093 Strategy+business Magazine Winter 2018 [PDF]

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GLOBAL INNOVATION 1000 • TATA’S NEW CHAIR • X FACTORS OF GREAT LEADERS

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editor’s letter 1

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A Fresh Take on Transformation Midway through the development of “The Four Building Blocks of Transformation,” by Al Kent, David Lancefield, and Kevin Reilly (page 60), the authors and I were challenged by one of the most senior executives at PwC. Asked to review the draft, he said it seemed stale: “It could have been written this way 75 years ago.” That led to a thorough revision and some soul-searching at strategy+business. We often say we’re looking for “timely originality” in our articles. But topics like transformation have been written about so much, they’re almost stale by definition. To think freshly — and productively — about change in organizations, we need to better understand how that change affects people. The four building blocks can help. The urgency of change is the underlying theme of “Leading a Bionic Transformation” (page 80). Miles Everson, John Sviokla, and Kelly Barnes expand on the idea of sparking dramatic organizational growth. It’s as if Moore’s Law is moving to another level: Instead of the microchip, it’s the enterprise whose capacity continually doubles.

Art Kleiner Editor-in-Chief kleiner_art@ strategy-business.com

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Several other articles are also relevant to those seeking to foster successful organizational change in their companies. “The Four X Factors of Exceptional Leaders,” by Merryck & Co experts David Reimer, Adam Bryant, and Harry Feuerstein, is based in part on their analysis of farsighted executives’ careers over many years (page 48). Another farsighted leader, Natarajan Chandrasekaran of Tata Sons (the core of India’s Tata group of companies), explains in our Thought Leader interview how he is revitalizing one of the world’s oldest and most proficient conglomerates (page 178). And Gary Ahlquist and John Petito explore how the pharma industry is — in the face of regulatory uncertainty — being thoroughly transformed by deals (page 26). This issue also contains two significant recurring features. First is our roundup of the Best Business Books of the year by leading business thinkers and journalists. This year we have Bethany McLean (on narratives), Sally Helgesen (on leadership), Theodore Kinni (on management), Ryan Avent (on economics), David Lancefield (on strategy), James Surowiecki (on innovation), and Catharine Taylor (on marketing). The collection, choreographed by executive editor Daniel Gross, begins on page 120. Second is the Global Innovation 1000, which highlights the world’s biggest public companies and their annual investments in research and development (page 96). Authors Barry Jaruzelski, Robert Chwalik, and Brad Goehle explain why the most successful launchers of new products and services are the smartest — not the most lavish — spenders on research and development, and how your company can become one. Fresh thinking is as valuable for innovation as it is for transformation. But we don’t seek timely originality for its own sake. We’re not looking for new ideas per se; we’re looking for the right ideas, new or old, on which we can base better practices. The importance of freshness, especially in these bionic times, is that it helps shake us out of our stale habits of mind. If we are thus prepared when the right old or new ideas cross our path, we’ll be better equipped to recognize them.

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LEADING IDEAS

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Why Is It So Hard to Trust a Blockchain? Steve Davies and Grainne McNamara A new PwC survey identifies the barriers to blockchain adoption and four strategies to overcome them.

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Getting Beyond Greenwashing Laura W. Geller IESE professor Pascual Berrone on why companies need to rethink their approach to sustainability.

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Gutenberg’s Revenge Bob Woods

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Books are the only form of physical media whose sales are growing.

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The M&A Activity Transforming Healthcare Gary Ahlquist and John Petito How deals are shaping the $450 billion industry that manages prescriptions in the United States.

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The Power of Price Points Thomas A. Stewart and Patricia O’Connell Customer segmentation is not just a revenue tool, but also a way to achieve excellence in execution.

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essays ORGANIZATIONS & PEOPLE

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Using Neuroscience to Make Feedback Work and Feel Better David Rock, Beth Jones, and Chris Weller Here’s how leaders can make an anxietyproducing process less stressful. STRATEGY & LEADERSHIP

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The Four X Factors of Exceptional Leaders David Reimer, Adam Bryant, and Harry Feuerstein Understanding what differentiates a great leader from a good leader will help companies make the right choices for the top jobs.

features STRATEGY & LEADERSHIP

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The Four Building Blocks of Transformation

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What the Top Innovators Get Right

Al Kent, David Lancefield, and Kevin Reilly

Barry Jaruzelski, Robert Chwalik, and Brad Goehle

How to lead the disruption of your own enterprise.

With careful attention to six key areas, companies can make the most of their R&D investment and outpace the competition.

78 Putting the Building Blocks to Work STRATEGY & LEADERSHIP

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THE GLOBAL INNOVATION 1000

Leading a Bionic Transformation Miles Everson, John Sviokla, and Kelly Barnes Three new kinds of capital give companies a new source of leverage and power.

83 Wealth in the 21st Century

102 Profiling the Global Innovation 1000 104 The 10 Most Innovative Companies 108 China’s R&D Success Story

STRATEGY

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Best Business Books 2018

154 Making the Leap

David Lancefield INNOVATION

NARRATIVES

122 American Tales

162 Technology Emerging

Bethany McLean

James Surowiecki

LEADERSHIP

MARKETING

130 Engagement Announcements

Sally Helgesen

170 Marketing Is Dead! Long Live Marketing!

Catharine P. Taylor MANAGEMENT

138 Revising the Managerial Playbook

Theodore Kinni

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Top Shelf

ECONOMICS

146 Value-Added History

Ryan Avent

THE THOUGHT LEADER INTERVIEW

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Natarajan Chandrasekaran Art Kleiner The chairman of Tata Sons says simplicity, synergy, and scale are the company’s mantras for the 21st century. ENDPAGE: RECENT RESEARCH

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What Happens When the Salary-Secrecy Taboo Is Broken? Matt Palmquist Employees who know what their bosses earn work harder, but the opposite is true if their colleague’s paycheck is bigger.

Cover illustration by Miguel Montaner

Issue 93, Winter 2018

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strategy+business

Published by PwC

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Leading Ideas

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Why Is It So Hard to Trust a Blockchain? A new PwC survey identifies the barriers to blockchain adoption and four strategies to overcome them. by Steve Davies and Grainne McNamara

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he rate of adoption for an emerging technology is influenced by how well it is understood and trusted. Potential adopters may feel anxious, or at least skeptical, about embracing a wholly new system — in particular, one that requires companies to rethink traditional ways of managing and sharing their data. This is perhaps especially true for blockchain, a technology whose very purpose is to fill gaps in confidence. Let’s dissect that paradox. Block-chain technology, by creating an immutable record of data transactions, should engender trust among its users. But survey data from a new global study by PwC reveals that trust issues are threatening to impede companies’ blockchain efforts at nearly every turn. This is not to say that companies aren’t experimenting: 84 percent of our survey respondents — representing a cross section of technology-focused leaders in 15 territories around the world — report at least some involvement with blockchain. To make the most of their initiatives, they’ll need to tackle their trust issues head-on. As with any emerging technology, there are challenges and doubts about blockchain’s reliability, speed, security, and scalability. Such doubts are only compounded by concerns regarding a lack of standardization and interoperability across blockchain systems. Moreover, many executives remain uncertain about what blockchain is and how it will change their business. Blockchain’s role as a dual-pronged change agent — as a new form of infrastructure and as a Blockchain Is Here. What’s Your Next Move? PwC’s inaugural global survey of 600 executives from 15 territories reveals the state of blockchain today. www.pwc.com/blockchainsurvey

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new way to digitize assets through tokens, including cryptocurrency — is not easy to explain. Another challenge is building trust among participants: A technology meant to bring consensus hits an early stumbling block on the need to design rules and standards. There’s a similar lack of comfort regarding regulation. The majority of regulators are still coming to terms with blockchain. Many territories have 44 percent of survey respondents reported that the begun studying and discussing the issues, particularly as they relate to fiinability to bring the network nancial services, but the overall regulatogether was a top barrier to tory environment remains unsettled. blockchain adoption. What’s a company to do? Clearly, blockchain has arrived. And those that adopt a wait-and-see mind-set risk falling behind the competition. But as our findings make clear, leaders should not swing to the opposite extreme by jumping in unprepared. Of the survey respondents who reported a blockchain project in the pilot stage, 54 percent said the effort sometimes or often hasn’t been justified by the result. This should be a call to more effective action. By focusing on four key strategies early in their blockchain efforts, companies can build trust and set themselves on a path to successful execution. 1. Make the business case. Developing and implementing a blockchain is not your traditional IT build. There’s no point in re-creating the old world, but with a blockchain at its core. The danger in not recognizing this paradigm shift from the outset is that companies will end up reasserting existing roles, processes, and business models. What they need is a commitment to a strategy that is suitably transformed from where they are today. And that begins with the business case. Start with a few questions: What are we trying to achieve strategically? What are the pain points, and which other stakeholders share them? How would we fund such an initiative? How might it be governed? 2. Build an industry ecosystem. Convening a group of stakeholders to agree collectively on a set of standards that will define the business model is perhaps the biggest challenge in blockchain: Forty-four percent of survey respondents reported that the inability to bring the network together was a top barrier to adoption. Participants have to decide the rules for participation, how to ensure that costs

