It’s important to take the advisory panel seriously and to work hard to show its members that their ideas make a difference. That way they’ll become true partners in helping the company address consumers’ concerns and advance social initiatives.
Steven Grover (sgrover@whopper.com) is vice president for food safety, quality assurance, and regulatory compliance at Burger King, based in Miami. Reprint F0806B

SUPPLY CHAIN

Subsidies and the China Price
by Usha C.V. Haley and George T. Haley

Many assume that China’s cost advantage in manufacturing comes from cheap labor. But in China’s burgeoning steel industry, our research suggests, massive government energy subsidies, not other factors, keep prices down. These subsidies have broad implications for how companies compete and collaborate with Chinese businesses. In 2005, Beijing designated steel as a pillar industry for the Chinese economy. China was the world’s largest producer of steel, with 27% of global production, but until then it had imported 29 million tons of steel annually. That year, China suddenly transformed itself from a net steel importer to a net steel exporter. In 2006, the country became the world’s largest steel exporter by volume, up from the ?fth largest in 2005. Today it remains the world’s largest consumer and producer of steel, with 40% of global production. How did China make these astonishing gains so quickly and

manage to sell steel for about 19% less than steel from U.S. and European companies? Labor accounts for less than 10% of the costs of producing Chinese steel, and Chinese steel doesn’t appear to rely on scale economies, supply-chain proximities, or technological ef?ciencies to lower its costs. Let’s look in detail at the probable source of this cost advantage. In research conducted with funding from the Alliance for American Manufacturing – work that draws heavily on our decade-long previous study of Chinese industry – we found that total energy subsidies to Chinese steel (from 2000 to midyear 2007) reached $27 billion. (See the exhibit “Energy, Subsidies, and Steel.”) About 95% of that amount was for coal. (These numbers are conservative best estimates, based on data from Chinese, U.S., and international agencies, industry associations, individual Chinese companies, and other sources.) Our analysis of the relationship between the increase in energy subsidies and the growth of Chinese steel production and steel exports showed a powerful statistical correlation; this is not a chance association. Our research revealed that energy subsidies to the steel industry were paid to the energy sector and passed on through lower energy prices, which suggests

that the energy supplied to China’s other manufacturing industries is subsidized as well. The steel industry may bene?t disproportionately from energy subsidies because of its voracious appetite for coal, but the energy subsidies obviously help other industries too. Foreign companies doing business in or with China or competing against Chinese rivals need to recognize a few things about subsidies. First, they can be abruptly affected by political forces. For example, the November 2007 World Trade Organization subsidy-reduction agreement between the U.S. and China cut export subsidies to foreign companies located in China but maintained subsidies to Chinese companies. This shows how subsidy-based cost advantages of foreign companies located in China can suddenly evaporate. Second, companies that offshore to, or source or import from, China may suffer price shocks if they don’t discount ?uctuating, subsidy-based cost advantages. Our research showed that under scrutiny, subsidies from Beijing often dry up, only to be replaced to varying degrees by subsidies from provincial and local governments, which use them to support employment, build self-suf?ciency, and promote import substitution locally. Companies should establish relationships

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Energy, Subsidies, and Steel After the Chinese government increased its energy subsidies to the steel industry, the country’s steel production and steel exports rose signi?cantly.
4,000% 3,500% 3,000%

Energy subsidies (US$) Global exports Production

$ 15.7B

2,500%

$ 7.8B (midyear) $ 6.1B $ 4.8B $ 5.8B

2,000% 1,500% 1,000%

$1.6B
500% $ .401B
0%

$.514B $ –.026B

-500%

2000

2001

2002

2003

2004

2005

2006

2007e

Subsidies were determined by the price-gap method, which indicates the difference between prices paid for energy and world reference prices.

with industry and government of?cials in China so that they know the source of subsidies and can gauge the risk of reduction and subsequent price increases. Before foreign companies cut other suppliers loose in favor of lower-priced Chinese sources, they should be mindful that Chinese ?rms’ prices may ?uctuate abruptly as subsidies shift. Foreign ?rms should therefore retain some original supply relationships until Chinese suppliers prove reliable over the medium term.

Usha C.V. Haley (uhaley@asia-paci?c. com) is a professor of international business and the director of the Global Business Center, and George T. Haley (gthaley@asia-paci?c.com) is a professor of industrial marketing and the director of the Center for International Industry Competitiveness, at the University of New Haven in Connecticut. The full report is available at americanmanufacturing.org. Reprint F0806C

SECURITY

Next-Generation Online Cons
by Clay Shirky

Con artists thrive by faking trustworthiness, and they’re ?nding the internet and the companies that do business there ripe for exploitation. Online con?dence games today are where spam was in 1998 – they’re bad but bearable, and businesses and governments are irrationally optimistic that they can be stopped. But a permanent solution to online cons won’t materialize, just as a way to eradicate spam has never been found. The only real way to end spam is to shut down e-mail communication, and the only real way to stop cons would be to disable the internet for commercial use.

Consider this online con: Scammers set up a fake Internal Revenue Service electronic-?ling site and offer to submit taxpayers’ returns for them. That sounds like a setup for identity theft, but this con is much more imaginative than that. Once the scammers get hold of a return, they adjust the income and deductions so that the IRS owes a refund, and then they have the refund directed to a bank account they control. In 2007 there was so much attempted electronic-?ling fraud that the IRS had to replace its previous e-?le vetting process.

This is an example of a classic short con, a one-shot transaction that involves a single breach of trust. More worrisome is the rise online of long cons, scams that involve repeated interaction with the mark over the course of weeks or months while bleeding him slowly or priming him to hand over a large amount of cash. (Nigerian “419” scams fall into this category.) The logic of outsourcing and telecommuting makes long cons less risky and more cost effective. It’s relatively easy for criminals to set up well-designed, legitimate-looking websites and use them to groom and exploit a number of victims simultaneously, far from the law, and over the long term. On the internet, a single con artist can run a long con using dozens of “sock puppets” (fake online identities), as happens when eBay scammers refer you to their “customers” who vouch for their bona ?des. Automation allows con artists to reach thousands of potential marks at once and then cherry-pick the most gullible, a high-volume/low-yield model impossible with face-to-face cons. That ease of operations means that long-con artists can be expected soon to turn their full attention to businesses, where the real money is. They could open legitimate accounts with businesses, order small shipments and pay on time, and then, when trust is established, order a huge shipment and vanish. They could mimic legitimate businesses’ websites to divert traf?c and collect information on customers – and money. Or they could open fake outsourcing shops and pass the work through to others, while stealing trade secrets. Ominously, the low cost of online cons also invites the participation of amateurs and could encourage con artists who have no pro?t motive – for example, activists or pranksters who simply want to damage a brand. Businesses are entering an arms race that for the moment favors the con artists; the balance of power won’t begin to shift until businesses wake up to the threat. Three defensive strategies can help: First, establish hard-to-fake relationships with customers. The best way to
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Conversation
CTO Bob Iannucci on the “deep future” of Nokia
ob Iannucci, Nokia’s chief technology of?cer, is betting that the mobile-phone industry will soon make the same sharp turn that the mainframe, minicomputer, and PC industries took in past years: Platforms will become standardized, You say you search widely for new technologies and product ideas. How do you handle the cost of casting a wide net?

B
direction?

manufacturers will stop making incompatible hardware, and the value of software and services will soar. His job, as he sees it, is to help Nokia position itself to lead in this next phase of mobile communications. Given that Nokia is ?rmly committed to the handset market, what response do you get when you propose that Nokia look for growth by taking a radical new

One thing I learned from IBM, where I worked for 14 years, is the importance of investing in basic science in areas that may have a profound impact on the company’s “deep future.” Our investment in nanoscience, for instance, is very much in the spirit of what IBM Research has done in hard sciences. But there’s a difference: We’re doing our nanoscience work in residence on university campuses with partners such as the University of Cambridge in the UK. Signi?cant nanoscience work requires a world-class team and world-class facilities – Cambridge has both. We bring expertise and challenging problems, and it makes for an interesting collaboration. This is a strategy we have implemented worldwide – we have moved from being a closed innovator to being an open innovator. In addition to our own research centers, we have co-locations with a half dozen of the world’s top universities. Our researchers augment the universities’ work, the academic researchers get the potential for future commercialization of their ideas on a vast scale, and we accelerate one another’s efforts.
Assuming Nokia’s efforts are fruitful, how will people use mobile phones differently in the coming years?

Though the company is a bit humble about it, Nokia has a 150-year history of reinventing itself. Depending on how you count, we are on our ?fth or sixth major reinvention. When I was running Compaq’s research back in 1999, I went to Finland to visit Nokia, and I was astounded by how much it invested in technological innovation – and astounded at myself that I didn’t know much about the company. Nokia became my model of an organization that reimagines itself by adding growth businesses to mature ones. Since coming to Nokia, I’ve found that during the strategy process, the leadership is pretty honest about the state of the industry and the need to reinvent, and there’s a very healthy discussion – and a low degree of politics or turf protection. On a scale of one to 10, Nokia is maybe a one or two when it comes to corporate politics. The management structure is very ?at, and strong interpersonal relationships are what drive the company forward. The leadership also grasps the gravity of what reinvention means. Just recently, the company took a corporate structure that had been in place for a few years and basically blew it up. A lot of the senior managers are now in very different roles. The company also takes a clear-eyed approach to evaluating research centers: On the basis of our seven-year industry forecast, we’ve opened new R&D centers, but we’ve closed a handful of others, all in the name of better aligning our actions with our ambitions. This, of course, has been a painful process. But Nokia seems to have re?ned the technique of bringing the relevant facts to bear on a discussion, making a decision, and then executing like crazy.

Nokia is moving into services and software for mobility. We’re trying to fuse the physical and digital worlds and looking at how wristwatches, sensors in your car, and other types of input devices might interact with your mobile phone so that you can get a whole range of data, from information about your health, to the status of your automobile, to whether there’s traf?c a few miles ahead. One particularly exciting technology is the use of the phone as a sensor. Rather than use a text query to search the internet, our researchers use an image captured by the phone’s camera to initiate what they call a “zero-click” search. Point the phone at a shoe in a store window, and in a second or two you can read about it on your screen. Or take a picture of a sign in one language and get a translation of it in another. All we’re trying to do is orchestrate a revolution in the mobile phone industry.
– Andrew O’Connell Reprint F0806E

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The Dance, by Alan Kenny

Ireland. One of Europe’s most successful economies. And also one of its happiest.
The Irish mind. Creative. Imaginative. And flexible. Agile, with a unique capacity to initiate, and innovate, without being directed. The Irish like thinking on their feet. Adapting and improving. Generating new knowledge and new ideas. Naturally, this innate flexibility pervades the ecosystem. Nowhere else will you find such close and frequently informal links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure. These competitive advantages make Ireland, according to the 2008 Index for Economic Freedom*, one of the world’s most business friendly environments, especially for investment. And now, according to a Eurobarometer Report**, it’s also one of the happiest nations, enjoying very high levels of satisfaction with the quality of life. The productive and happy Irish mind can be the pathway to profit and success for your business.

To learn more, contact the Irish Government’s inward investment agency, IDA Ireland, 345 Park Avenue, New York on 212 750 4300, email idaireland@ida.ie or log on to www.idaireland.com
* The Heritage Foundation & The Wall Street Journal, 2008 Index of Economic Freedom. ** Eurostat, Special Eurobarometer Report 273, Wave 66.3 European Social Realities, February 2007.

prevent con artists from inserting themselves between you and your customers is to make sure that customers can easily tell the difference between dealing with your business and dealing with a fake one. A good way to do that is to exchange hard-to-counterfeit information that only you and the customer know of. You could provide a review of the customer’s last purchase or a reference to something that the customer has been looking at on your site, or the customer could share a photo only he could have taken, to adorn every page he looks at on your site. Second, make frontline employees a critical part of security, giving them both tools and incentives to raise red ?ags, because they, and not the members of the executive team, are going to be the targets of business cons. Finally, collaborate with other businesses. This will require sharing information and solutions, rather than trying to solve the problem quietly.
Clay Shirky (clay@shirky.com) is the author of Here Comes Everybody (Penguin Press, 2008), a book about social media. He teaches in New York University’s graduate Interactive Telecommunications Program. Reprint F0806D

many ?rms that have been paying deeply discounted rates. For those companies, the law will have the effect of increasing taxes by up to 25% over the next ?ve years. In addition, China will place multinationals under greater scrutiny as it seeks to ensure that it’s getting its share of the wealth generated by the country’s economic boom. The new tax regulations also form a map, of sorts, showing how the Chinese authorities plan to transform the country: China wants to improve its transport infrastructure. It is looking for more hightech jobs for its engineers. It wants to green its industry. And it hopes to dispel its image as a manufacturer of cheap products and become a provider of highquality, high-margin goods. The country is providing tax incentives to make all this happen. Of course, the authorities may tweak the rules for months to come – there’s no telling what exact shape the regulations will eventually take. It’s crucial for ?rms wishing to bene?t by assisting in the transition to be sure they’re relying on the most up-to-date of?cial guidelines. That said, here are a few general things multinationals can do to take advantage of the tax breaks. Some may require a willingness to diversify or alter operations in China.