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and benefits are allocated fairly, what risk and control framework can be used to address the shared architecture, and what governance mechanisms are in place, including continuous auditing and validation, to make certain that the blockchain functions as designed. 3. Determine the rules of engagement. The participants in a blockchain ecosystem need to decide what the operating standards will be and what various users will be able to see and do. The design begins with the strategic business model, which includes making decisions about whether the blockchain will be permissionless, and thus available to everyone, or permissioned (having various levels of permissions). Permissions determine participants’ roles and engagement with the blockchain, which can range from entering information or transactions to only viewing information. The choice of model isn’t automatic; organizations will decide based on design and use case con-siderations. They will also need to consider the type of network to establish. Forty percent of survey respondents reported that they were using permissioned blockchains, 34 percent were working with permissionless chains, and 26 percent were taking a hybrid approach (meaning the project they are working on uses a mix of permissioned and permissionless blockchains). 4. Navigate regulatory uncertainty. A well-designed blockchain validates data and eliminates the need for a central authority, such as a bank, clearinghouse, or government, to approve and process Cutting out a central authority transactions. Cutting out that central authority may reduce costs and delays, may reduce costs and delays, but it also removes the institutions that but it also removes the institutions that are important are important for ensuring market stability, combating fraud, and more. for ensuring market stability, There are indications that regulators combating fraud, and more. will eventually step in when it comes to blockchain, but that shouldn’t be a reason to slow progress. Yet among survey respondents, 27 percent believe that regulatory concerns are the number one barrier to blockchain adoption. This uncertainty is fairly consistent around the world, with the number of respondents who ranked regulatory concerns as their biggest barrier ranging from 17 percent in China to 38 percent in Germany.

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How Far Along Are Companies with Blockchain? Survey respondents described the current state of their company’s blockchain project.

20% 32% 10% 15% 7% 14%

research development pilot live paused no activity yet

Source: PwC Global Blockchain Survey, 2018

Steve Davies [email protected] is a partner with PwC UK, based in Edinburgh. He is PwC’s blockchain leader for the firm’s global network, working with clients on blockchain-related initiatives and business strategies in financial services, supply chain provenance, smart contract applications across various industries, and blockchain security.

Grainne McNamara [email protected] is a principal with PwC US, based in New York. She is the PwC US blockchain and cryptocurrency leader, specializing in delivering large transformation programs at top-tier banks.

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As a distributed, tamperproof ledger, a well-designed blockchain doesn’t just cut out intermediaries, reduce costs, and increase speed and reach. It also offers greater transparency and traceability for many business processes. Most companies will confront a variety of challenges as they seek to reap the rewards of this potential. Building trust — in the technology, in their strategy, in their network, and in the regulatory environment — is a critical first step. +

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Getting Beyond Greenwashing IESE professor Pascual Berrone on why companies need to rethink their approach to sustainability. by Laura W. Geller

Photograph courtesy of IESE Business School

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t’s good to be green, but it’s not easy. Changing the way products are made or packaged, abandoning longtime practices in favor of more eco-friendly options, or adopting new technologies to meet sustainability targets can involve high cost and risk. The temptation to greenwash — to appear to limit environmental impact without actually doing so — may rise. Pascual Berrone, professor of strategic management and the Schneider Electric Sustainability and Business Strategy Chair at IESE Business School in Madrid, has spent the last 10 years studying this phenomenon. Although the backlash against companies that commit greenwashing is typically swift, it doesn’t seem to be a deterrent. As consumers, we can see evidence of this practice everywhere, in claims of “all-natural” foods and cleaning supplies, of homes and appliances that purport to be energy efficient, of products that are falsely labeled biodegradable, and so on. Companies may feel more pressured than ever to tout their sustainability, amid global accords such as the United Nations’ Sustainable Development Goals and the Paris AgreePascual Berrone ment on climate change. Yet Ber-

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S+B: What determines how effective a company’s sustainability strategy will be? BERRONE: Sustainability is often equated with efficiency, but in my mind, sus-

tainability is really about transformation. To truly become green, you’ll need organization-wide commitment to change. One of the problems many companies have is that they make sustainability the responsibility of one team or department. They delegate their sustainability actions to this group of people, but it’s not truly integrated with the overall strategy of the company. If you want your sustainability effort to be honest and genuine and to create a positive impact on the environment, then it has to be company-wide, and the commitment has to come from the top. And that’s where the importance of the CEO “Sustainability is often kicks in. equated with efficiency, but In one study, my colleague and I in my mind, sustainability is set out to understand exactly how a really about transformation.” CEO’s power affected his or her company’s ability to undertake a sustainability transformation. We assessed environmental performance using an index that included seven key indicators: greenhouse gas emissions, other emissions, general waste, water abstraction, heavy metals, volatile organic compounds, and natural resource use. For this study, we distinguished between formal and informal power. Formal power is authority, or the right to direct the activities of others. Informal power is the ability to influence people through more intangible means. Here we defined informal power

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rone’s research indicates that greenwashing causes more harm than good, in terms of both companies’ standing in the world and their market value. When he meets with executives around the globe, he quantifies this harm in an attempt to dissuade future malpractice. Rather than letting what he calls “green lies” make him a cynic, Berrone maintains an optimistic view that corporations can, and will, do better — especially if they have a chief executive with the informal power to drive top-down change. Berrone recently spoke to s+b about how companies can approach sustainability in a way that effects real environmental improvement, by embracing it as part of their strategy and prioritizing action over rhetoric.

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S+B: What else needs to happen for sustainability to become more than lip service? BERRONE: I always say that there are three ways a company can improve or

minimize its negative impact on the environment. One is to reduce the number of customers it serves, and that’s certainly not beneficial from the economic standpoint of the firm. The second is to invite its customers to consume less. Again, this is not necessarily advisable. And the third is to make sure that the customers who consume their products — or services or solutions, or whatever they are offering the market — consume products that have less impact. The only way that we can reduce the impact per unit is through innovation. And I think this is another aspect of sustainability that some companies overlook. Company leaders believe they can basically copy and paste green solutions from other companies and other industries. I think this is a big mistake. As a company leader, you need to define what sustainability means to your company. You also need to recognize that many of the solutions for improving the environment may draw on knowledge from outside your organization. You need to be able to collaborate with others. It may be your customers, your suppliers, or NGOs. S+B: The kinds of changes we’re talking about can be daunting. What happens when companies decide to take a shortcut? BERRONE: When executives realize all the effort, time, and resources that are

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based on a CEO’s past experience in environmental projects, any awards a CEO might have received for being an environmental champion, and other sources of environmental knowledge. We found that CEOs with informal power are much better at improving environmental performance: A one-unit increase in a CEO’s informal power reduces the company’s environmental impact by about 8 percent, on average. The fact that a CEO has dedicated time and effort to environmental activities can be seen as evidence of the type of values that he or she has. In the end, the decisions of many CEOs are a reflection of what they believe in, what their values are. We also found that CEOs who exercise both types of power are able to achieve even better environmental performance. But we found no evidence that formal power on its own improves environmental performance.

S+B: What leads companies down this path? BERRONE: There are four main categories of drivers. The first is regulation.

Governments around the world have been pushing toward stricter environmental regulations when it comes to company operations. Because a company is making efforts to comply with the law, it may spin these efforts as something it is doing proactively — when the reality is that it’s something the company is required to do. The second driver is market related or customer related. Interest in sustainability has been running high over the last few decades. Companies may be tempted to highlight environmental features of their products, even if they don’t really have them, in order to gain access to environmentally conscious customers. The third driver is created by the organization itself. It might be that incentives are designed such that executives get perks, such as a bonus, by saying that they’ve taken certain actions or met certain targets when it comes to the environment. And the final driver happens at the individual level. People may be motivated by certain preferences or biases, or even by the thrill of telling a lie and getting away with it. Most commonly, it’s some combination of these drivers. When it comes down to it, if you really want to turn your company into a green company, it re-

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needed to adopt a more sustainable business model, they might be tempted to avoid the necessary investment in transformation and instead make their company appear to be more environmentally friendly than it really is. A company is greenwashing when it makes a claim that is either false or misleading regarding the environmental impact of its products, its practices, or its activities. For example, company leaders may say, “Our product is made with recycled materials,” but not say what percentage of the product is composed of these materials. It could be 50 percent or it could be 1 percent. And they say nothing about the impact of their manufacturing process on the environment. I would add another element to this definition, which is that companies make these false or inaccurate claims with the intention of obtaining some benefit. There’s a bit of debate in the [academic] literature about whether the term greenwashing implies intentionality, but for me, it does.

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quires significant commitment in terms of time, resources, and people. It also entails a lot of risk. There might be the temptation to ask, “How can I get the benefits of making my company greener without running that risk?” S+B: How can greenwashing affect a company’s standing in the market? BERRONE: My colleagues and I have measured the impact of what we call

S+B: What about the effect on the bottom line? BERRONE: To determine impact on market value, my colleagues and I looked at

[close to 1,000] publicly traded companies in the U.S. and Europe. We found that greenwashing has a significant negative impact on market capitalization. Here, examples of symbolic actions included philanthropy and environmental reporting, and examples of substantive actions included manufacturing environmental products and

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symbolic environmental actions, or what you say, and substantive environmental actions, or what you do. We found that when there’s a gap between a company’s symbolic and substantive environmental actions, it negatively affects a company’s perceived legitimacy, reputation, and market value. We also compared the short-term and the long-term impact of substantive and symbolic activities on legitimacy [focusing on U.S. firms] by reviewing press coverage of the companies, and found that substantive actions have a positive impact. And when you also take symbolic action, the effect of your substantive actions increases. But taking only symbolic action — so, talking about envi“If you really want to turn ronmental issues but not actually doyour company into a green ing anything — doesn’t have much of company, it requires an effect on legitimacy. And in the few significant commitment in exceptions where symbolic actions terms of time, resources, and alone do have a positive impact, it is people. It also entails a lot only short term. This is an important of risk.” finding for managers who are thinking about engaging in greenwashing behaviors: In the short term they might actually gain some basic legitimacy, but this positive impact won’t last. This should lead managers to question whether lying is worth getting caught.

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

: Meet the next generation of business thought leaders at strategy-business.com/youngprofs.

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implementing responsible resource management. Philanthropy is considered a symbolic action because it’s simply giving money to an NGO; there is no commitment of the firm in terms of people and time, and often no follow-up on the destination of the donated money. Environmental reporting is done voluntarily; thus, companies can select what to report and what not to report. Our results indicate that the greater the number of symbolic actions, the lower the market capitalization. In contrast, the companies that took substantive actions had a higher market cap. Interestingly, we also found that the positive impact on market cap was less significant on European companies compared with U.S. companies. This could be because U.S. firms are better at transforming environmental efforts into profitable products and services. Or it could be that in Europe, sustainability is less of a distinctive element because a larger number of companies are engaging in green activities. Environmental regulations in Europe are more robust than in other regions; it’s perhaps therefore considered a given in Europe that companies in certain industries will be environmentally conscious, and the market doesn’t value it as much. Overall, though, the message is clear: The market punishes weaker signs of environmental commitment. In contrast, the markets tend to reward companies that are dedicated to producing truly green products and services. When I talk to company leaders, their first reaction to my research is often: “Well, this is obvious.” And maybe it is, but the fact is, companies still greenwash. I think sometimes it’s good to be reminded of the obvious things. I have yet to learn of any company that has zero impact on the environment. The key is to make sure that we move in the right direction before it’s too late. I like to be an optimist here, and trust that we’re going to make it. +

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Gutenberg’s Revenge Books are the only form of physical media whose sales are growing. by Bob Woods

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he media and entertainment industry has a long history of embracing disruptive innovations, from the printing press to the personal computer. But the rapid shift from physical to digital over the past decade or so has been truly revolutionary. In general, physical media has suffered a great deal. Printed newspapers and magazines have migrated to online versions, while DVDs and CDs have been supplanted by film – and musicstreaming services. But the oldest form of physical media is actually holding up quite Print Presses On Spending on books is expected to grow. well. According to PwC’s Global Entertainment & Media Outlook Change in revenue 4% 2018–2022, the consumer market for physical, printed books is hold2% Consumer books ing its own in an increasingly digi0% tal world (see “Print Presses On”). Physical traditional –2% video gaming Between 2018 and 2022, sales of –4% physical video games, recorded mu–6% Physical sic, and home video are expected to recorded music decline each year, in some instances –8% by double-digit percentages. By con–10% trast, sales of physical books are ex–12% Physical home pected to grow modestly, by about 1 video –14% percent annually, every year. By 2017 2018 2019 2020 2021 2022 2022, PwC expects consumers around the world will spend Source: PwC’s Global Entertainment & Media US$50.3 billion on books in physi- Outlook 2018–2022, Ovum

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Illustration by Serge Bloch

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cal or audio (i.e., non-electronic) form, compared with $47.8 billion in 2017. In May, the Association of American Publishers (AAP) reported that in the U.S., print books, especially hardbacks, remain a source of growth for the association’s nearly 1,200 publishers. AAP’s Monthly StatShot revealed that revenues for trade (consumer) books increased by $96 million (1.3 percent), to $7.6 billion, from 2016 to 2017. The growth was attributed to a 3 percent revenue increase in the adult books category, which accounts for more The consumer market for than 65 percent of all revenue for physical, printed books trade books. is holding its own in an At the same time, the movement increasingly digital world. toward people snuggling up with Kindles and Nooks instead of real books has hit a wall. According to AAP, e-book sales in 2017 fell for the third consecutive year, off 4.7 percent from 2016, to $1.1 billion from $1.16 billion. What gives? Several factors are at play. “People love print books for a few reasons,” says Marisa Bluestone, director of communications for AAP, citing the tactility of books relative to other physical media. “The feel of the paper in their hands, the smell of the books, displaying a library in their homes,” Bluestone explains, are all important factors supporting continued growth in print book sales. Jim Milliot, editorial director at Publishers Weekly, points to the cyber-life symptom known as screen fatigue. “People looking at screens all day at the office

PwC’s Global Entertainment & Media Outlook 2018–2022 For more on entertainment and media trends, see PwC’s five-year projection of consumer and advertiser spending data across 15 industry segments and 53 territories. www.pwc.com/outlook

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don’t want to come home and look at another screen,” he says. “They’re perfectly happy to read a good, old-fashioned book.” Demographics play a significant role, too, notes James DePonte, an audit partner at PwC who has been involved with the E&M Outlook since its inception 20 years ago. “It’s a pretty well-established fact that [print] books skew to an older demographic,” he says, adding that baby boomers will stay in that sweet spot for a while. The industry has also been buoyed by a younger demographic that buys books tied into blockbuster movie franchises, including Harry Potter and The Hunger Games. Business models surrounding media, especially those that drive unit prices down through streaming or subscription models, also help explain the differing trajectories of books and other physical media. Consider how the markets for physical music and video have been undercut by disruptive business mod“People looking at screens els. In both realms, the world quickly all day at the office don’t evolved so that consumers could get want to come home and look access to identical digital versions of at another screen. They’re perfectly happy to read a good, the physical media at a tiny fraction of the cost. Following the ruckus around old-fashioned book.” free, peer-to-peer downloading of music on Napster, Apple set up iTunes, which sold songs for 99 cents each. Next came all-you-can-eat streaming services from Pandora, Spotify, Apple Music, and others, which today offer free ad-interrupted versions and value-added models for as little as $10 a month. Music consumers can “buy” far more music in its digital form, for far less money, than they can in physical form. Netflix stirred up the movie-rental model by mailing DVDs, then famously pivoted to streaming movies and TV shows and developing its own original series. Hulu and Amazon have followed suit. Netflix and Hulu have subscription