Do research. Some of the biggest tax breaks have been reserved for multinationals engaged in quali?ed R&D activities in China. Repave, reuse, recycle. A foreign company with a qualifying infrastructure, environmental, or recycling business in China may be eligible for a three-year tax exemption and a subsequent threeyear rate reduction, according to of?cial guidelines. Even companies without such businesses may be able to bene?t from tax credits if their Chinese operations set up initiatives that protect the environment, save water, or produce safety equipment. Sow, reap, go ?shing. Companies engaged in agricultural, forestry, animal husbandry, and ?shery activities may qualify for lower rates. Go high-tech. Lower rates also may be available for new high-technology ?rms in China that own intellectual property and employ knowledge workers. Companies should also take the following steps to limit their tax exposure and avoid the risk of triggering a Chinese audit: Mind the ex-pat head count. The presence of a multinational’s nonChinese employees in the country for more than 180 days a year could prompt the authorities to classify the MNC – not

TAX INCENTIVES

Tapping Hidden Opportunities in China’s New Tax Law
by Jeff Olin and Gary James

A new Chinese law has erased many of the previous tax bene?ts for foreign ?rms, but it also offers abundant opportunities for multinationals that are willing to help transform the country into a more sophisticated – and greener – producer of high-end goods. For many foreign ?rms, the law, which took effect this year, will inevitably increase the cost of doing business in China. It sets a single corporate income tax rate of 25% for all foreign and domestic companies – low by other countries’ standards (the U.S. rate is 35%, for example) but a shock to the system for the

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just its local subsidiary – as a permanent Chinese establishment and assert that the parent company should be subject to higher taxes. Companies should therefore schedule more-ef?cient trips, make liberal use of video conferencing, limit employees’ in-China vacation time, and monitor non-Chinese employees’ time at the summer Olympics in Beijing. Document, document, document. Certain transfer payments from a Chinese subsidiary to its foreign parent – interest, rent, service fees, some kinds of royalties – will continue to be deductible. But all such payments, along with related employee activities and the transfer of company goods and intellectual property into China, must be properly documented – in Chinese. The new tax law provides an opportunity for multinationals to fold their global tax strategies into their global business strategies – or, if they have already done so, to reimagine that integration. A wellthought-out integration of strategies will help ?rms make the most out of China’s coming transformation.
Jeff Olin (jeff.olin@gt.com), based in Chicago, is a national managing partner in the International Tax Services practice of Grant Thornton, the U.S. member ?rm of Grant Thornton International. Gary James (gary.james@gthk.com.hk) is a partner in the International Tax Services practice of the Hong Kong member ?rm of Grant Thornton International. Reprint F0806F

The Best Advice I Ever Got
Stephen A. Schwarzman Chairman and Chief Executive Of?cer, the Blackstone Group

I

grew up in a small town outside Philadelphia and went to the local high school, where I ran track all four years. Our team practiced outdoors, and in the winter, in the bitter cold, the experience was pretty miserable. The school

was set on a hill, and as we ran around the parking lot the wind would come whipping around the building and hit us. We had to watch our steps carefully so as not to slip and fall on the ice. While we were doing our laps, the coach – a 50-year-old named Jack Armstrong – would stand against one wall protected from the wind, bundled up in a huge coat and wool hat and gloves, clapping and smiling cheerfully. Every time the pack shuf?ed past, he’d shout, “Remember – you’ve got to make your deposits before you can make a withdrawal!” Now, this was a public school with no special facilities, and the team was made up of average athletes with differing levels of intelligence and motivation. But we never lost one single meet. And because of that success, and maybe because of the way in which the advice itself was delivered – I remember it when people yell at me – Coach Armstrong’s words resonated. I’ve thought of them a million times throughout my career in ?nance, and they’ve guided this ?rm, too. Coach Armstrong came to mind in one of my ?rst weeks on Wall Street, 35 years ago. I’d stayed up all night building a massive spreadsheet to be ready for a morning meeting. These were the days before Excel, and it was a huge feat for someone as bad at statistical stuff as I was to do this all by hand; I was pretty proud of myself. The partner on the deal, however, took one look at my work, spotted a tiny error, and went ballistic. As I sat there while he yelled at me, I realized I was getting the MBA version of Coach Armstrong’s words. Making an effort and meeting the deadline simply weren’t enough. To put it in Coach Armstrong’s terms, it wasn’t suf?cient to make some deposits; I had to be certain that the deposits would cover any withdrawal 100% before we made a decision or did a deal. If I hadn’t done all the up-front work and made completely sure that my analysis was correct, I shouldn’t have put anything forth. Inaccurate analysis produces faulty insights and bad decisions – which lead to losing a tremendous amount of money. Today, whenever I’m under pressure to make a decision on a transaction but I don’t know what the right one is, I try desperately to postpone it. I’ll insist on more information – on doing extra laps around the intellectual parking lot – before committing. I take the same approach with people, too. For example, when we were looking for a manager to start up our long-short hedge fund, we interviewed for a year and a half. The timing was ripe for that asset class, and if you weren’t doing something with it, you were losing out. It took a huge amount of time and effort for Blackstone, but we found a young money manager we were comfortable with, and he’s become an enormous asset. Every year I speak to our new associates and give them this advice, although in my own words. This isn’t like school, I tell them, where you want to get your hand in the air and give an answer quickly. The only grade here is 100. Deadlines are important, but at Blackstone you can always get help in meeting them. As a ?rm, we can always ?gure out how to do another lap around the parking lot. Because what’s true when running track is true when doing deals: The person who’s the most ready for game day will be the one who wins.
– Interviewed by Daisy Wademan Dowling Reprint F0806H

CEO COMPENSATION

The Fatal Flaw in Pay for Performance
by Ben W. Heineman, Jr.

Many corporate boards, responding to shareholder and public pressure, are designing pay-for-performance plans to hold CEOs accountable. But there is often a crucial ?aw in such schemes: They don’t pay for performance with integrity. The omission – evident from compensation committee reports in top companies’ proxy statements – is striking. Corporations, after all, face unceasing
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pressures to make the numbers by bending the rules, and an integrity miss can have catastrophic consequences, including indictments, ?nes, dismissals, and collapse of market capitalization. Furthermore, performance with integrity creates the fundamental trust – inside and outside the company – on which corporate power is based. A board should explicitly base a de?ned portion of the CEO’s cash compensation and equity grants on his or her success in handling the foundational task of fusing high performance with high integrity at all levels of the company. Why don’t boards do that? They may be uncertain about the meaning of integrity and how to assess its integration into ?nancial performance. Step one, then, in designing pay for performance with integrity is using the following de?nition: Integrity is a uniform corporate culture with three elements – robust adherence to formal rules; adoption of ethical standards that are in the company’s long-term enlightened self-interest; and employee commitment to honesty, candor, fairness, trustworthiness, and reliability. Step two is for the board to assess whether the CEO has infused high performance with high integrity. The board can do that by answering the following questions, using hard analytics as well as the board members’ own judgment. Has the CEO established companywide performance-with-integrity principles for which the ?rm’s leaders are responsible and accountable? Examples of these include demonstrating committed and consistent integrity leadership; managing performance with integrity as a business process; using early-warning systems to stay ahead of global trends; providing timely, risk-assessed training; and giving employees a voice. Have the CEO and top managers implemented these principles through robust practices? If leaders don’t invest time, effort, and resources in embedding key integrity practices in business processes, “tone at the top” is just window dressing. (For examples, see the box “The Practice of Performance with Integrity.”)

Has integrity permeated every aspect of the corporate culture? One vital tool for assessing that is an annual, anonymous employee survey across all businesses and regions that asks, “Is integrity compromised by business pressures?” and “Are the leaders’ verbal commitments to integrity re?ected in action?” The board can also have

The Practice of Performance with Integrity
Here’s a sample list of questions (greatly shortened because of space limits) that will help boards assess a CEO’s performance-with-integrity practices. They can be answered using tools like process reviews and substantive audits and external outcomes (such as environmental violations or customer complaints).

Leadership Does the CEO...
communicate to the organization that integrity must never be compromised to make the numbers? discipline generals, not just troops, for integrity lapses? address dif?cult integrity issues regularly at staff meetings?

Business processes Does the CEO...
build a strong integrity infrastructure – processes for preventing, detecting, and responding to lapses in all businesses and regions – and put A players in charge of it? assess integrity needs realistically and provide adequate funding for those activities? respond promptly to early warnings on trends in legal, ethical, and country risks?

outside HR experts periodically conduct 360-degree assessments of the CEO and top executives that explore such questions. Has the CEO met annual performance-with-integrity objectives set by the board? One example might be effectively handling a major miss or crisis – an environmental accident, a bribery case, or a ?nancial restatement – and remedying the problem systematically after a candid analysis of its causes. Another objective might be hiring leaders in emerging markets such as China, Russia, and India who are skilled in integrating performance and integrity. How do business divisions rate comparatively? The board should look at how integrity practices differ among divisions and how the CEO deals with laggards. It should also look at how the units rank against external peers. (This may require data from news or government reports or a comparative audit by, say, a former regulatory of?cial.) The board’s standards for assessing pay for performance with integrity should also de?ne a new set of “specs” in the company’s CEO succession planning. In evaluating candidates, the board should ask: Do they possess the knowledge, experience, and skills to drive a robust performance-with-integrity culture deep into the company’s global operations? The same specs should be used to evaluate the compensation of senior executives and set goals for leadership development programs. That’s the best way to ensure that, over the long term, the company’s top ranks are ?lled with managers who live by the principles and practices of performance with integrity – and thus help the company avoid debilitating risks and secure the trust that is vital to doing business.
Ben W. Heineman, Jr. (ben_heineman@ harvard.edu), a former senior vice president and general counsel of General Electric, is a senior fellow at Harvard Law School and Harvard’s Kennedy School of Government in Cambridge, Massachusetts. He is the author of High Performance with High Integrity (Harvard Business Press, 2008). Reprint F0806G

Giving employees a voice Does the CEO...
encourage reporting of ?nancial, legal, and ethical concerns through a system that prevents retaliation? ensure that concerns are investigated fairly and promptly, that trends are tracked, and that remedial action is taken if needed?

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GLASS CEILING

One Reason Women Don’t Make It to the C-Suite
by Louann Brizendine, MD

As a neuropsychiatrist who studies the differences between male and female brains, I’m often asked whether such differences play a role in professional achievement – and particularly, in men’s dominance of the highest ranks of many ?elds. Male and female brains are more alike than not, and business’s famous glass ceiling has nothing to do with raw intellect. Yet the distinct demands that are put on men’s and women’s brains at key career phases may help explain the gender inequality in top management. Many women are sidelined, ultimately, by a timing issue. There’s a certain age, long established by large organizations, at which professionals must decide to make their play for the big promotion – the one that will put them in line for the C-suite – and while it’s a good time for men, it’s not a good time for women. That go-for-it moment typically comes in one’s forties, when managers have gained the knowledge and perspective needed to take on real stewardship of a business. But at that phase of life, women with children already have a lot on their plates. Not only are they usually expected to handle the lion’s share of responsibility on the home front (even when both members of a couple hold fulltime jobs), but their own brain chemistry makes it hard for them to do otherwise. For reasons important to the survival of the species, women in childbearing years undergo changes that intensify their focus on the viability of offspring. It’s a passing phenomenon, but ill-timed for those with career ambitions. Women tend to pride themselves on their multitasking capabilities – and rightly so – but as their children grow past grade-school years the demands on women’s brains reach their maximum levels. This may seem counterintuitive, given that younger children are less independent. It’s not the quantity of care

required that taxes the brain, however, so much as the unpredictable need for care. When any decision maker’s brain function is overburdened, the result is stress, and nothing taxes the brain more than unpredictability. We know this from numerous scienti?c studies. Moreover, the typical woman in her forties deals with at least two sources of heightened unpredictability not shared by her male colleagues. The ?rst is preadolescent and teenage children, who no longer require basic care and nurturing. Effective

another source of high-stress unpredictability into their lives. If the same call came a few years later, many women would seize the opportunity. The very woman who could not ?nd the capacity to green-light her own promotion in her forties can be, in her ?fties, ready to take on the world. How unfortunate if, by then, top management has shifted its focus to the next cohort and her candidacy is off the table. The model of the brilliant career we’ve all internalized was established over

parenting is vital at their ages but can’t be achieved on a schedule; mothers must be on the lookout for moments of need and quick to respond when they arise. Second, women in their forties are also beginning to experience the normal hormonal changes leading up to menopause. For some, this has unpredictable effects on sense of well-being. People coping with heightened levels of unpredictability rarely go looking for even more ways to mix it up. To expect the typical woman to make her play for a newly demanding role at this particular life stage is unrealistic. Yet this expectation is implicit in most organizations. Top management starts looking seriously at a cohort as it enters its forties. But the high-potential women may be opting out – temporarily, they hope – because the timing is wrong to introduce yet

decades by men – which isn’t to imply any prejudicial intent. It’s merely a pattern that worked for them. Organizations, however, have it within their power to create new patterns that work for both sexes. If a business is serious about bringing more women into top management, here’s an idea: Open that window of promotability wider. When you dangle the brass ring of advancement and someone quali?ed fails to grab for it, don’t write that person off for good – especially if the candidate is a woman.
Louann Brizendine, MD (louann.brizendine @ucsf.edu), is the director of the Women’s Mood and Hormone Clinic at the University of California, San Francisco, and the author of The Female Brain (Broadway Books, 2006) and The Male Brain (Broadway Books, forthcoming in 2009). Reprint F0806J

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Reviews
Megacommunities
How Leaders of Government, Business and Non-Pro?ts Can Tackle Today’s Global Challenges Together
Mark Gerencser, Reginald Van Lee, Fernando Napolitano, and Christopher Kelly (Palgrave Macmillan, 2008)
In the aftermath of Hurricane Andrew in 1992, state of?cials and others in Florida realized they lacked an effective structure for responding to the extraordinary devastation wrought by Andrew’s 160-mile-an-hour winds. The interrelated problems were of such a scale, and involved the interests of so many stakeholders from every part of society, that only a vast, combined effort by organizations from every sector could have resolved them. Based on its analysis of the ?awed Hurricane Andrew response, Florida created the kind of framework for which the book Megacommunities is named – a “community of institutions and organizations” representing government, businesses, and nonpro?ts. The authors – a quartet of Booz Allen Hamilton consultants – argue that a host of heavyweight global problems (involving, among others, the environment, energy policy, and threats to human health and security) can be solved only by harnessing the power, creativity, and insight of the three sectors working in concert. These collaborations, they write, require structures “in which no leader or institution is necessarily in charge, and yet a healthy, prosperous, effectual environment exists in which issues are addressed and complexity is reduced.” How to do that is the crux of this book. The authors draw on interviews with CEOs, government of?cials past and present (Bill Clinton is among the most cogent), and heads of nonpro?t agencies to give credence to their view that only by putting aside the individual institutions’ unilateral agendas and identifying areas of “overlapping vital interest” can a megacommunity effectively coalesce around a well-de?ned mission and produce worthy solutions. Unfortunately, the idea is new enough that few examples of such collaboration exist; most are in their early stages. Moreover, because of the massive scale of the problems they address, megacommunities are inherently open-ended undertakings rather than time-bounded projects. Hardly a megacommunity exists that has fully realized its mission. This dearth of practical experience occasionally leaves the reader awash in too much theory and too little street cred. Still, the authors manage to convey useful guidance, sometimes by depicting instructive failures. In one such case, an international conference on avian in?uenza recommended the aggressive culling of infected birds. But since conference organizers excluded groups they perceived as opposed to their interests (a healthy megacommunity would strive to include such viewpoints), a global bird conservation group was not present to share solid scienti?c evidence that culling infected birds actually accelerates the virus’s spread. Oops. The book doesn’t soft-pedal the dif?culty of getting parties with strongly held beliefs and agendas to subordinate them to pursue overlapping vital interests. But it is in the main an optimistic handbook for creating promising frameworks for change that balance ideals with realities, the perfect with the good.
–Lew McCreary

The Making of Second Life Reviews_aux text
Wagner James Au (Collins, 2008)

A good anthropologist keeps one foot ?rmly planted in the society he is studying and the other in his own. If he’s simply a detached observer or – just as bad – if he goes native, he won’t be able to straddle the two cultures in a way that leads to true understanding. Wagner James Au carefully strikes the right balance in his nuanced account of the evolution of the online world Second Life. Au, who was ?rst a reporter hired by Second Life developer Linden Lab and is now an independent blogger, has always combined an empathetic view of the place and its “residents” with a journalist’s dispassionate (if not always combatively critical) voice. This book, which draws on the vast trove of fascinating tales and trends he has chronicled over the years, continues in that vein, deftly addressing subjects ranging from virtual sex to the Second Life marketing initiatives of real-world companies.
– Paul Hemp

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
Charles R. Morris (PublicAffairs, 2008)

Why did the credit markets tighten so drastically last year, in the absence of major shocks? Morris, a former banker, sees the crunch as the culmination of a quarter century of deregulation and innovation that initially greatly bene?ted the economy but eventually self-destructed in an orgy of ideologically driven behavior. He sees unnecessarily cheap money from the Federal Reserve as the main proximate cause of the excessive risk taking. With the United States now in a slowdown, he adds, this Fed policy, combined with the global shift away from the dollar, means the government has little leeway to stimulate growth without provoking in?ation. The only good news is that Morris’s cyclical view of the political economy suggests America will return to a sustained period of prosperity in the next decade.
– John T. Landry

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HBR Case Study
BY EDWARD E. LAWLER III COMMENTARY BY ANNA PRINGLE, F. LEIGH BRANHAM, JIM CORNELIUS, AND JEAN MARTIN

Why Are We Losing All Our Good People?
Sambian Partners has prided itself on being a great place to work, but now talented employees are leaving. What’s going on?
MARY DONILLO, the head of human resources at Sambian Partners, motioned Tom Forsythe, Sambian’s assistant director of commercial design, to a comfortable chair in her of?ce. It was late on a Thursday afternoon, and the Chicago sky looked like slate. The darkness outside made the overhead ?uorescent lights in her of?ce seem even more glaring than usual. “Hey, Tom,” she said, adding an extra bit of warmth to her voice. “I was so sorry to hear that you’ve decided to leave. I know your mind is made up – everyone’s already tried to talk you out of it. But I do hope you can help us understand why.” She paused and offered a rueful smile. “It’s a huge loss, but maybe we can learn something from it.” Tom sat stif?y in his chair, one side of his face partially covered by a few strands of dark hair that had escaped his ponytail. The lights brought out the bags under his eyes, and his ?ve o’clock shadow looked more like a seven. With a newborn at home, he probably hadn’t been getting enough sleep, Mary thought. “Well, I think you know that I wasn’t out looking,” Tom said. “Their headhunter came to me, and, what can I say? It’s an of-

Daniel Vasconcellos

fer I couldn’t refuse. I mean, a directadmit partnership to J&N? It really is an opportunity that doesn’t come along often.” Mary couldn’t help blinking at the mention of J&N, Sambian’s much larger competitor. In the past year, it had seemed to step up its raids on Sambian’s talent pool, luring some very capable people over to “the dark side,” as Sambian’s CEO, Helen Gasbarian, liked to call it. “I’m glad for you,” Mary managed to say. “Although I wish it were anywhere else.” “I know.” Mary studied Tom’s face for a moment, wondering how to press for more. No unplanned departure was good news, but this one was really setting off alarm bells. Tom was at the top of his game; at 35, he’d been with Sambian nearly eight years. The company had been like a family to him, even after he got married and had children. He’d won a slew of design awards, and he was on the CEO’s short list of high performers. Mary could see the attraction of a partnership position. But was that the whole story? At Sambian, Tom enjoyed the same kind
HBR’s cases, which are ?ctional, present common managerial dilemmas and offer concrete solutions from experts.

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HBR Case Study Why Are We Losing All Our Good People?

of authority he would have at J&N, if not more. He chose his projects, set his own priorities. Did he know how hard it would be to earn that kind of autonomy at a new ?rm, partner or no? “I’m sure it’s no news to you that you were coming up for promotion,” she ventured. “If not this year, then maybe the next. Would it have made a difference if the raises had been bigger? For that matter, would it make a difference now? I mean, there’s no shame in reconsidering – you really are highly respected here, you know.” Tom looked at his hands. “It’s nice to hear that, Mary,” he said. “But of course I’ve already accepted. And anyway, it’s time to move on. I have to challenge myself, keep it fresh.” “But you’ve always managed to keep it fresher than just about anyone. Are the projects themselves less challenging these days?” She avoided the obvious question: Have you been unhappy? Tom tilted his head and looked directly into Mary’s gray eyes, as if reading her thoughts. “I’ve been very happy here,” he said. “The people are great. I’m not running away from anything. It’s just that a fantastic opportunity came along at a good time.” Mary kept probing, asking all the standard questions, but Tom demurred, merely repeating what he’d already told her. By the time the interview had ended and she’d seen him to the door, she felt de?ated. After leaving her of?ce, Tom headed into the back stairwell, pulled out his cell phone, and speed-dialed his wife. “Alyson? Hey. Yeah. You’ll be proud of me – I kept my mouth shut. I mean, you’re right about not burning bridges, but who cares at this point? This place can be as screwed up as it wants. It’s not my problem anymore.”

Francisco, New York, and and it showed plainly on Offer your advice London. her face. on this case at LosingGood Helen looked hard at “Working on the memo?” People.hbr.org. Mary. She wished she could Mary asked gently. put the blame for losing Tom Helen nodded. “Not much on her – or on someone, anyone – but fun. I was just going to send it to you so she couldn’t. “You know, ever since Dad you could look it over. How’d the exit founded this company, we’ve tried to interview go?” make it a great place to work,” she said, Mary confessed that Tom hadn’t resighing. “And I think we treat people vealed much. “He didn’t want to get spereally well. Where are we going wrong?” ci?c about why the grass is greener there “I don’t know, honestly,” Mary replied or tell me about anything that made carefully, hearing the bewilderment in him unhappy here.” Helen’s voice. “But I want to be careful When Helen’s father, Peter Gasbarian, about not reading too much into this. had founded Sambian, in 1975, it was Obviously, we need to get to the bottom supposed to be the antithesis of a beof it, but it might turn out that it’s not a hemoth like J&N. His idea was to build trend, just a nasty coincidence. People a top-notch architecture and engineerleave jobs for all kinds of reasons.” ing ?rm by making appealing offers to

hbr.org

There was nothing Helen hated more than losing staff to her ?rm’s much larger competitor.
young talent. Rather than spend years as anonymous “leverage” to fat-cat partners, young people at Sambian could start making their mark immediately on interesting projects. It was no coincidence that he had stopped mulling this idea over and turned it into reality after his only child announced she was applying to architecture school. It was also no surprise when Helen took the reins following her father’s death, in 1997. By then an award-winning architect in her own right, she made it her mission to increase collaboration among the ?rm’s cutting-edge designers, engineers, and client account managers. As a result, innovation had ?ourished in general – and, in particular, the ?rm had been in the vanguard of the “green building” movement. By the time other, larger firms were just starting their green practice groups, Sambian had already designed dozens of LEED-certi?ed buildings. Riding the growth wave, the company had opened of?ces in San Helen pondered the point. “Well, that’s true enough: Pat Dougherty moved to Ireland ‘for family reasons.’ Irena Milkovic decided to go solo – I’m still trying to ?gure that one out. And now Tom, to a partnership at a big traditional ?rm.” She shook her head. “But the fact remains that it is a trend. I want to know what we need to do to keep the rest!” “I have a few theories, Helen,” Mary said, as soothingly as possible. “But to see whether there’s anything to them, I’d like to move this year’s employee survey up on the schedule. I think we need to get some new data in front of us.” Helen turned back to the computer. “Yes, do the survey,” she said. “Do it as soon as you possibly can.”

An Unhappy Memo Early the next morning, Mary tapped on Helen Gasbarian’s door. She found Helen staring at her computer screen, frowning. There was nothing Helen hated more than losing staff to J&N,

The Word on the Street Designer Hal Pope and engineer Savannah Dorsey were two ?oors down in Sambian’s large kitchen, heating up their lunches in the microwaves. They were

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both subdued, having read the memo bearing the news of Tom’s departure. “Tom sort of checked out when we lost that Marko bid,” Savannah ventured. “He really wanted to see that design get built. It was gorgeous, with all that light and air. And anyone could see that the price was right.” Hal agreed. “The design couldn’t have been better.” He lowered his voice a little. “If only Paul Bonney had been able to point that out.” Paul Bonney was the head of architecture sales. Savannah stared at Hal. “You thought so, too,” she said. “His pitch sounded so, well, uninspired.”

be as simple as that. Two kids now. He’ll be worrying about college funds.” Savannah jumped back into the conversation. “True, but you’d think he’d also be worried about quality of life. I guess Alyson must have decided not to go back to work. They’ll have him on the road constantly.”