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plans starting at $8 per month, while Amazon Prime, at $119 per year, includes access to movies, music, and original programming. Contrast that with a cable TV subscription, at about $100 per month, or purchasing DVDs at $15–30 each or CDs for at least $10 each. The savings for consumers are compelling. There’s another factor E-books appeared to be on a simithat continues to support lar track when they hit the publishing the sale of physical books: scene nearly a decade ago. Amazon led the stubborn survival of the way, offering digitized books for booksellers, especially the $10 each. Apple went after a piece of independents that have that e-pie, too, but at prices of $13–15 endured a series of attacks. per title. The category got discombobulated, however, when the U.S. Justice Department filed an antitrust lawsuit against Apple and the Big Five book publishers in 2012, alleging they’d colluded to raise the price of e-books. Apple paid a $450 million fine in 2016, and as of last year Amazon commanded more than 83 percent of the e-book market. But here’s the thing: These days the price difference between a print book and an e-book isn’t much. For example, Amazon offers the best-selling novel The President Is Missing, by Bill Clinton and James Patterson, for $17.99 in hardcover, $12.38 in paperback, and $14.99 in e-book. It’s worth mentioning, too, that allyou-can-eat models have emerged for e-books — the top two are Scribd ($9 per month) and Amazon’s Kindle Unlimited ($10 per month), but neither has achieved Netflix’s or Spotify’s level of success, one possible reason being that titles from the Big Five publishers aren’t offered. (Amazon declined s+b’s request for revenue or unit numbers for print and e-books.) One nontraditional format of books, however, is growing rapidly. U.S. audiobook sales rose 29.5 percent last year, according to AAP, to $343 million, from $265 million in 2016. That’s still only a small niche for publishers, but “they’re not as afraid they will cannibalize print sales as they were about e-books, and that’s been true,” Milliot says. There’s another factor that continues to support the sale of physical books: the stubborn survival of booksellers, especially the independents that have endured a series of attacks. “First, there were the big-box sellers like Barnes & Noble

Bob Woods [email protected] is a writer based in Madison, Conn., who specializes in sports, entertainment, and media business topics.

leading ideas

and Borders,” says Roxanne Coady, owner of R.J. Julia Booksellers in Madison, Conn., for 30 years. “Next came Amazon, and then the Kindle [from Amazon] and e-books.” Borders filed for bankruptcy in 2011 and liquidated, and Barnes & Noble has been reducing its footprint. But independent bookstores are picking up the slack. As Harvard Business School professor Ryan Raffaelli wrote in the Harvard Business Review, the independent bookstore industry is experiencing “technological reemergence,” as the number of independents in the U.S. rose 35 percent between 2009 and 2015, from 1,651 to 2,227. A similar dynamic has notably not played out among retailers of physical music and videos. Blockbuster is down to a single remaining store in Oregon. And music store chains such as HMV and Virgin Records are long gone. R.J. Julia, like other indie stalwarts, has endured by expanding beyond print books to offer a range of high-end gift and stationery items, staging celebrity author signing events, and, as in Coady’s case, opening an in-store café. “My worry now is that baby boomers are in the shedding mode, not the acquisitive mode,” she laments. What’s more, although boomers’ kids are reading a lot, they’re not just reading e-books and listening to audiobooks but also consuming newsletters and blogs. “If there were a finite amount of time given to culture, the portion of their time going to books would be different from baby boomers,” she says. “We’re trying to figure out what that looks like.” It will certainly look different, says James DePonte. “I suspect that, long term, the amount of reading will dissipate over time, if by smaller degrees than for other media,” he says. Despite the disruptive elements, “if you stack those all up, print books have done fine, but I don’t think that in 30 years we’re going to find them in the same light.” +

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The M&A Activity Transforming Healthcare How deals are shaping the $450 billion industry that manages prescriptions in the United States. by Gary Ahlquist and John Petito

A

Deals amid Uncertainty

Since November 2017, a slate of new transformative deals involving PBMs have been announced. In March 2018, insurer Cigna said it would acquire Express Scripts, the largest PBM in the U.S., in a deal worth $67 billion. (The U.S. Department of Justice approved the transaction in September.) In May, insurer WellCare said it was buying Meridian, which specializes in Medicaid insurance

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rapid and far-reaching transformation of the US$450 billion pharmacy benefits manager (PBM) market, which touches virtually every healthcare consumer, is unfolding before our eyes. In the fall of 2017, after retail chain CVS proposed a $69 billion acquisition of insurer Aetna, and insurance giant Anthem partnered with CVS to create a PBM, we argued that the pharmacy benefits function was poised to evolve. The PBM industry, which historically had administered drug plans and focused on containing drug spending for employers and insurers, would likely have to enter new collaborative arrangement models with stakeholders along the value chain. Over the past year in the PBM industry, however, we’ve seen the announcement of even more significant deals, which point to a potential transformation beyond the degree we contemplated, and which are likely to spur an even tighter integration of pharmacy and medical benefits. The market has moved aggressively away from the independent PBM model. It is clear that pharmacy benefits are no longer viewed as a cost to be managed, but rather as a strategic lever that can be pulled by organizations seeking meaningful impacts on both cost and quality. Two large and interrelated factors are driving this transformation: deals and regulatory uncertainty.

Illustration by Adrià Fruitós

leading ideas

and has its own PBM, MeridianRx. (The deal closed in September.) In the spring, reports suggested that Walmart, the giant retailer that is also one of the largest pharmacies, was interested in acquiring insurer Humana. The central theme in these arrangements is the potential to create value by integrating medical and pharmacy data and benefits, and by acquiring and influencing consumers earlier in the care life cycle. In particular, for models that include a retail footprint, the ability to target and attract consumers prior to illness is an appealing capability in an increasingly consumer-directed world. Express Scripts, which acquired eviCore, a medical benefits manager, would be a natural partner for Cigna in bringing a suite of comprehensive medical and pharmacy management capabilities to bear. Walmart and Humana, which had previously partnered on a low-cost Medicare Part D prescription drug plan, would have an impressive array of medical–PBM–retail capabilities focused on serving the growing Medicare Advantage market. As they plot their strategies, leaders are also having to deal with a high level of regulatory uncertainty that could impact core elements of the PBM business model. Thus far, the Trump administration and U.S. Secretary of Health and Human Services Alex Azar have largely spared PBMs and other drug supply chain stakeholders from significant policy changes. But the broad direction that Azar and the Trump administration have signaled may indicate that PBMs will have to evaluate both their role in the pharmaceutical value chain and the ways in which they currently generate economic value. Specifically, Azar has singled out the role of PBMs in negotiating rebates as a key focus area to reexamine in the future. Should the government enact strict regulation curtailing or otherwise limiting rebate practices, it would eliminate a core element of the current PBM economic model.

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Scenario Planning

We are confident the PBM market will look different in three to five years. The recent major deals largely represent vertical integrations, and thus have evaded regulatory opposition. But we have less clarity about precisely how those differences

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The combination of transformative deals and regulatory uncertainty raises the stakes for all healthcare players — PBMs, insurers, and providers alike. The traditional role of PBMs in servicing insurers and employers will be fundamentally altered, as the integrated titans that are emerging bring to market full suites of capabilities at scale. Pure-play independents and PBMs without scale will struggle to compete. Insurers that do not already own, or have not already partnered with, a PBM will seek out partners that can provide differentiated and integrated offerings. And as they struggle with profitability, providers — especially those with health plans — will have to rapidly reevaluate their offerings.

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will manifest themselves. We can envision several likely scenarios that could develop in the next few years, representing varying degrees of disruption and change. Reign of the integrated titans. Of the three scenarios, this would likely represent the highest level of disruption. The PBM industry will be remade by a small group (three or four) of integrated PBM–payors over the next 18 to 36 months, unhindered by regulatory challenge. Across commercial and government segments, traditional independent PBMs will no longer have the right to win. Offering integrated medical–pharmacy benefits and total cost management capabilities will become table stakes. Smaller PBMs will look to be acquired or to partner with regional or national PBMs for their capabilities, contracts, and membership synergies. A supercompetitor emerges. In this scenario, one integrated jumbo player will become an effective supercompetitor in the geographic markets or medical sectors in which it competes. By commanding superior price and capability advantages, the supercompetitor will destabilize the market. Non-integrated PBMs with both national and regional scale will continue to have a seat at the table in the near term, but will be forced to evaluate strategic options to remain viable. Those options could range from forming strategic partnerships to using M&A to acquire scaled capabilities. This scenario could also take the form of an emerging new entrant supercompetitor with distinct advantages in a focused area of the pharmacy benefits value chain. For instance, Amazon, which in June acquired online pharmacy PillPack, could disrupt the mail-order pharmacy space with a compelling value proposition based on price, speed, and customer experience. Status quo. In this scenario, representing the least disruption in the short term, none of the proposed acquisitions are finalized. However, given the continued regulatory uncertainty, and the extent to which Azar pursues strategies that may erode traditional pharmacy economics, PBMs and payors alike will place a significant focus on resilience. Unit price will continue to be the leading enabler of a PBM’s right to win in the space. Integration and total medical cost will continue to be value drivers for a limited group of existing integrated organizations, but will remain on the periphery. In the short to medium term, no significant transformations will disrupt the market. PBMs and payors will continue to focus on investing in no-regret and option-value capabilities.