This Is Not a Drill A month later, Helen was scanning a staff utilization report when the phone rang. The phone’s display showed that the call was coming from Bob Wortham, the vice president of engineering. Through the open door, Helen saw her

“We really value you around here, and I want you to be happy. I don’t want you to even think about leaving.”
Adrienne Perle, another colleague from engineering, couldn’t help overhearing as she reached past them for some utensils. “He’s uninspired,” Adrienne said. “And he’s not the only one. It’s really a pity when you have someone doing incredibly creative work, and the support structure isn’t there to let it see the light of day. All the salespeople focus on is cutting the deal. If you ask me, that’s why Tom is leaving. He’s a ?rstclass architect, but if he doesn’t have ?rst-class sales and marketing behind him, he’s no one. He’s the tree falling in the forest. I’ve tried telling people upstairs that we’re veering off base. But nobody’s listening.” Hal shook his head. “I don’t know, guys. Tom had plenty of wins. More work than he could handle. I just think he looked above him and realized he was going nowhere fast. No one on the executive team is even close to retiring, and the org chart is top-heavy as it is. Where’s the career path?” Adrienne pulled a sour face, indicating agreement. “I wonder how much he’ll make as a partner at J&N? It could assistant, Jessie, move to pick it up at her own desk. “I’ve got it, Jess,” she said, lifting the receiver. “Hi, Bob. What’s up?” “I might need your help on something. I’m afraid we’re at risk of losing Adrienne. It’s just a rumor so far, but I want to jump on the situation.” Helen grimaced. “Adrienne? You’re right – we don’t want to lose her. Why don’t you come up now?” Hanging up, Helen called out to Jessie. “Can you see if Mary is free? If she can make time right now, that would be great.” She stood up, walked over to the window, and pressed her forehead against the cool glass. On the plaza below, a few late lunchers clustered around a vendor’s stainless-steel cart. She closed her eyes. Another loss for Bob, she thought. Was he part of the problem? She shook her head, refusing to pursue that line of thought. The best way to decrease attrition surely couldn’t be to ?re loyal employees. In the hallway outside Helen’s of?ce, Bob ran into Mary. As he relayed the

rumor about Adrienne, Mary felt the blood start to drain from her face. “It’ll be a real problem if we lose Adrienne,” Bob said. “She’s in the thick of a huge project, and the client loves her.” He gave Mary a hard look as they passed Jessie’s desk. “What’s going on here, anyway? It’s like our talent is being sucked out by vampires.” Hearing them enter, Helen turned away from the window. “OK, Bob,” she said. “What exactly is this rumor?” “People are picking up a vibe that she might follow Tom to J&N,” Bob began, pulling the door shut. “The two of them were kind of on a wavelength. It wouldn’t surprise me if he wanted to ?nd a home for her there.” Helen shot a look at Mary. “No noncompete?” Presumably, Tom had signed the standard contract preventing him from taking talent or clients with him to the competition. “Oh, sure,” Mary replied. “Tough to enforce, though,” she added, immediately wishing she hadn’t. “Oh, I’ll ?nd a way,” Helen spat. “Even if I can’t win, I can make life tough for him.” Mary and Bob exchanged glances. Helen turned to Bob, on the offensive now. “So you’re telling me we shouldn’t be surprised, but I’m also getting the sense that you haven’t done anything in anticipation of this.” She couldn’t resist adding a swipe at Mary. “And why are you waiting around for the satisfaction survey results before taking any action?” Mary opened her mouth as if to object, but Helen waved her hand impatiently. “OK, look,” she said. “I’ll talk to her. Let me see what I can do.” She walked to the door and opened it. “Jess, call Adrienne Perle and ask if she’s available. I want to see her as soon as possible.”

Oh, Won’t You Stay? Ten minutes later, Adrienne appeared in Helen’s doorway. Her heavy-framed designer glasses made it a little dif?cult to read the expression on her face, but her body language signaled anxiety. It

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wasn’t every day she was summoned to the CEO’s of?ce. A few moments of small talk prolonged the awkwardness, but Helen got to the point as quickly as possible. “Adrienne, I’ve heard an alarming rumor – that you might be considering a job elsewhere. I certainly hope this isn’t true.” Adrienne looked down at the coffee table and then around the room as if to see who might have spilled the beans. “Rumors spread fast around here,” she said ?nally. “I want you to tell me the truth – in total con?dence, no repercussions,” Helen said pleadingly. She paused for effect. “Is Tom Forsythe talking to you?” Adrienne’s eyes widened slightly, and her answer seemed, to Helen, a little too quick. “Tom has nothing to do with this,” she said. “I mean, it’s true that I talk to him. We’ve known each other for a long time – since I got here, ?ve years ago. He’s probably the closest thing I’ve had to a mentor. And I guess I do feel a little lost now that he’s gone.” “Well, my job is to make sure that you don’t feel lost. We really value you around here, and I want you to be happy. I don’t want you to even think about leaving.” She paused. “Is it possible that Bob could play more of that mentoring role?” With an uncomfortable shrug, Adrienne began formulating a careful response. “Well, it’s not so much, um…” Her voice trailed away. Helen let her off the hook. “Well, let’s ?gure out how we can ?ll that void.” It was clear that Adrienne wasn’t being totally forthcoming but impossible to know how much she was withholding. Of course, she would know better than to say that Tom was recruiting her, even if he was. Recalling Bob’s note of desperation earlier, Helen made a decision. “In fact, maybe you would let me play a little of that role myself. I’m promoting you.”

Helen had known that the suddenness of her executive decision would not sit well with Mary, but the intensity of Mary’s reaction surprised her. She had, after all, succeeded in keeping Adrienne on board. “Desperate times call for desperate measures,” Helen offered in her own defense. “But that’s just it,” Mary cried. “It will look like an act of desperation to anyone who heard the rumor. And worse than that, it isn’t fair. If that job is available, there are other people who should get a crack at it. It’s not right that they should effectively be penalized because they were the loyal ones. What kind of signal does that send?” “I’ll tell you what signal I think it sends. It tells people that we aren’t so constrained by HR procedures that we can’t make exceptions for fast-rising talent. That’s a positive message. And as for Adrienne, don’t worry about her. Everyone loves her. She’ll step up to the plate.” Mary shook her head. “It’s not a question of popularity or attitude. She’s missing some of the competencies…” “Well, aren’t we all!” Helen interrupted. “Sometimes I think we focus too much on the things that aren’t quite perfect. If Adrienne were on the outside and sent us her résumé, we’d say she was perfect for this job. Tell me that’s not true.”

Which Is Worse? “Helen, you can’t do that! Adrienne’s only a level-six employee – she’ll drown in that position.”

The Voice of the People A few weeks after the tense encounters over Adrienne, Mary tapped again at Helen’s door. “Survey results time,” Mary called out in a singsong voice, glad that she and Helen were back on a happy footing. She sat down across the desk from Helen and handed over a copy of a chart-saturated report. “I’ll give you the big picture ?rst. Overall, people at Sambian are quite satis?ed with just about every aspect of their employment experience.” Helen groaned. “I know, I know,” Mary continued, “but once you get into the details, there are some nuances.” She offered a few ex-

amples of departments whose results diverged from the averages. And, as always, the open-ended questions had yielded food for thought. Commenting anonymously on their survey forms, a few employees had complained of too much deadwood in the project manager ranks. One staffer referred to “certain prima donnas” who cared more about winning awards than staying on budget. The administrative staff was, for the most part, neutral. Some resented the evening and weekend hours they spent when, as one phrased it, “someone higher up the chain procrastinated.” The perks were good. The perks were bad. The perks were skewed to the younger employees. The younger employees didn’t feel valued enough. Helen listened for 20 minutes, saying little but shaking her head frequently. Then, when Mary was in the middle of reading a comment about the snack and beverage choices in the kitchen, she interrupted. “Oh, that one was mine,” she joked. Mary played along. “I thought so. And don’t worry, I’m on the case.” But she knew the boss had heard enough for the moment. Closing the report cover, she leaned back in her chair.“I know it’s hard to separate the signal from the noise here, but at least it gives me some more ideas about what to probe for when I’m talking to people one-on-one.” “And that might be enough,” Helen said, “if only they would give us straight answers.”
How can Sambian discover what’s really driving people out the door? Four commentators offer expert advice beginning on the next page. Edward E. Lawler III (elawler@marshall.

usc.edu) is the Distinguished Professor of Business at the University of Southern California’s Marshall School of Business and the founder and director of the university’s Center for Effective Organizations. His latest book is Talent: Making People Your Competitive Advantage (Jossey-Bass, 2008).

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HBR Case Commentary How Can Sambian Discover What’s Really Driving People Out the Door?

Mary is not doing her most important job, which is to be the custodian of talent at Sambian.
HELEN GASBARIAN has had a wake-up call. To keep precious talent on board, she must grab the helm. This is especially urgent because Mary Donillo is not giving Helen the help she needs. Indeed, if I were Helen, I’d be taking a hard, cold look at Mary. In her exit interview with Tom Forsythe, Mary asks poor questions, offers only stock responses, and gives up too soon. Mary is not doing her most important job, which is to be the custodian of talent at Sambian. She should have known Tom was at risk. If she had established an earlywarning system, Tom might not have quit. If his departure was not preventable, she should have been looking out for the people around him, such as Adrienne Perle. When Tom left, Mary should have thoroughly rerecruited Adrienne. At the very least, Helen should tell Mary to pull up her socks and start providing the kind of information and advice needed to keep Sambian’s talent intact. Even if Mary were more effective, Helen should be out there listening to people. She cannot delegate that task to anyone inside or outside the ?rm. In organizations like Sambian, where creativity, innovation, and intellectual capital equal competitive advantage, the most effective leaders devote at least 40% of their time to people – coaching and mentoring other leaders, rerecruiting the top talent. To this end, Helen and Mary – or Mary’s replacement – should consider conducting “listening tours.” These would involve visiting every department, gathering direct feedback from supervisors and staff, and taking the organization’s pulse. Helen should hold small, open discussions with key employees in the form of breakfast or coffee meetings. These should be at least a weekly feature on her calendar. At Microsoft, one effective listening tool is the HR vice president’s weekly blog. In

Anna Pringle (anna. pringle@microsoft.com) is the head of international people and organization capability for Microsoft. She is based in Dublin.

it, she writes about topics that employees have raised, often during her listening tours, and then she asks for opinions, which people can offer anonymously. Recently, the blog revealed that many employees had a strong interest in international careers but were frustrated because it was so dif?cult to ?nd out about opportunities. As a result, we’re now posting listings of international jobs. Sambian should also establish an open-door policy so that employees know that they can talk to someone above their supervisors if they have a complaint. Helen must personally guarantee that it is safe to do this and that feedback will be taken seriously. Making this policy work requires robust and clear HR processes. Additionally, Helen should assure employees that she knows what’s important to them and that Sambian’s value proposition for employees is clear and differentiated from the competition’s. At Microsoft, we try to tailor our proposition to individuals’ needs. Parents like Tom, who have young children at home, don’t have the same needs as younger, single employees. They may value ?exible hours above, say, access to a ?tness club. Sambian should also try to engage people intellectually, emotionally, and even through their physical environment, so that they can enjoy doing their best work there. Finally, it’s important for Sambian to make leaders accountable for attracting and retaining key talent. This starts at the top. Helen should make it clear that she personally holds herself and her direct reports to a high standard in this regard and will, over time, remove those who are not effective. Sambian’s performance management systems should be revamped to focus managers on both business results and people management goals. By doing these things, Sambian will be able to keep employees from drifting.

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Wendy Wray

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HBR Case Commentary How Can Sambian Discover What’s Really Driving People Out the Door?

F. Leigh Branham (LB@ keepingthepeople.com) is the CEO of Keeping the People, a human resources consultancy in Overland Park, Kansas. He is the author of The 7 Hidden Reasons Employees Leave: How to Recognize the Subtle Signs and Act Before It’s Too Late (Amacom, 2005).

SADLY, I’VE seen Helen’s panicked reaction too often when good people start to leave a company. After the second or third resignation, the CEO acts impulsively, just as Helen did with Adrienne Perle. She wants to stop the bleeding so desperately that she’s trying to do so before she even knows why it’s happening. Mary, the cooler head, is absolutely right to try to put the brakes on Adrienne’s on-the-spot promotion. Helen needs to take a deep breath, pull back, and move directly to expose the causes of the exodus, going far beyond deciphering the clues in the ?rm’s super?cial, apparently self-conducted, survey. In my analysis of 20,000 employee surveys conducted by the Saratoga Institute, a humancapital-management ? rm in Silicon Valley, I discovered that in all sorts of companies and industries, there are several “triggering events” that can impel employees to ?ee. Sometimes, soon after being hired, an employee realizes that there is a misalignment between her expectations and the actual work or

grumbles about a misalignment between the designers and the salespeople. The disconnect between the ?rm’s long-standing focus on innovative design and its concern with deal cutting can lead to disillusionment for proud professionals like Tom. To get to the root of what is happening, Helen needs to provide a forum where employees can speak openly about their discontent without fear of repercussions. For example, she might consider calling employees together into a GE-style “workout session,” where employees break into groups to discuss their concerns and appoint representatives to make recommendations to the larger group. One design ?rm I worked with suffered from a staf?ng ?ight similar to the one at Sambian. During a workout session, the CEO – an engineer who was an introvert by nature – made himself vulnerable by taking the stage and listening to every employee who had an idea. He took action based on what he had heard – including raising pay to

To discover what impels employees to ?ee, Helen must go beyond deciphering clues in the ?rm’s self-conducted survey.
the workplace, or she ?nds that the job doesn’t ?t her. Other times, a boss offers insuf?cient coaching or feedback. Workers may feel that their career opportunities are limited or that they are not valued, listened to, or well paid. Employees may experience an imbalance between work and life, or a loss of trust and con?dence in senior leaders. Most employees are reluctant to talk openly with management about any of these so-called push factors. In Sambian’s case, several of these belowthe-radar issues are in play, as the conversation among Hal Pope, Adrienne, and Savannah Dorsey reveals. Tom feels devalued by Paul Bonney, the head of architecture sales, and so is lured away from Sambian by the promise of a partnership and a fresh challenge. Hal market levels and reassigning less effective sales staff. This kind of action went a long way toward gaining the respect of his workforce. Within ?ve months, the ?rm had won a key contract and the bleeding had stopped. Helen also needs to get some help for Mary, who is not providing the honest information Helen desperately needs to guide the ?rm. Hiring a third party to assist with surveys and exit interviews would help, because employees will tell a trusted outsider things they may not feel safe telling an insider like Mary. This is clearly the case with Tom. In the absence of an environment in which employees can speak freely about what bugs them, even a once-great company like Sambian may become little more than a revolving door.

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HBR Case Commentary How Can Sambian Discover What’s Really Driving People Out the Door?

Helen needs to assure her most talented employees that she understands their concerns and desires.
HELEN MAY have inherited her architectural talents – as well as the ?rm – from her father, but she doesn’t seem to have his managerial genes. As a CEO, Helen’s number one job is to attract and retain great talent, but she’s just not doing that. I can certainly understand the dif?culty of the problem, having been in a talent-draining situation myself. In 2006, Bristol-Myers Squibb, where I was then an independent member of the board, spun into turmoil when the CEO and general counsel were summarily ?red following a botched patent ?ght. Having spent my previous life as a senior executive at both Guidant and Eli Lilly, I understood the business well enough and accepted the board’s request to step in as interim CEO of BMS. Dealing with workforce turmoil was one of the toughest challenges I’d ever faced. Following the ?rings, employees were in shock. Our stock price fell, and there were rumors that we were going to be acquired. Given the drop in employee morale and our proximity to other large pharmaceutical ?rms in the New York area, competitors found it pretty easy to lure people out the door. It looked as if there might be a large exodus. Worst of all, nobody really knew me; I had to build trust from ground zero. My job, not unlike Helen’s, was to reestablish stability – and fast. If my experience can serve as a guide, I would suggest to Helen that she do several things right away. First, she should simplify the management structure so that she can gain a direct understanding of the issues facing each area of the ?rm. Second, she should make sure that Sambian’s mission is crystal clear and that everyone in the ? rm understands it. Third, she should ensure that people are being compensated correctly. It’s also critical for Helen to spend much more time with the key talent. At our ?rm,

Jim Cornelius (ceo@bms.

com) is the chairman and CEO of Bristol-Myers Squibb in New York City.

the future of the business rests with people in R&D. Having worked with R&D employees in my previous positions, I understood their language, and that proved helpful at BMS when I met with R&D staffers in the wake of the ?rings to discuss science and technology issues. With our chief scienti?c of?cer, I still attend R&D meetings and discuss the importance of the R&D function to the future of the company. In addition, our scientists know that I sit on the board’s science and technology committee and that they have the board’s full support. At Sambian, Helen can use the language of architecture to connect with her most talented employees and assure them that she understands their concerns and desires. At the same time, I would encourage Helen, with her leadership team, to hold a lot of faceto-face meetings with senior managers from all departments, including, as often as possible, the folks from San Francisco, New York, and London. Phone calls, e-mail, and teleconferences won’t cut it; she needs to read the senior managers’ body language and facial expressions. In these meetings, she and the team must de?ne what success means for Sambian and how they will achieve it. Finally, Helen should start writing bimonthly e-mails – “memos from the CEO” – in which she actively solicits anonymous feedback, suggestions, ideas, and complaints from everyone in the company. At BMS, my memos generate hundreds of responses – a sure sign of employee engagement. I read them all and respond to as many as possible. As a result of doing all these things at BMS, we cut turnover to a level below the historical average and have attracted some industry stars, all within 15 months. If Helen does likewise, she may be able to turn Sambian around.

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SAMBIAN’S STORY is not unusual. People

begin leaving, and the blame game starts (“Is it the manager? Is it HR?”). Senior managers react by increasing compensation, making promotions, and introducing new projects and even new managers. But these are short-term ?xes. They might postpone a departure, but they are really no more than Band-Aids. Helen must understand that people don’t just leave managers; they leave organizations. Sambian needs a cure for the organizational ills that are making employees unhappy. In a fouryear analysis of more than 100,000 employees around the world, the Corporate Leadership Council found that although workers join companies for rational motives (better compensation, bene?ts, and career opportunities), they stay and work hard for emotional ones. The most important contributor to employees’ emotional commitment is a sense of connection to the ? rm’s mission. Tom’s situation reveals the danger of Sambian’s failure to make this connection. When his pet project loses a bid, he’s disappointed because he feels a misalignment between the direction the ?rm is taking and his own aspirations. His boss probably failed to spot his growing unhappiness for two reasons: The ?rst is that Tom never said anything about it. Indeed, CLC data show that, on average, only 25% of departing employees express dissatisfaction before quitting. This means that by the time unhappy workers tell their managers what’s going on, it’s often too late to win them back. The second reason that Tom’s unhappiness went unnoticed may be that his performance was so strong. In a CLC survey, however, nearly a third of high performers reported that what they want for their careers is not what their company wants for them. To better pick up on the warning signs of an emotional disconnect, Sambian needs ?rst to communicate a clearer mission and the contribution individual employees will make to it. Helen must also update the company’s mission; words like “creative” and “green” may no longer set the ?rm apart in the minds of talented employees like Tom. To get disenchanted staffers back on board, Helen could

hold monthly employee-run “mission review sessions,” in which workers discuss Sambian’s mission and its relevance to their work. Employees also stick around when they have everything they need – from tools and resources to top-down managerial support – to succeed in their jobs. Without a clear understanding that the ?rm is aligned behind them, even the most talented workers can feel that their work is futile. Finally, employees – especially young ones – are more likely to stay at a company whose culture and values they enjoy. Mary should conduct regular “culture audits” to measure employees’ connection to the company’s work environment. These anonymous audits consist of a brief set of questions aimed at discovering cultural disconnects: “What are the unwritten assumptions about the way work gets done here?” “Do you believe hard work will be rewarded?” “Do you feel that other employees are committed to your success and the organization’s success?” By

Jean Martin (martinj@ executiveboard.com) is the executive director of the Corporate Leadership Council, a global membership of chief human resources of?cers and a division of the Corporate Executive Board, headquartered in Washington, DC.

Sambian has failed to create a mission and culture to which high performers feel connected and committed.
comparing the answers to such questions with employee demographic data, Sambian may see trends. For instance, employees with ?ve or more years of tenure may feel disconnected from the ?rm’s culture. Such studies, followed by proper managerial attention, can reduce attrition rates by as much as 87%. In the end, by making sure that Sambian actively supports a mission and culture to which employees feel committed, Helen can see to it that her high performers – and her company – survive and thrive.

Reprint R0806A Reprint Case only R0806X Reprint Commentary only R0806Z To order, see page 143.

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Growt_ & P_o?t
The world’s most successful companies have this one ?gured out.

?

www.kenexa.com

Sourcing | Applicant Tracking | Skills Testing | Behavioral Assessment | Onboarding | Career Development Performance Management | Employee Surveys | Succession Planning | HR Analytics | Exit Interviewing

First Person
BY VIKRAM AKULA

The author, center, in India.

Business Basics at the Base of the Pyramid
Why should business among the very poor be different than it is anywhere else? Listen to customers, standardize processes, and don’t be afraid to make a pro?t.
day that a fellow who runs a $250 million ?nancial services ?rm has a fatwa, or Islamic religious ruling, issued against him. But that’s what happened four years ago when my then $7.3 million company, SKS Micro?nance, started doing business in Nizamabad, India. Armed with broken bottles and machetes, a gang of local thugs intimidated, attacked, and stole
IT’S NOT EVERY

cash from some of our loan of?cers. They tried to extort money from us in exchange for permitting SKS to operate safely in the region. When we refused to pay, they spread rumors that we were trying to convert people to Christianity.

The fatwa, handed down by local clerics, said it was a sin to borrow from us. We knew if we became complicit with a culture of extortion, our customers would be the ones to suffer. They barely had enough money to meet basic needs, never mind pay off bad guys. So we walked away from our $285,000 portfolio in Nizamabad. By not giving in to the thugs, however, we won some respect in that town and in other villages where we were doing business. Many companies say they protect the interests of their customers. Very few actually sit in the dirt with them, using stones, ?owers, sticks, and chalk powder to ?gure out if they’ll be able to repay a $20 loan at $1 a month. With this approach, we’ve created our own loyal “gang” of over 2 million customers.

photos courtesy of SKS Micro?nance

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First Person Business Basics at the Base of the Pyramid

SKS is like any other healthy highgrowth business, except that our customers have almost no money. Consider the plight of Saryamma: She and her husband were landless laborers who earned about $1 a day. Persistent drought often made work and food scarce. Saryamma’s husband entered into bonded labor, a form of indentured servitude that still exists in India, just so the family would have enough money for grain. Her oldest son was forced to seek work rather than attend school. In 2002, Saryamma joined our program and recruited four other women from her village who wanted loans. In line with our group-lending model, each loan was linked to the others: If one woman couldn’t pay her small weekly installment, the rest of the women chipped in; if she refused to pay, the others pressured her into meeting her obligation. Saryamma initially borrowed $200 to buy a buffalo so she could sell the milk. She took one year to repay, in weekly increments of $4.50. In subsequent years, she took out other capital loans, eventually adding three more buffalo, a cow, two acres of land, and a pair of bulls to her portfolio. Her family’s net income has increased to $10 a day, propelling her ?rmly into India’s lower middle class. Her husband is now free from bonded labor, and Saryamma’s youngest children are the ?rst in the family to attend school. Saryamma’s story illustrates that providing loans to women is a sure way of making micro?nance work. Studies have shown that women are more likely than men to reinvest pro?ts in the household and to support others in their borrowing group. That’s why we lend only to women. How do we manage to help women like Saryamma on such a large scale? From the beginning, SKS’s deliberate strategy has been to bypass the usual conventions of poverty-eradication programs. By reenvisioning micro?nance, we have achieved excellent customer and business relationships throughout India.

ARTICLE AT A GLANCE
Vikram Akula’s $250 million ?rm applies for-pro?t principles to the world of micro?nance – accessing commercial capital, standardizing products and processes, and embracing new technology. The company unfailingly does what’s best for customers, even if that undermines the ?rm’s short-term interests. The result: a rapidly growing customer base, now over 2 million strong, and a solid brand to leverage with partners.

Rethinking Micro?nance A fatwa is hardly the only scary thing my company has encountered on its path toward rapid growth. Much more worrisome is the slow rate at which our industry has been able to gain traction and deliver broadly on its promise. Micro?nance is often lauded as the solution to poverty. Borrowers include agricultural laborers, mom-and-pop entrepreneurs, street vendors, homebased artisans, and small-scale producers, each living on less than $2 a day. They are quintessential base-of-thepyramid customers – the potentially lucrative market segment that University of Michigan professor C.K. Prahalad has so famously drawn attention to and that many companies have had trouble reaching. (See his and Allen Hammond’s “Serving the World’s Poor, Profitably,” HBR September 2002.) The simple notion of micro?nance – providing business loans of as little as $100 or $200 to the poor – was pioneered in 1976 by Muhammad Yunus, who founded Grameen Bank, won the Nobel Peace Prize, and is a personal hero of mine. No doubt, micro?nance has bene?ted people like Saryamma tremendously, but the model just hasn’t managed to scale to large numbers. Most micro?nance institutions worldwide are small nonpro?ts; about 80% serve fewer than 10,000 customers.

While the industry celebrates having reached about 140 million people, roughly 3 billion (or 750 million households) still live on $2 a day or less. In terms of households, that’s only a 19% market penetration – a sure sign of underperformance in any other industry. Micro?nance ?rms haven’t succeeded in helping as many customers as they would like for several reasons: their lack of access to commercial funds, the high cost of handling millions of microtransactions, and an inability to create scalable operating systems. I ?rst learned about these limitations in 1995, when, after graduating from Yale with a master’s degree in international relations, I became a loan of?cer for the Deccan Development Society (DDS), an NGO that extends micro?nance loans in India. One day, in the course of my normal rounds, an impoverished woman from Kusunoor, a remote village DDS wasn’t serving, asked me, “Can you offer loans in my area?” I passed her inquiry on to the NGO’s directors. Their response was both a refusal and an excuse: The grant cycle was ending, and DDS could not expand beyond the 100 villages it was then serving. I shared that with the woman, and I will never forget her reply: “Am I not poor, too? Do I not deserve a chance to get my family out of poverty?” I realized then that to truly use micro?nance to help eradicate poverty, we would need a new model, one that would allow micro?nance organizations to scale up quickly so that we’d never have to turn any poor person away. I launched SKS in 1998 to build that next-generation micro?nance company. I remember early on walking down a dusty road in a remote drought-prone region of India, looking for potential customers. I turned a corner and came upon a group of women in brightcolored saris sitting in front of thatched mud huts. I approached and explained that I was starting a micro?nance program and could bring collateral-free loans right to their doorstep. “You can start small businesses and get out of poverty,” I said. The women met my pitch

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with silence and probably some skepticism, but one had a sparkle in her eye. That woman was Saryamma.