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The future industry composition and winners are far from certain. PBMs will require vigilance and resilience as they evaluate competitive dynamics in their customer base and make capital investment decisions over the next three to five years. The following three no-regret moves will help organizations enhance their position, regardless of how the industry evolves. Employ competitive intelligence and market sensing. Fortifying competitive intelligence and strategy capabilities will strengthen players regardless of the nature and timing of the market evolution. Organizations that can closely monitor shifts in profit pools and market dynamics will be better positioned to achieve the strategic agility required in the current healthcare market. As dynamics change, proactively adjusting strategy and reassessing investments using real-time data and insight will be more effective than reacting to shifts and assessing investments solely through an annual strategic planning process. Beyond monitoring the macro changes roiling the market, PBMs must understand the implications of those changes for their pricing and capital investment strategies. Double down on the consumer. At a time when companies such as Amazon, whose mission is to be “Earth’s most customer-centric company,” are trying to disrupt the healthcare industry, catering to the consumer will be a heightened priority for healthcare incumbents if they are to stay relevant. As the healthcare industry continues to shift responsibility and financial decision making to the consumer, those that build capabilities to serve consumers will be well positioned to thrive. PBMs can no longer be passive intermediaries that administer drug plans for health plans or large employers and remain in the background. They must make their value apparent to the consumer, and play an active part in improving consumer experience and influencing member behavior to drive better clinical and financial outcomes. Most of the PBM–insurer vertical integration deals referenced earlier are banking on strategic benefits that would come through simplifying and personalizing healthcare for consumers, expanding consumer choice by offering a suite of services that allow for enhanced touch points with consumers, and coor-dinating the end-to-end patient healthcare journey. The emergence of point-of-sale rebates for patients is one example of an opportunity for PBMs to show value for consumers. Building foundational capabilities that

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Staying Relevant

Gary Ahlquist [email protected] is an advisor to executives in the healthcare industry, formerly with Strategy&, PwC’s strategy consulting business. Based in Naples, Fla., he is a retired principal with PwC US.

John Petito [email protected] advises executives in the healthcare industry for Strategy&. Based in San Francisco, he is a director with PwC US.

leading ideas

allow PBMs to better understand consumer needs and preferences is a prerequisite for pursuing this strategy. Additionally, investing in the digital channels and mobile tools consumers have come to expect will better position them to engage consumers in a personalized and enduring fashion. Achieve market power through optimized networks. Increasingly, the depth of the retail network — as defined by both the capabilities it can deliver and the pricing it can achieve — will be an important driver of advantage for PBMs. In the last few years, we’ve seen a shift toward preferred or narrow networks. In 2016, Walgreens created preferred network arrangements with PBMs OptumRx and Prime Therapeutics. These “optimized” retail networks can enable PBMs and payors to increase the number of meaningful touch points with their members, and could serve as a platform for creating differentiated experiences. Consider, for instance, a premium experience for selected consumers at a given set of pharmacies, or personalized recommendations and interactions with pharmacists for consumers at in-network pharmacies. Although the power of these narrow and tightly aligned networks will be amplified by an integrated PBM–payor, all organizations can achieve cost benefits through strategically aligning with local providers and retail partners. None of these moves alone can ensure the success of all participants in the pharmacy benefits space. But each is a strategy that will better an incumbent’s position. In a time of continued instability and disruption in the PBM sector and the broader healthcare environment, every PBM and insurer executive team will need to evaluate the organization’s starting set of capabilities and unique market position. By doing so, players can best understand their exposure to risk of disruption, and where to place bets that will maximize return. Because of continued market uncertainty, one thing is becoming increasingly clear: The future market dynamics and economics of pharmacy benefits are unlikely to resemble those that exist today. +

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The Power of Price Points Customer segmentation is not just a revenue tool, but also a way to achieve excellence in execution. by Thomas A. Stewart and Patricia O’Connell

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hen it comes to customer experience, the airline industry takes a lot of criticism. Even a reasonably good air travel experience involves an ordeal: a remote airport, a long trek to the gate, a debilitating passage through security, a generally uncomfortable and squeezed-into seat, and, then, if you’ve checked bags, time standing around a conveyor belt anxiously awaiting their re-appearance. No wonder customers’ videos about their air travel grievances — some trivial, some not — regularly go viral on social media. In the last year, all this angst has been seemingly exacerbated by the introduction of “basic economy”: a class of fare that’s less expensive than economy, is stripped of extras, and requires additional payment even for a seat assignment and, on many flights, overhead bin space. Basic economy customers are all but guaranteed to board last and sit in the worst seats on the plane. Aggrieved fliers argue that basic economy is just another way for airlines to mistreat them while extracting more money. Despite the moans, overall customer satisfaction with airlines hit a high in 2017, and declined only slightly in 2018, according to the American Customer Satisfaction Index Travel Report. In other words, the airlines are doing something right when they institute ideas like this. Indeed, in introducing the basic economy segment, airlines are carrying out a well-known practice that actually bespeaks good service design: clearly defined customer segmentation. If you understand how the airlines make it work, you can better understand how to segment customers in a less inherently problematic business — such as, presumably, your own. The key to basic economy is not what happens to the passengers who accept it, but what happens to the many passengers who avoid it. By creating a class of

leading ideas

Illustration by Dan Page

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service many passengers shun, basic economy appears to have made ordinary service seem less bad. To be sure, moves like this have been moneymakers for the airlines. Over the past decade, ancillary revenues at the 10 airlines that collect the most in fees have risen steadily, from US$2.1 billion in 2006 to more than $28 billion in 2016, according to marketing and consulting firm Idea Works. But basic economy is much more than a quickie revenue driver. It is a way of segmenting customers into two groups: those who care about cost above all else and those for whom a moderately better experience can seem downright pleasant. In this way, the airlines are forcing customers and themselves to match experience and expectation. When there’s no confusion about what customers are paying for, life is simpler for both customers and employees. Customers know what they are getting, and it’s easier for the airline to execute because guidelines become guardrails. Airline industry executives have admitted that basic economy was designed to be so onerous that corporate flyers would pay to be seated in more expensive regular coach class. For example, Delta president Glen Hauenstein told Forbes

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that “the success of that product in our minds is not how many people buy it, but how many people don’t buy it and choose another product.” American Airlines president Robert Isom told USA Today, “We’ve seen that about 50 percent of the customers that are presented with the basic [economy] fare are choosing to buy up…. That is all improved revenue for us.” There is a larger benefit: The fare class allows customers to upgrade, often on an à la carte basis, to the level of experience or service that balances their wants and wallets. Although customers may be disgruntled when their wants don’t match their wallets, they can’t argue ignorance. Indeed, segmentation makes implicit the customers’ responsibil-ity to co-create their experience. If you don’t like the lack of bells and whistles in basic economy, upgrade next time — and read the fine print. At the same time, segmentation provides guardrails that give employees the surety of their actions. Every business must identify its target customers, define the offering, and design the experience they will get. Segments such as basic econ-omy make these rules explicit, which is helpful in a complex service business. For example, financial services and health insurance are two industries that have been overtly using this practice for years as a way to avoid over-servicing less profitable customers while being able to upsell to more profitable ones. In B2B relationships, segmentation may be more implied than stated, but it’s still critical. A basic economy offering promises something of genuine value to both parties — a low-cost alternative for budget-conscious fliers, and a source of potential extra revenue for the airlines — and that’s nothing for either customer or company to be ashamed of, particularly if it meets both parties’ needs. Any business can do better by segmenting its customers, whether it is done openly with tiers such as green, gold, or platinum, or tacitly. When looking at how you can segment your customers, consider the following: Create tiers of service. For example, automate lower-end services and use a personal touch at the higher end; or, in professional-services businesses, have junior associates serve less important clients and oversee more commoditized offerings, while more seasoned partners handle the bigger, more complex deals. Clearly set and communicate offerings. Doing so will allow customers to come in with expectations you can reliably and profitably meet. Develop clear

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Thomas A. Stewart [email protected] is the executive director of the National Center for the Middle Market at Ohio State University. Formerly the chief marketing and knowledge officer of Booz & Company (now Strategy&) and editor-in-chief of Harvard Business Review, he is a contributing editor of strategy+business.