The Scale Is the Thing SKS’s business strategy is based on three entrepreneurial principles borrowed from fast-scaling consumer businesses like Starbucks and McDonald’s. These principles can help guide any multinational or NGO that wants to sell – pro?tably – to the hundreds of millions of people at the base of the economic pyramid. Adopt a pro?t-oriented approach in order to access commercial capital. When I started SKS 10 years ago, I had no money of my own and no interested investors, so I established it as a nonpro?t with lots of small donations from friends and relatives. I had certainly admired Grameen Bank’s grouplending model, but I wasn’t a big fan of Yunus’s theory that micro?nance ?rms should be merely self-sustaining companies – what he calls “social businesses.” I felt that if the industry were going to provide the estimated $300 billion of credit needed by the poor, it would have to tap larger, commercial capital markets – and that meant structuring our businesses so that investors could expect signi?cant returns. To attract the kind of bigwigs that any Silicon Valley start-up might, I made the following pitch: “There’s an entrepreneurial spirit among the poor, who earn extraordinarily high returns from their small businesses. You invest in us, we invest in them – and fortunes will come to both of you.” As a ?rst step, right after SKS broke even, I converted it to for-pro?t status and was able to get philanthropist Ravi Reddy to be a founding investor. Then I secured money from parties such as Unitus, a Seattlebased NGO that helps promote micro ?nance; the Small Industries Development Bank of India; and technology entrepreneur Vinod Khosla. Later, we landed Sequoia, a premier venture capital ?rm that was an early investor in Google. With our performance strong and these power players on board, SKS

was able to attract multimillion-dollar lines of credit from Citibank, ABN Amro, and others. Standardize products, training, and other processes in order to boost capacity. Taking a cue from giants like Starbucks and McDonald’s, SKS standardized its products and frontline processes. Instead of getting, say, 23 rupees from one villager and 27 from another, all in coins, our loan of?cers collected standard repayments in round numbers of 25 or 30 rupees. Internally, we adopted the factory-style training models that had helped the corporate giants scale up so rapidly – and thereby boosted our own workforce capabilities and growth. To this day, we walk our employees (all of whom come from poor villages themselves) through a series of highly simpli?ed and experiential learning modules. We enroll about 500 new

on paper, in three separate locations: passbooks, collection sheets, and backof?ce ledgers. A loan of?cer who has 450 customers with two products each must make 2,700 manual entries a week or more than 140,000 a year. Imagine how many missed zeroes and transposed digits there might be, particularly with a low-skilled workforce? So we digitized the process. Because we couldn’t ?nd software that suited us, we enlisted vendors to help us build our own – a suite of simple, user-friendly applications that a computer-illiterate loan of?cer with a 12th grade education can easily learn. Since the loan repayments are standardized, the ?elds in the online forms are prepopulated and only the exceptions must be entered. The system is also internet-enabled, so loan of?cers can send their summary data to the head of?ce within hours after their morning

loan of?cers every month. They participate in theory classes on Saturdays and practice what they’ve learned in the ?eld during the week. At most micro?nance organizations, it takes four to six months of training for a loan of?cer to become productive; we have shortened that to two months and hope to cut it to one. Use technology to reduce costs and limit errors. Most micro?nance organizations record all their transactions

?eld meetings. (Given that electricity is unreliable in many areas, we’ve installed car batteries or gas-powered generators as backups.) More recently, we’ve been experimenting with mobile text-messaging payment applications and biometric authentication technologies. These improvements offer our borrowers the convenience of settling their accounts online and our loan of?cers a measure of protection from cash-hungry thugs.

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First Person Business Basics at the Base of the Pyramid

Scaling Up Customer Loyalty Perhaps the most critical factor in our growth (and maybe one not so obvious to most companies that want to do business at the base of the pyramid) has been our extreme focus on the customer. In everything we do, we ask, “Does this work for the borrower?” – even if it means operating against our own shortterm interests. It’s hard to identify what’s best for the Indian customer without immersing yourself in the rhythms of her village. We’ve succeeded by engaging poor communities in culturally appropriate ways. When we were ?rst scouting mar-

kets and collecting information about potential borrowers, for instance, we relied on some of the visual exercises from my days as a DDS ?eld agent. Instead of asking villagers, who are often illiterate, to describe the seasonal pattern of their cash-?ow needs, we had them diagram it with sticks, seeds, and coins. We encouraged them to use colored chalk powder and ?owers to map out the village on the ground – indirectly telling us where the poorest people lived, what kind of ?nancial products they needed, which areas were lorded over by which loan sharks, and so on. I personally sat in tea stalls and lunched in roadside diners,

talking informally and forging bonds with potential borrowers. Using this local knowledge, we designed a set of products and a delivery mechanism speci?cally for our customers. For example, based on what we learned from the visual exercises about how money ebbed and ?owed from households – when pay day was, when bills came due, what ?nancial crises families faced – we set people’s tiny weekly repayments as low as $1 per week. In the same vein, our health insurance and whole-life insurance premiums are only $10 a year and 25 cents a week, respectively. We also offer interest-free emer-

56756756756756756756756756756756756756 RISE TO ANY CHALLENGE, such as making global connections. 56756756756756756756756756756756756756
With an approach that inspires you to put your ideas into action, the Kellogg Executive MBA Program can help you fulfill your aspirations. And with a global network of programs in Europe, Asia, the Middle East and the Americas, you can fulfill them almost anywhere. Visit www.kellogg.northwestern.edu/emba or call 847-491-3100 to sign up for an upcoming information session.

gency loans. All these products are costly to administer. For example, we are borrowing the funds we use for emergency loans at commercial rates. We do it anyway because the customer needs a safety net when, say, her family’s hut catches ?re or she can’t resume her manual work after complications during childbirth. Our customer-?rst philosophy also extends to our processes and systems. The salaries of loan of?cers, for example, aren’t tied to repayment rates or the size of their loan portfolios – something probably unheard of in mainstream ?nancial services. We don’t want our loan of?cers, because of pressure to make their numbers, to collect from a borrower who’s in a dif?cult situation or to try to lend her more than she needs. Instead of having borrowers visit a branch

costs, we are growing at nearly 200% annually, adding 50 branches and 160,000 new customers a month. The customer growth slope is getting steeper, so we are on track to reach 8 million clients by 2010. The next step is to leverage our brand to expand an already broad distribution network. With our huge base of borrowers, we can say to makers of soap, clothes, consumer electronics, and other packaged goods, “Source high-quality products to us at the lowest cost available, and we can guarantee you a large market share.” We’ve already done such deals with Indian insurers ICICI Lombard and Bajaj Allianz, and telecom providers Nokia and Airtel. For instance, we supply borrowers with Nokia cell phones and airtime at lower prices than

UPCOMING EMBA INFORMATION SESSIONS: Tuesday, April 22
Miami, FL

Friday, April 25
Evanston, IL

Friday, May 9
Evanston, IL

Thursday, May 15
Miami, FL

Our loan of?cers journey on mopeds to borrowers’ villages and schedule loan meetings as early as 7:00 AM.
of?ce, our loan of?cers journey on mopeds to their villages and schedule loan meetings as early as 7:00 am so that the women don’t miss part of the workday. We do this even though the costs of travel are quite high. It’s not just the gasoline; our of?cers brave monsoons, summer heat, and sometimes harrowing driving conditions on rough dirt roads. Our reward for these efforts? Deep customer loyalty that ultimately results in a 99.5% repayment rate. the marketplace offers. We’ve also been approached by electronics manufacturers, retailers, and others that want to utilize our channel. The bottom line: Our borrowers get high-quality, low-cost goods. Our suppliers also ?nd new market segments, and SKS and its investors see a small pro?t margin. Of course, Sequoia is not particularly interested in tiny margins. But when you bundle 15 or 20 products to 8 million customers, with a small pro?t earned on each, well, that’s Google territory.
Vikram Akula (vikram@sksindia.com)

Tuesday, June 10
Evanston, IL

Thursday, June 26
Miami, FL

Thursday, June 26
Minneapolis, MN

Wednesday, July 9
Cleveland, OH

Thursday, July 10
Cincinnati, OH

Leveraging the SKS Brand How can razor-thin margins and costly customer relationships lead to high returns? The payoff comes with volume. Over the past 10 years, SKS has provided $725 million in unsecured microloans and insurance products to over 2 million people in 30,000 Indian villages and slums. Because of the changes we’ve made related to capital, capacity, and

is the founder and CEO of SKS Micro?nance, an India-based provider of small business loans and other ?nancial services to poor women.
Reprint R0806B To order, see page 143.

Visit www.kellogg.northwestern.edu/emba or call 847-491-3100 to sign up for one of these upcoming information sessions.

SPECIAL ADVERTISING SECTION

Delivering High Performance

Using Enterprise Systems to

Create Distinctive Capabilities

T

here’s no longer any real argument about whether enterprise systems add value. What is surprising, however, according to Accenture research, is the extent to which high-performance businesses use enterprise systems as the platform on which to create distinctive capabilities—those that are differentiated from competitors’ capabilities. “The stereotype of enterprise systems as commoditized, packaged software is now obsolete,” says James Hayes, managing director, Oracle business for Accenture. “Our research shows that the best performers know how to use their enterprise systems to create the distinctive capabilities that drive high performance. ” Accenture conducted a four-part survey of experts and senior executives in 34 countries and 19 major industries, updating a similar survey done previously. Fully 91 percent of the 450 respondents said enterprise systems contributed either “to a very large extent” or “substantially” to distinctive capabilities, which the survey defined as “integrated business processes and capabilities that together serve customers in ways that are differentiated from competitors. ” Three factors in particular determine whether a company will obtain this kind of business value from its enterprise systems, says Jeanne Harris, executive research fellow for the Accenture Institute of High Performance Business. They are: ? The extent to which operations are integrated. ? The degree of business process optimization. ? The amount of data analysis used in decision making. Of the three, the updated survey revealed that companies are paying much more attention to developing an analytical capability for better decision making. In the earlier survey, only 28 percent of the respondents said their organizations had an above-average or outstanding analytical capability, compared with 57 percent in the second survey. High performers understand the correlation between business results and the use of analytics, Harris explains. “They realize that the use of information from enterprise systems is how an organization differentiates itself,” she says. Companies that emphasize the use of business intelligence and analytics software are better able to out-perform their peers. In addition to analytics, other IT-enabled outcomes that respondents rated highly as contributors to the creation of
FOR MORE INFORMATION

THE LINK BETWEEN ENTERPRISE SYSTEMS AND DISTINCTIVE CAPABILITIES Survey respondents rate to what extent their enterprise systems’ enabled capabilities contribute to their distinctive capabilities (% of respondents).
(some totals exceed 100% due to rounding)

Integrated critical processes
28 38 32 44 36 28 28 23 25 24
20 40

23 27 30 36 33 33 18 22 40 16 22
80

7 4 18 5 10 2 11 4 20 6 9 10 12 13
100

Using IT as a strategic asset
18 15

Analytics for decision making Accurate planning
13 13 11 11 8 8
0

Enabling flexibility to adapt to change Monitoring/measuring progress against aggressive or stretch goals Investing resources in alignment with strategic objectives
34

Understanding how the organization creates value Insight into customers
34
60

To a very large extent Somewhat Slightly
Source: Accenture

Substantially Not at all

distinctive capabilities include integrated critical processes and using IT as a strategic asset (see chart, “The Link Between Enterprise Systems and Distinctive Capabilities”). The Accenture research proves that, although controversial in the past, enterprise systems can add business value. In addition, the research shows that an organization’s distinctive capabilities are often enhanced by the significant business value derived from enterprise systems. Indeed, the Accenture research demonstrates that high performers are acting on that insight today. ■

The Research Report
To read the research report on new growth from enterprise systems, go to: http://accenture.com/newgrowthreport

More on High Performance Business
To see insights from Accenture’s research and experience, including its study of more than 500 high performers, go to: http://accenture.com/research

Using Enterprise Systems
To learn more about using enterprise systems to gain competitive advantage, go to: http://accenture.com/enterprisesystems

? 2008 Accenture. All rights reserved.