Patricia O’Connell [email protected] is president of Aerten Consulting, a New York City–based firm that works with companies to devise content strategies and develop thought leadership for top management. She is the former management editor of BloombergBusinessweek.com.

Stewart and O’Connell are the coauthors of Woo, Wow, and Win: Service Design, Strategy, and the New Art of Customer Delight.

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guidelines for employees — particularly account managers and the front line — setting out the degree of flexibility they have when it comes to serving marginally profitable customers. Encourage tier jumping. Let customers know what the perks of a status bump are and how to move up a level. This can persuade budget-minded customers to jump to premium ranks. Examine customer requests and employee complaints. This allows you to uncover promising new opportunities. For example, are you repeatedly turning down customers’ requests to offer a particular product or service? Satisfying these requests could result in a profitable new line of business while keeping your customers happy and encouraging them to come back. The financial-services sector already segments well with credit card types, but what about further segmenting, such as offering accounts that don’t include paper checks or access to live tellers? We are now in an à la carte and customized world. Consumers download (and pay for) apps for entertainment rather than subscribe to an omnibus cable package. Businesses of all kinds offer shoppers the choice of overnight, expedited, or standard delivery options, at different price points. Basic economy is part of this trend, which will only expand as companies harness technology and customer data to create ever more targeted customer experiences. The promise — not yet fully proven — is that sophisticated segmentation can lead to a sweet spot where profits and customer satisfaction rise together. +

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Using Neuroscience to Make Feedback Work and Feel Better by David Rock, Beth Jones, and Chris Weller

Illustration by Lars Leetaru

Here’s how leaders can make an anxiety-producing process less stressful.

Why Feedback Matters

Feedback isn’t just a ritual of the modern workplace. It’s the means by which organisms, across a variety of life-forms and time periods, have adapted to sur-

essay organizations & people

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ot too long ago, 62 employees at a major consultancy were called into a room in pairs, neither person having any prior relationship to the other, for what they were told was a role-playing exercise. Researchers asked them to sit across from each other. Participants then learned they weren’t assigned to be collaborators, but adversaries — opposing sides engaging in a mock negotiation to buy or sell a biotechnology plant. They had six minutes to haggle over the price, and heart-rate monitors tracked the ups and downs of the argument. When the negotiations were finished, each side gave feedback about his or her opponent’s performance. Some participants were told to give the feedback unprompted. Others were instructed to ask for feedback. Quietly, the heart-rate monitors listened. Here’s what the researchers found: If you want to put people on edge, tell them they will receive some feedback. Or, just as bad, tell them they’ll be giving feedback. Subjects in the study felt equally anxious offering feedback and receiving it, which might explain why so much workplace feedback — particularly in the United States — amounts to a series of polite statements, with few suggestions for improvement. “There’s a strong culture of being very nice to people, and it’s hard to be critical of someone in those conditions,” says Tessa West, the New York University psychologist and NeuroLeadership Institute senior scientist who led the study, alongside researcher Katherine Thorson, also of NYU. “How good is the feedback going to be if the person feels this strong normative pressure to be nice during the interaction? It might just be overly nice and not constructive because they feel weird about the feedback experience.” Simple as it may seem, feedback — that ubiquitous necessity of organizational life — has proven to be an axis on which organizational culture turns. Research is suggesting that by switching from giving feedback to asking for it, organizations can tilt their culture toward continuous improvement; smarter decision making; and stronger, more resilient teams that can adapt as needed.

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vive. To University of Sheffield cognitive scientist Tom Stafford, feedback is the essence of intelligence. “Thanks to feedback we can become more than simple programs with simple reflexes, and develop more complex responses to the environment,” he writes. “Feedback allows animals like us to follow a purpose.” It’s no coincidence the words organism and organization share a Latin root. Just as feedback enables the former to flourish, so it does for the latter. The singlecelled amoeba that relies on feedback from its marine environment can more easily find bacteria to munch on, and the salesman who risks losing his job for missing targets — metrics, too, are a form of feedback — knows he must change his approach, finding better leads or making more of the customers he has. The same is true for the underperforming department that faces restructuring and rethinks how it collaborates. In all cases, feedback is what keeps organisms, and organizations, alive and well. Even within organizations, feedback can take many forms. Key performance indicators (KPIs) and other quantitative data are perhaps the most recognizable kind of feedback, especially during performance reviews, but conversational feedback — for example, a quick chat over coffee — counts too. Indeed, just as leaders should think carefully about the KPIs that guide behavior on their teams, they should consider the patterns of verbal feedback that guide their teams to improve. Research has found roughly 87 percent of employees want to “be developed” in their job, but only a third report actually receiving the feedback they need to engage and improve. The reason for the gap is hardly a mystery: Typical feedback conversations are about as pleasant as a root canal. Managers dread them because it’s often unclear what kind of feedback the employee wants or needs, and employees dread them because even light criticism can feel like an assault on their status and credibility. Indeed, West and Thorson’s new study found that feedback receivers’ heart rates jumped enough to indicate moderate or extreme duress in unprompted situations. Management gurus have devised a range of tactics to repair these broken interactions. Mostly, they restructure how feedback is given, and apply little thought to what the research literature advises. Under the popular sandwich model, a manager carefully slips a criticism in between two compliments, hoping

Mock Negotiations, Real Insights

After the participants in West and Thorson’s study finished their negotiations, each person was randomly assigned to one of two conditions: asking for feedback or giving it outright. Afterward, the researchers asked people how they felt during the interaction. Did they feel anxious? How difficult was hearing feedback about their negotiation skills? When the investigators analyzed the data, they found a curious effect among the people who gave feedback unsolicited: They were rated as being much friendlier than those who were asked to give it. Not only that, the feedback itself was judged to be more positive. It was only when West and Thorson looked at the givers’ heart-rate reactivity and saw it was jumping around erratically that they deduced the givers were actually terribly anxious during the interaction. “They’re looking really friendly,” West says, “but they’re feeling really uncomfortable.” Psychologists have come to label this phenomenon “brittle smiles.” It hap-

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to offer guidance without threatening the employee. Other variations include the start, stop, continue method, which encourages employees to start doing one set of behaviors, stop doing another, and continue doing a third. In our own research of 35 such models, no organization was confident its feedback model was effective at creating lasting behavior change. And tellingly, only one gave tools to the feedback giver. Of course, some organizations forgo these methods entirely, opting to spend large sums of money — US$1,273 per employee, by some estimates — to build and deploy learning initiatives that seek to improve behavior and performance en masse. These initiatives stand partially, if not entirely, in place of feedback conversations because organizations assume it’s easier to get everyone up to speed at once than to let it happen organically. A growing body of research argues against all of these approaches. This research compels organizations to heed the wisdom of West and Thorson’s negotiation study: Developing a habit of asking for feedback may be the most costeffective way to develop healthy, ever-evolving work cultures.

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Why Feedback Is So Miserable

Though most of us no longer have to fend off predators, our brains are still exquisitely attuned to threats — both physical and social. It’s a vestige of how survival has largely depended on appeasing group members. Among our ancestors, eviction from the group led to a dangerous, isolated existence in the wild. Modern humans base their decisions on many of the same pro-social, consensus-building impulses. We make polite chitchat at work, even in our most antisocial states, so others will see us as friendly. We avoid talking to the attracPeople try to adhere to a “culture of niceness” even tive stranger at the bar because something deep and ancient in us registers though they want to speak the possibility of rejection as a matter or act more candidly and of life and death. When neuroscientists critically. So they conduct brain scans of people exposed overcompensate. to social threats, such as a nasty look or gesture, the resulting images look just like the scans of people exposed to physical threats. Our bodies react in much the same ways. Our faces flush, our hearts race, and our brains shut down. No matter if we’re giving a speech to thousands or coming face-to-face with a jungle cat, our body’s response is the same: We want out. Feedback conversations, as they exist today, activate this social threat response.