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The Secrets to Successful

STRATEGY EXECUTION
Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness – decision rights and information ?ow.
by Gary L. Neilson, Karla L. Martin, and Elizabeth Powers

A
A BRILLIANT STRATEGY,

Jacob Thomas

blockbuster product, or breakthrough technology can put you on the competitive map, but only solid execution can keep you there. You have to be able to deliver on your intent. Unfortunately, the majority of companies aren’t very good at it, by their own admission. Over the past ?ve years, we have invited many thousands of employees (about 25% of whom came from executive ranks) to complete an online assessment of their organizations’ capabilities, a process that’s generated a database of 125,000 pro?les representing more than 1,000 companies, government agencies, and not-forpro?ts in over 50 countries. Employees at three out of every ?ve

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This time, management looked beyond lines and boxes to companies rated their organization weak at execution – that the mechanics of how work got done. Instead of searching is, when asked if they agreed with the statement “Important for ways to strip out costs, they focused on improving execustrategic and operational decisions are quickly translated into tion – and in the process discovered the true reasons for the action,” the majority answered no. performance shortfall. Managers didn’t have a clear sense of Execution is the result of thousands of decisions made evtheir respective roles and responsibilities. They did not intuiery day by employees acting according to the information tively understand which decisions were theirs to make. Morethey have and their own self-interest. In our work helping over, the link between performance and rewards was weak. more than 250 companies learn to execute more effectively, This was a company long on micromanaging and secondwe’ve identi?ed four fundamental building blocks executives guessing, and short on accountabilcan use to in?uence those ity. Middle managers spent 40% of actions – clarifying decision their time justifying and reporting rights, designing information upward or questioning the tactical flows, aligning motivators, decisions of their direct reports. and making changes to strucWhen a company fails to execute its strategy, the ?rst thing Armed with this understanding, ture. (For simplicity’s sake managers often think to do is restructure. But our research the company designed a new manwe refer to them as decision shows that the fundamentals of good execution start with agement model that established rights, information, motivaclarifying decision rights and making sure information ?ows who was accountable for what and tors, and structure.) where it needs to go. If you get those right, the correct strucmade the connection between perIn efforts to improve perture and motivators often become obvious. formance and reward. For instance, formance, most organizathe norm at this company, not untions go right to structural Information 54 usual in the industry, had been to measures because moving promote people quickly, within 18 lines around the org chart Decision Rights 50 months to two years, before they seems the most obvious soluMotivators 26 had a chance to see their initiation and the changes are vistives through. As a result, managible and concrete. Such steps Structure 25 ers at every level kept doing their generally reap some shortRelative Strength (out of 100) old jobs even after they had been term ef?ciencies quickly, but promoted, peering over the shoulin so doing address only the ders of the direct reports who were now in charge of their symptoms of dysfunction, not its root causes. Several years projects and, all too frequently, taking over. Today, people later, companies usually end up in the same place they started. stay in their positions longer so they can follow through on Structural change can and should be part of the path to imtheir own initiatives, and they’re still around when the fruits proved execution, but it’s best to think of it as the capstone, of their labors start to kick in. What’s more, results from those not the cornerstone, of any organizational transformation. In initiatives continue to count in their performance reviews for fact, our research shows that actions having to do with decisome time after they’ve been promoted, forcing managers to sion rights and information are far more important – about live with the expectations they’d set in their previous jobs. As twice as effective – as improvements made to the other two a consequence, forecasting has become more accurate and building blocks. (See the exhibit “What Matters Most to Stratreliable. These actions did yield a structure with fewer layers egy Execution.”) and greater spans of control, but that was a side effect, not the Take, for example, the case of a global consumer packagedprimary focus, of the changes. goods company that lurched down the reorganization path in the early 1990s. (We have altered identifying details in this and other cases that follow.) Disappointed with company The Elements of Strong Execution performance, senior management did what most compaOur conclusions arise out of decades of practical application nies were doing at that time: They restructured. They elimiand intensive research. Nearly ?ve years ago, we and our colnated some layers of management and broadened spans of leagues set out to gather empirical data to identify the actions control. Management-staf?ng costs quickly fell by 18%. Eight that were most effective in enabling an organization to impleyears later, however, it was déjà vu. The layers had crept back ment strategy. What particular ways of restructuring, motiin, and spans of control had once again narrowed. In advating, improving information ?ows, and clarifying decision dressing only structure, management had attacked the visrights mattered the most? We started by drawing up a list of 17 ible symptoms of poor performance but not the underlying traits, each corresponding to one or more of the four building cause – how people made decisions and how they were held blocks we knew could enable effective execution – traits like accountable. the free ?ow of information across organizational boundaries

What Matters Most to Strategy Execution

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The 17 Fundamental Traits of Organizational Effectiveness
From our survey research drawn from more than 26,000 people in 31 companies, we have distilled the traits that make organizations effective at implementing strategy. Here they are, in order of importance.
STRENGTH INDEX RANK ORGANIZATION TRAIT
(OUT OF 100)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Everyone has a good idea of the decisions and actions for which he or she is responsible. Important information about the competitive environment gets to headquarters quickly. Once made, decisions are rarely second-guessed. Information ?ows freely across organizational boundaries. Field and line employees usually have the information they need to understand the bottom-line impact of their day-to-day choices. Line managers have access to the metrics they need to measure the key drivers of their business. Managers up the line get involved in operating decisions. Con?icting messages are rarely sent to the market. The individual performance-appraisal process differentiates among high, adequate, and low performers. The ability to deliver on performance commitments strongly in?uences career advancement and compensation. It is more accurate to describe the culture of this organization as “persuade and cajole” than “command and control.” The primary role of corporate staff here is to support the business units rather than to audit them. Promotions can be lateral moves (from one position to another on the same level in the hierarchy). Fast-track employees here can expect promotions more frequently than every three years. On average, middle managers here have ?ve or more direct reports. If the ?rm has a bad year, but a particular division has a good year, the division head would still get a bonus. Besides pay, many other things motivate individuals to do a good job.

81

68 58 58

55

48 32 32 32

32

29

29

29

23

19

13

10

BUILDING BLOCKS

Decision Rights

Information

Motivators

Structure

or the degree to which senior leaders refrain from getting involved in operating decisions. With these factors in mind, we developed an online pro?ler that allows individuals to assess the execution capabilities of their organizations. Over the next four years or so, we collected data from many thousands of pro?les, which in turn allowed us to more precisely calibrate the impact of each trait on an organization’s ability to execute. That allowed us to rank all 17 traits in order of their relative in?uence. (See the exhibit “The 17 Fundamental Traits of Organizational Effectiveness.) Ranking the traits makes clear how important decision rights and information are to effective strategy execution. The ?rst eight traits map directly to decision rights and information. Only three of the 17 traits relate to structure, and none of those ranks higher than 13th. We’ll walk through the top ?ve traits here. 1. Everyone has a good idea of the decisions and actions for which he or she is responsible. In companies strong on execution, 71% of individuals agree with this statement; that ?gure drops to 32% in organizations weak on execution. Blurring of decision rights tends to occur as a company matures. Young organizations are generally too busy getting things done to de?ne roles and responsibilities clearly at the outset. And why should they? In a small company, it’s not so dif?cult to know what other people are up to. So for a time, things work out well enough. As the company grows, however, executives come and go, bringing in with them and taking away different expectations, and over time the approval process gets ever more convoluted and murky. It becomes increasingly unclear where one person’s accountability begins and another’s ends. One global consumer-durables company found this out the hard way. It was so rife with people making competing and con?icting decisions that it was hard to ?nd anyone below the CEO who felt truly accountable for pro?tability. The company was organized into 16 product divisions aggregated into three geographic groups – North America, Europe, and International. Each of the divisions was charged with reaching explicit performance targets, but functional staff at corporate headquarters controlled spending targets – how R&D dollars were allocated, for instance. Decisions made by divisional and geographic leaders were routinely overridden by functional leaders. Overhead costs began to mount as the divisions added staff to help them create bulletproof cases to challenge corporate decisions. Decisions stalled while divisions negotiated with functions, each layer weighing in with questions. Functional staffers in the divisions (?nancial analysts, for example) often deferred to their higher-ups in corporate rather

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than their division vice president, since functional leaders were responsible for rewards and promotions. Only the CEO and his executive team had the discretion to resolve disputes. All of these symptoms fed on one another and collectively hampered execution – until a new CEO came in. The new chief executive chose to focus less on cost control and more on pro?table growth by rede?ning the divisions to focus on consumers. As part of the new organizational model, the CEO designated accountability for pro?ts unambiguously to the divisions and also gave them the authority to draw on functional activities to support their goals (as well as more control of the budget). Corporate functional roles and decision rights were recast to better support the divisions’ needs and also to build the cross-divisional links necessary for developing the global capabilities of the business as a whole. For the most part, the functional leaders understood the market realities – and that change entailed some adjustments to the operating model of the business. It helped that the CEO brought them into the organizational redesign process, so that the new model wasn’t something imposed on them as much as it was something they engaged in and built together. 2. Important information about the competitive environment gets to headquarters quickly. On average, 77% of individuals in strong-execution organizations agree with this statement, whereas only 45% of those in weak-execution organizations do. Headquarters can serve a powerful function in identifying patterns and promulgating best practices throughout business segments and geographic regions. But it can play this coordinating role only if it has accurate and up-to-date market intelligence. Otherwise, it will tend to impose its own agenda and policies rather than defer to operations that are much closer to the customer. Consider the case of heavy-equipment manufacturer Caterpillar.1 Today it is a highly successful $45 billion global company, but a generation ago, Caterpillar’s organization was so

About the Data
We tested organizational effectiveness by having people ? ll out an online diagnostic, a tool comprising 19 questions (17 that describe organizational traits and two that describe outcomes). To determine which of the 17 traits in our pro? ler are most strongly associated with excellence in execution, we looked at 31 companies in our database for which we had responses from at least 150 individual (anonymously completed) pro? les, for a total of 26,743 responses. Applying regression analysis to each of the 31 data sets, we correlated the 17 traits with our measure of organizational effectiveness, which we de?ned as an af?rmative response to the outcome statement, “Important strategic and operational decisions are quickly translated into action.” Then we ranked the traits in order, according to the number of data

badly misaligned that its very existence was threatened. Decision rights were hoarded at the top by functional general of?ces located at headquarters in Peoria, Illinois, while much of the information needed to make those decisions resided in the ?eld with sales managers. “It just took a long time to get decisions going up and down the functional silos, and they really weren’t good business decisions; they were more functional decisions,” noted one ?eld executive. Current CEO Jim Owens, then a managing director in Indonesia, told us that such information that did make it to the top had been “whitewashed and varnished several times over along the way.” Cut off from information about the external market, senior executives focused on the organization’s internal workings, overanasets in which the trait exhibited lyzing issues and second-guessing a signi?cant correlation with our decisions made at lower levels, costmeasure of success within a 90% ing the company opportunities in con?dence interval. Finally, we fast-moving markets. indexed the result to a 100-point Pricing, for example, was based scale. The top trait – “Everyone on cost and determined not by has a good idea of the decisions market realities but by the pricing and actions for which he or she general of?ce in Peoria. Sales repreis responsible” – exhibited a sentatives across the world lost sale signi?cant positive correlation after sale to Komatsu, whose comwith our success indicator in 25 petitive pricing consistently beat of the 31 data sets, for an index Caterpillar’s. In 1982, the company score of 81.

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posted the ?rst annual loss in its almost-60-year history. In 1983 and 1984, it lost $1 million a day, seven days a week. By the end of 1984, Caterpillar had lost a billion dollars. By 1988, then-CEO George Schaefer stood atop an entrenched bureaucracy that was, in his words, “telling me what I wanted to hear, not what I needed to know.” So, he convened a task force of “renegade” middle managers and tasked them with charting Caterpillar’s future. Ironically, the way to ensure that the right information ?owed to headquarters was to make sure the right decisions were made much further down the organization. By delegating operational responsibility to the people closer to the action, top executives were free to focus on more global strategic issues. Accordingly, the company reorganized into business units, making each accountable for its own P&L statement. The functional general of?ces that had been allpowerful ceased to exist, literally overnight. Their talent and expertise, including engineering, pricing, and manufacturing,

ing second-guessed, whereas only 45% of those from strongexecution organizations felt that way. Recently, we worked with a global charitable organization dedicated to alleviating poverty. It had a problem others might envy: It was suffering from the strain brought on by a rapid growth in donations and a corresponding increase in the depth and breadth of its program offerings. As you might expect, this nonpro?t was populated with people on a mission who took intense personal ownership of projects. It did not reward the delegation of even the most mundane administrative tasks. Country-level managers, for example, would personally oversee copier repairs. Managers’ inability to delegate led to decision paralysis and a lack of accountability as the organization grew. Second-guessing was an art form. When there was doubt over who was empowered to make a decision, the default was often to have a series of meetings in which no decision was reached. When decisions were ?nally made, they had generally been vetted by so many parties that no one person could