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pens when people try to adhere to a “culture of niceness,” as West calls it, even though they really want to speak or act more candidly and critically. So they overcompensate. They smile too much and become overly positive in their speech. To West’s mind, asking for feedback is the best way to avoid brittle smiles and the culture of niceness. “When you ask for feedback, you’re licensing people to be critical of you,” she says. “It may feel a little more uncomfortable, but you’re going to get honest, more constructive feedback.” This permission, it turns out, is hugely important for putting both parties in a psychological state that’s ready for negative news. Without it, the brain begins to revert to a state that isn’t conducive to growth, and that finds its roots thousands of years in the past.

Rewarding Feedback

Asking for feedback is the path to get to minimal threat response, because it appears to offer both the receiver and the giver much more psychological safety than a giver-led approach. This safety is crucial during feedback discussions because our brains will be in a much better state for performing complex cognitive functions. One of the strongest models for understanding social threat and reward is what psychologists call the SCARF model. The term stands for status, certainty, autonomy, relatedness, and fairness, with each component referring to a domain of social interaction that can create a threat or reward state in participants. If a

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In West and Thorson’s study, participants’ heart rates jumped as much as 50 percent during feedback conversations. (Equivalent spikes have been found during some of the most anxiety-producing tasks, such as public speaking.) In their self-assessments, participants reported feelings that mirror what just about everyone has experienced personally: nerves, uncertainty, and anxiety. All this physiological stress has the unfortunate effect of draining a person’s mental resources. “Giving all that negative feedback that wasn’t asked for, you might feel like you just told someone a bunch of stuff they care about,” West says, “but they just shut down and stop listening to you.” Even if people retain the informa“When you ask for feedback, you’re licensing tion, there’s no telling if they’ll agree people to be critical of you. with it, because social threats can create cognitive dissonance. People are inIt may feel uncomfortable, clined to flee the actual room or space but you’re going to get where they are threatened; similarly, honest feedback.” cognitive dissonance motivates them to “flee” the threatening idea itself. People have been shown to more often reject disagreeable information, such as criticism, as patently untrue when they are in a threat state. The goal is self-preservation. If they can convince themselves the critique is false — My boss has no idea what he’s talking about! — they can also avoid a bruised ego. Scientific research suggests that feedback conversations, if they are to be productive, must begin with the goal of minimizing threat response.

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Getting to a Culture of Feedback

West believes what she found in that negotiation room should compel all organizations to adopt an asking model of feedback. However, she realizes how threatening it may seem to actively seek out criticism — perhaps even more nerve-racking than just happening to receive it. Unless an organization has an extremely well-established growth mind-set, in which employees absolutely relish the chance to get better, people are unlikely to go searching for anything that might reveal room for improvement. The key is to start small. “It’s like going on a diet,” West says. “You don’t want to cut out everything that’s delicious. You have to gradually replace the unhealthy with the healthy.” At the office, leaders can begin by asking for feedback on low-stakes topics, such as the temperature in the office or how people felt about yesterday’s lunch. The point is to get people used to giving feedback that was asked for. When leaders take the first step, they signal to the wider organization that asking is important, and the low-stakes questions help build a sense of trust and agency in their team members. People are given an opportunity to feel heard, which boosts their status,

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meeting has no clear end time or there is no well-defined agenda, attendees may feel certainty threats — negative feelings due to a lack of clarity. Alternatively, if the host clearly lays out the structure and schedule of the meeting, people may feel certainty rewards. In another instance, employees whose manager constantly checks in and meddles with every last detail would rightfully feel threats to their autonomy. They might feel more rewarded if the manager appointed people to lead individual projects, giving them a greater sense of control. When people ask for feedback, they feel greater autonomy and certainty because they are in the driver’s seat — they can steer the conversation where it’ll be most useful. Feedback givers, in turn, feel more certainty because they have clearer guidelines for the kind of comments they should offer. The information will be more relevant to the team member and less threatening to his or her status, ultimately making the entire discussion feel more equitable and fair. It might be uncomfortable, but manageably so. “We’re not promising it’s going to feel good right away,” West says. “But it will be better for you in the long term.”

Motivate with “Mental Contrasting”

people cut down on food cravings

make the experience as vivid as pos-

and the desire to smoke, by simply

sible to create strong emotions that

making the future reality come alive

will inspire them to create a change.

in their minds. To make use of mental contrast-

Leaders can take advantage of the technique in feedback dialogues

ing, people must mentally inhabit

with questions that expand the con-

ental contrasting, developed

both temporal worlds — the pres-

versation. For instance, a manager

by psychologist Gabriele

ent and the future — and reconcile

can ask a direct report to vocalize

Oettingen, is a visualization technique

how they’ve been behaving with how

a few of her long-term goals, and

that involves juxtaposing the present

they’d like to behave. They can jux-

then follow up with such questions

reality with the desired future reality

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as: What steps are necessary to get

to generate motivation. It is essential

future if they stop the behavior, such

there? and What about that future is

for feedback conversations because

as living longer in the absence of

different from the present? Getting

it gets people thinking about how they

cigarettes, or they can imagine a neg-

the employee to actively imagine her

might improve, not how they’ve been

ative future — lung disease, medical

own growth and create a better fu-

messing up. Oettingen’s research

bills, and so on — if they stay on their

ture can produce intrinsic motivation

has shown that contrasting can help

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that leads to lasting behavior change.

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makes them feel more included, and gives them a greater sense of autonomy. West says it also empowers them to give better feedback, replacing brittle smiles with more honest critiques. If organizations keep up this behavior, they should have little trouble amping up feedback to tackle larger challenges, West says. But, she adds, organizations would be wise to roll out the initiative according to three criteria, in an effort to get feedback that is less biased, that promotes a growth mind-set, and that cements the habit as part of the corporate culture. Those three criteria are asking for feedback broadly, explicitly, and often. In typical feedback conversations, one direct report learns of ways to improve from one manager. Even if the person asks for that feedback, it’s bound to be influenced by the manager’s unique experiences, assumptions, and mood. Indeed, behavioral economists have found that something as simple as eating or not eating lunch before making decisions can skew them in one direction or the other. Getting broader feedback from higher- and lower-ranking people across departments can reduce the chances that feedback will be biased. The critiques or compliments will better reflect the person’s actual performance rather than the mental state of the person they asked. The second sign of good feedback is that it is explicit. Our research has found that if people ask for more specific feedback, it’s bound to be richer and

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Making Feedback a Habit

The feedback habit is important for both parties. If employees ask for feedback only every so often, they risk wasting valuable energy and discussion time to gain

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more informative than if they just ask “How am I doing?” or “What can I do better?” One simple reason, based on West and Thorson’s research, is the finding that giving feedback creates much more anxiety than getting feedback. Managers deal with incredible uncertainty about what kind of feedback is appropriate, and also about how to deliver feedback in a way that doesn’t create a threat state in their employee. Here West says it’s up to employees to equip their managers with the right kinds of questions — a help-them-help-you approach to feedback, she says. These can include “Could you please give feedback on my presentation skills?” or “Should I have spoken up more in yesterday’s meeting?” The tactic helps managers avoid what relationship psychologists call “kitchen sinking.” In kitchen sinking, “you say one thing that sucks, and then you pile everything else on that sucks,” West says. When employees ask for explicit feedback, they give their manager clearer boundaries. An added benefit of asking for feedback is that it helps employees indicate their preferred level of construal — the degree of psychological distance in the conversation. Construal levels range from abstract to concrete, and research has shown people have individual differences in the levels they prefer. For example, if someone wants to improve their presentation skills, a high-construal (abstract) question might be “What were the goals I should have considered when presenting?” and a low-construal (concrete) question could be “Did I talk too fast?” The first deals more with the why, the second with the how or what. If employees can tailor their feedback request to their preferred construal level, they’ll be more likely to process and retain the information. Finally, employees should ask for feedback often, for two reasons. In the short term, frequent feedback allows people to course-correct more quickly than sporadic talks. They can avoid errant thinking and unnecessary problem solving. Frequent feedback requests also shorten the time between events and feedback, so a manager’s memory of events is fresher and less tainted by bias.