Second-guessing was an art form: When decisions were ?nally made, they had generally been vetted by so many parties that no one person could be held accountable.
were parceled out to the new business units, which could now design their own products, develop their own manufacturing processes and schedules, and set their own prices. The move dramatically decentralized decision rights, giving the units control over market decisions. The business unit P&Ls were now measured consistently across the enterprise, as return on assets became the universal measure of success. With this accurate, up-to-date, and directly comparable information, senior decision makers at headquarters could make smart strategic choices and trade-offs rather than use outdated sales data to make ineffective, tactical marketing decisions. Within 18 months, the company was working in the new model. “This was a revolution that became a renaissance,” Owens recalls, “a spectacular transformation of a kind of sluggish company into one that actually has entrepreneurial zeal. And that transition was very quick because it was decisive and it was complete; it was thorough; it was universal, worldwide, all at one time.” 3. Once made, decisions are rarely second-guessed. Whether someone is second-guessing depends on your vantage point. A more senior and broader enterprise perspective can add value to a decision, but managers up the line may not be adding incremental value; instead, they may be stalling progress by redoing their subordinates’ jobs while, in effect, shirking their own. In our research, 71% of respondents in weak-execution companies thought that decisions were bebe held accountable. An effort to expedite decision-making through restructuring – by collocating key leaders with subjectmatter experts in newly established central and regional centers of excellence – became instead another logjam. Key managers still weren’t sure of their right to take advantage of these centers, so they didn’t. The nonpro?t’s management and directors went back to the drawing board. We worked with them to design a decision-making map, a tool to help identify where different types of decisions should be taken, and with it they clari?ed and enhanced decision rights at all levels of management. All managers were then actively encouraged to delegate standard operational tasks. Once people had a clear idea of what decisions they should and should not be making, holding them accountable for decisions felt fair. What’s more, now they could focus their energies on the organization’s mission. Clarifying decision rights and responsibilities also improved the organization’s ability to track individual achievement, which helped it chart new and appealing career-advancement paths. 4. Information ?ows freely across organizational boundaries. When information does not ?ow horizontally across different parts of the company, units behave like silos, forfeiting economies of scale and the transfer of best practices. Moreover, the organization as a whole loses the opportunity to develop a cadre of up-and-coming managers well versed in all aspects of the company’s operations. Our research indicates that only

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21% of respondents from weak-execution companies thought information ?owed freely across organizational boundaries whereas 55% of those from strong-execution ?rms did. Since scores for even the strong companies are pretty low, though, this is an issue that most companies can work on. A cautionary tale comes from a business-to-business company whose customer and product teams failed to collaborate in serving a key segment: large, cross-product customers. To manage relationships with important clients, the company had established a customer-focused marketing group, which developed customer outreach programs, innovative pricing models, and tailored promotions and discounts. But this group issued no clear and consistent reports of its initiatives and progress to the product units and had dif?culty securing time with the regular cross-unit management to discuss key performance issues. Each product unit communicated and planned in its own way, and it took tremendous energy for the customer group to understand the units’ various priorities and tailor communications to each one. So the units were not aware, and had little faith, that this new division was making constructive inroads into a key customer segment. Conversely (and predictably), the customer team felt the units paid only perfunctory attention to its plans and couldn’t get their cooperation on issues critical to multiproduct customers, such as potential trade-offs and volume discounts.

bounded by the information available to employees. If managers don’t understand what it will cost to capture an incremental dollar in revenue, they will always pursue the incremental revenue. They can hardly be faulted, even if their decision is – in the light of full information – wrong. Our research shows that 61% of individuals in strong-execution organizations agree that ?eld and line employees have the information they need to understand the bottom-line impact of their decisions. This ?gure plummets to 28% in weak-execution organizations. We saw this unhealthy dynamic play out at a large, diversi?ed ?nancial-services client, which had been built through a series of successful mergers of small regional banks. In combining operations, managers had chosen to separate front-of?ce bankers who sold loans from back-of?ce support groups who did risk assessments, placing each in a different reporting relationship and, in many cases, in different locations. Unfortunately, they failed to institute the necessary information and motivation links to ensure smooth operations. As a result, each pursued different, and often competing, goals. For example, salespeople would routinely enter into highly customized one-off deals with clients that cost the company more than they made in revenues. Sales did not have a clear understanding of the cost and complexity implications of these transactions. Without suf?cient information, sales staff believed that the back-end people were sabotaging their deals,

To help companies construct an improvement program with the greatest impact, we’ve developed an organizational-change simulator.
Historically, this lack of collaboration hadn’t been a problem because the company had been the dominant player in a high-margin market. But as the market became more competitive, customers began to view the ?rm as unreliable and, generally, as a dif?cult supplier, and they became increasingly reluctant to enter into favorable relationships. Once the issues became clear, though, the solution wasn’t terribly complicated, involving little more than getting the groups to talk to one another. The customer division became responsible for issuing regular reports to the product units showing performance against targets, by product and geographic region, and for supplying a supporting root-cause analysis. A standing performance-management meeting was placed on the schedule every quarter, creating a forum for exchanging information face-to-face and discussing outstanding issues. These moves bred the broader organizational trust required for collaboration. 5. Field and line employees usually have the information they need to understand the bottom-line impact of their day-to-day choices. Rational decisions are necessarily while the support groups considered the front-end people to be cowboys. At year’s end, when the data were ?nally reconciled, management would bemoan the sharp increase in operational costs, which often erased the pro?t from these transactions. Executives addressed this information misalignment by adopting a “smart customization” approach to sales. They standardized the end-to-end processes used in the majority of deals and allowed for customization only in select circumstances. For these customized deals, they established clear back-of?ce processes and analytical support tools to arm salespeople with accurate information on the cost implications of the proposed transactions. At the same time, they rolled out common reporting standards and tools for both the front- and back-of?ce operations to ensure that each group had access to the same data and metrics when making decisions. Once each side understood the business realities confronted by the other, they cooperated more effectively, acting in the whole company’s best interests – and there were no more year-end surprises.

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Creating a Transformation Program
The four building blocks that managers can use to improve strategy execution – decision rights, information, structure, and motivators – are inextricably linked. Unclear decision rights not only paralyze decision making but also impede information ?ow, divorce performance from rewards, and prompt work-arounds that subvert formal reporting lines. Blocking information results in poor decisions, limited career development, and a reinforcement of structural silos. So what to do about it? Since each organization is different and faces a unique set of internal and external variables, there is no universal answer to that question. The ?rst step is to identify the sources of the problem. In our work, we often begin by having a company’s employees take our pro?ling survey and consolidating the results. The more people in the organization who take the survey, the better. Once executives understand their company’s areas of weakness, they can take any number of actions. The exhibit, “Mapping Improvement Tactics to the Building Blocks” shows 15 possible steps that can have an impact on performance. (The options listed represent only a sampling of the dozens of choices managers might make.) All of these actions are geared toward strengthening one or more of the 17 traits. For example, if you were to take steps to “clarify and streamline decision making” you could potentially strengthen two traits: “Everyone has a good idea of the decisions and actions for which he or she is responsible,” and “Once made, decisions are rarely second-guessed.” You certainly wouldn’t want to put 15 initiatives in a single transformation program. Most organizations don’t have the managerial capacity or organizational appetite to take on more than ?ve or six at a time. And as we’ve stressed, you should ?rst take steps to address decision rights and information, and then design the necessary changes to motivators and structure to support the new design. To help companies understand their shortcomings and construct the improvement program that will have the greatest impact, we have developed an organizational-change simulator. This interactive tool accompanies the pro?ler, allowing you to try out different elements of a change program virtually, to see which ones will best target your company’s particular area of weakness. (For an overview of the simulation process, see the sidebar “Test Drive Your Organization’s Transformation.”) To get a sense of the process from beginning to end – from taking the diagnostic pro?ler, to formulating your strategy, to launching your organizational transformation – consider the experience of a leading insurance company we’ll call Goodward Insurance. Goodward was a successful company with strong capital reserves and steady revenue and customer growth. Still, its leadership wanted to further enhance execution to deliver on an ambitious ?ve-year strategic agenda

Mapping Improvements to the Building Blocks: Some Sample Tactics
Companies can take a host of steps to improve their ability to execute strategy. The 15 here are only some of the possible examples. Every one strengthens one or more of the building blocks executives can use to improve their strategy-execution capability: clarifying decision rights, improving information, establishing the right motivators, and restructuring the organization.

Focus corporate staff on supporting business-unit decision making. Clarify and streamline decision making at each operating level. Focus headquarters on important strategic questions. Create centers of excellence by consolidating similar functions into a single organizational unit. Assign process owners to coordinate activities that span organizational functions. Establish individual performance measures. Improve ?eld-to-headquarters information ?ow. De?ne and distribute daily operating metrics to the ?eld or line. Create cross-functional teams. Introduce differentiating performance awards. Expand nonmonetary rewards to recognize exceptional performers. Increase position tenure. Institute lateral moves and rotations. Broaden spans of control. Decrease layers of management.

BUILDING BLOCKS

Decision Rights

Information

Motivators

Structure

that included aggressive targets in customer growth, revenue increases, and cost reduction, which would require a new level of teamwork. While there were pockets of cross-unit collaboration within the company, it was far more common for each unit to focus on its own goals, making it dif?cult to spare resources to support another unit’s goals. In many cases there was little incentive to do so anyway: Unit A’s goals might require the involvement of Unit B to succeed, but Unit B’s goals might not include supporting Unit A’s effort.

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The Secrets to Successful Strategy Execution

The company had initiated a number of enterprisewide projects over the years, which had been completed on time and on budget, but these often had to be reworked because stakeholder needs hadn’t been suf?ciently taken into account. After launching a shared-services center, for example, the company had to revisit its operating model and processes when units began hiring shadow staff to focus on priority work that the center wouldn’t expedite. The center might decide what technology applications, for instance, to develop on its own rather than set priorities according to what was most important to the organization. In a similar way, major product launches were hindered by insuf?cient coordination among departments. The marketing department would develop new coverage options without asking the claims-processing group whether it had the ability to process the claims. Since it didn’t, processors had to create expensive manual work-arounds when the new kinds of claims started pouring in. Nor did marketing ask the actuarial department how these products would affect the risk pro?le and reimbursement expenses of the company, and for some of the new products, costs did indeed increase. To identify the greatest barriers to building a stronger execution culture, Goodward Insurance gave the diagnostic survey to all of its 7,000-plus employees and compared the organization’s scores on the 17 traits with those from strongexecution companies. Numerous previous surveys (employeesatisfaction, among others) had elicited qualitative comments identifying the barriers to execution excellence. But the diagnostic survey gave the company quanti?able data that it could analyze by group and by management level to determine which barriers were most hindering the people actually charged with execution. As it turned out, middle management was far more pessimistic than the top executives in their assessment of the organization’s execution ability. Their input became especially critical to the change agenda ultimately adopted. Through the survey, Goodward Insurance uncovered impediments to execution in three of the most in?uential organizational traits: Information did not ?ow freely across organizational boundaries. Sharing information was never one of Goodward’s hallmarks, but managers had always dismissed the mounting anecdotal evidence of poor cross-divisional information ?ow as “some other group’s problem.” The organizational diagnostic data, however, exposed such plausible deniability as an inadequate excuse. In fact, when the CEO reviewed the pro?ler results with his direct reports, he held up the chart on cross-group information ?ows and declared, “We’ve been discussing this problem for several years, and yet you always say that it’s so-and-so’s problem, not mine. Sixtyseven percent of [our] respondents said that they do not think information ?ows freely across divisions. This is not so-andso’s problem – it’s our problem. You just don’t get results that

Test-Drive Your Organization’s Transformation
You know your organization could perform better. You are faced with dozens of levers you could conceivably pull if you had unlimited time and resources. But you don’t. You operate in the real world. How, then, do you make the most-educated and costef?cient decisions about which change initiatives to implement? We’ve developed a way to test the ef?cacy of speci?c actions (such as clarifying decision rights, forming cross-functional teams, or expanding nonmonetary rewards) without risking signi?cant amounts of time and money. You can go to www. simulator-orgeffectiveness.com to assemble and try out various ? ve-step organizational-change programs and assess which would be the most effective and ef?cient in improving execution at your company. You begin the simulation by selecting one of seven organizational pro?les that most resembles the current state of your organization. If you’re not sure, you can take a ? ve-minute diagnostic survey. This online survey automatically generates an organizational pro?le and baseline execution-effectiveness score. (Although 100 is a perfect score, nobody is perfect; even the most effective companies often score in the 60s and 70s.) Having established your baseline, you use the simulator to chart a possible course you’d like to take to improve your execution capabilities by selecting ? ve out of a possible 28 actions. Ideally, these moves should directly address the weakest links in your organizational pro?le. To help you make the right choices, the simulator offers insights that shed further light on how a proposed action in?uences particular organizational elements. Once you have made your selections, the simulator executes the steps you’ve elected and processes them through a webbased engine that evaluates them using empirical relation-

low [unless it comes] from everywhere. We are all on the hook for ?xing this.” Contributing to this lack of horizontal information ?ow was a dearth of lateral promotions. Because Goodward had always promoted up rather than over and up, most middle and senior managers remained within a single group. They were not adequately apprised of the activities of the other groups, nor did they have a network of contacts across the organization. Important information about the competitive environment did not get to headquarters quickly. The diagnostic data and subsequent surveys and interviews with middle management revealed that the wrong information was moving up the org chart. Mundane day-to-day decisions were escalated to the executive level – the top team had to approve midlevel hiring decisions, for instance, and bonuses of $1,000 – limiting Goodward’s agility in responding to competitors’ moves,

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ships identi?ed from 31 companies representing more than 26,000 data observations. It then generates a bar chart indicating how much your organization’s execution score has improved and where it now stands in relation to the highest-performing companies from our research and the scores of other people like you who have used the simulator starting from the same original pro?le you did. If you wish, you may then advance to the next round and pick another ? ve actions. What you will see is illustrated above. The beauty of the simulator is its ability to consider – consequence-free – the impact on execution of endless combi-

nations of possible actions. Each simulation includes only two rounds, but you can run the simulation as many times as you like. The simulator has also been used for team competition within organizations, and we’ve found that it

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