David Rock [email protected] is cofounder and director of the NeuroLeadership Institute (NLI), a global initiative bringing neuroscientists and leadership experts together.

Beth Jones [email protected] is a senior consultant at, and leads the performance practice for, NLI.

Chris Weller [email protected] is a senior science editor at NLI.

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information that merely collects dust. The conversations might feel good, but learning won’t be taking place. With more regular interactions, askers get more comfortable asking, givers get more comfortable giving, and both gain experience in seeing how to fill the opposite role when the time comes. Of course, there will be times when managers must give feedback unsolicited, such as when team members make inappropriate comments or act on impulse, hurting others’ feelings, or worse. The beauty of regularly asking for feedback is that people become emotionally equipped to give and receive their feedback in these cases, too. In West and Thorson’s study, only one participant demonstrated this give-and-take ability. When she needed to critique the other person, unprompted, she said, “Can I give you some feedback on your eye contact?” “She turned it into an ask,” West observes. In work cultures where asking is the norm, she says, givers can ask permission to give explicit feedback; receivers can understand the giver’s intent; and both can enjoy more accurate feedback, fewer perceived threats, and stronger learning. It all goes back to West’s call for people to get comfortable with the uncomfortable, for the sake of personal and organizational growth. “If both people have license to be critical, it’s actually going to be good,” West says. The culture can become one of reciprocity, not niceness, which means people will still feel encouraged to give honest feedback, but do so respectfully, since the roles might be reversed someday. She continues: “You might be a little more sensitive in how you deliver critical feedback, because you know it’s going to come back to you.” Companies that drag their feet and uphold a culture of niceness may feel better from day to day, but it’s the ones that embrace some creative discomfort that make better decisions, and prevail in the end. +

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STRATEGY & LEADERSHIP

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The Four X Factors of Exceptional Leaders Understanding what differentiates a great leader from a good leader will help companies make the right choices for the top jobs. Illustration by Lars Leetaru

by David Reimer, Adam Bryant, and Harry Feuerstein

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E

very February for the last 35 years, the National Football League has run a scouting camp, called a combine, to assess the skills of college players before its annual draft. With scientific precision, the players are evaluated on a number of tests, including the 40-yard dash, bench presses, and vertical leaps. Performance at the combine can affect how early a player is selected in the draft, which is assumed to be a leading indicator of career trajectory. However, many studies have shown that although the combine measures the table stakes of athletic skills, it misses the intangibles that make a player stand out come game time. That helps explain why Tom Brady, one of the greatest quarterbacks of all time, was not picked until the sixth round, and star cornerback Richard Sherman was not drafted until the fifth round. Just as the NFL combine attempts to predict future stars, companies have developed elaborate constructs to answer a seemingly simple question: Which traits distinguish our best future C-suite leaders? Using an array of competency definitions, development planning, and training modules, organizations spend heavily in building their leadership pipelines. Yet when the time comes to distinguish between the “best” leadership candidates and “solid” or When distinguishing “safe” choices, those deciding who to between the “best” promote frequently struggle — and candidates and “solid” often miss the signifiers that identify choices, those deciding true stars. often miss the signifiers Our experience working within that identify true stars. hundreds of C-suites and boardrooms around the world has shown us that traditional approaches to senior leader assessment and development often fall short for two distinct reasons. The first lies in granularity. Measuring a long list of highly specific competencies creates an illusion of validity. In its most common manifestation, this error arises when organizations use the profiles of historically successful leaders within the business to assess the traits of current candidates. Given the pace of change today, those legacy profiles have limited relevance to future requirements.

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The other side of this “granularity coin” occurs when organizations attempt to imagine all future leadership competencies necessary to deliver the business strategy in five years’ time. Again, the pace of change reduces such highly specific predictions to well-intended guesses. The second failure point, and one to which boards of directors are particularly susceptible, is a disproportionate focus on skills that should be table stakes. For instance, having a strategic mind-set, delivering P&L performance, and having boardroom presence all make for an attractive C-suite candidacy. But an emphasis on these attributes simply catalogs traits shared by the majority of C-suite players, rather than highlighting the X factors that separate truly outstanding leaders from highly competent ones. We have sought to address these shortcomings by identifying four specific traits that our research shows the best-performing C-suite leaders share. The analysis is drawn from the real world: As mentors and coaches, we have followed the careers of many C-suite leaders over time. Our data, collected from 2008 to 2018, covers a period that includes the financial crisis and its aftermath, a time marked by disruption across all sectors. We conducted in-depth interviews with more than 2,500 executives, participated in hundreds of C-suite successions, and worked alongside more than 1,000 individual senior executives. Seventy percent of the organizations in the analysis had annual revenues of US$5 billion and higher, and the vast majority were publicly traded. The remaining 30 percent ranged in size from $100 million to $5 billion in annual revenues, and were evenly split between private and public ownership. In defining “best-performing leaders,” we focused on a number of factors, but gave priority to actual delivery against the organization’s strategy: the clarity and alignment those leaders generated and the pace of the transformation they were able to drive successfully. In other words, we prioritized the “how” of their leadership, while also considering the “what” of their results. Although our analysis did consider share price as a factor, we weighted it lower than actual performance against strategic goals. For example, one tech company in our data set announced a major shift to mobility and the cloud, and subsequently initiated a round of expensive acquisitions, most of which ended up being wound down or spun off at a discount because they weren’t scalable.

1.

They Simplify Complexity and Operationalize It

As the pace of change and disruption quickens across the world, leaders face an onslaught of new and complex questions. The typical C-suite leader can process vast amounts of data and complexity, often on the fly. “Ability to deal with ambiguity” and “learning agility” have become standard (if unevenly defined) language in executive assessments. Truly standout executives, however, do more than live comfortably with chaos: They take ownership of complexity by creating simple, operational narratives around it that can be readily understood and embraced by those who work for them. This combination of simplifying and operationalizing complexity provides a critical foundation. Simple, but not simplistic. For many of the business revolutions underway — such as the Internet of Things and blockchain — the endgame is unclear. In the face of this ambiguity, the best leaders strive to create clarity on the problems their business strategy seeks to solve. They emphasize the reasons the organization is uniquely positioned to address those challenges, and offer a simple plan for winning that has just three or four priorities.

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The share price remained steady during the period, mainly because of efficiencies created in managing the legacy business, but the future planks of its strategy remained largely unrealized. Our analysis discounted leadership’s effectiveness based on that failure. In contrast, an energy company in a similar time period committed to shifting from primarily coal- and oil-based operations to renewable solutions, a massive pivot that required a multistage transformation of all aspects of its business model. Over a four-year period, the stock remained flat as the leadership team drove those changes, but as their success in the transformation became apparent, the price began rising. We rated this leadership team successful because they delivered the promised transformation. When we analyzed our data on all 2,500 leaders, four X factors that distinguish great leaders emerged clearly. Company leaders and boards should understand and recognize these traits.

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“Simply put, leadership is the ability to inspire others to achieve shared objectives, and I think the most important word there by far is inspire,” LinkedIn CEO Jeff Weiner told us. “It starts with vision, and the clarity of vision that the leader has, and the ability to think about where they ultimately want to take the business, take the company, take the team, take a particular product.” Operationalizing complexity. Creating a simple plan and driving clarity on the problems that the company’s strategy solves is the first step. The next, and typically harder, one is execution. The best leaders use the simple plan as a foundation for an operational narrative that serves two critical functions. First, it must include one or two simple frameworks for how the company will carry out its strategy. For example, when Brent Saunders (now head of Allergan) became CEO of Bausch & Lomb earlier this decade, he noticed that its engineers seemed overly focused on getting patents and publishing papers. As part of his operational narrative, he switched the name of “R&D” to “D&R” as a constant reminder to employees to focus more on the marketplace and customer. “Success needed to be defined as creating products that mattered,” said Saunders, whose successful turnaround led to IPO preparations before the company was acquired by The best leaders are Valeant Pharmaceuticals. intentional about giving In addition to providing basic the entire organization a frameworks, an operational narrative common reference point should articulate one or two leading to track progress toward a indicators by which the organization long-term goal. can track progress at a glance. This is not to suggest that companies replace the array of business unit–specific or role-specific metrics used to measure executive or company performance. Rather, the best leaders are intentional about giving the entire organization a common reference point to track progress toward a long-term goal. “The first thing I have to do is to have people understand where I’m going to take the company,” said Joseph J. Jimenez, the former CEO of Novartis International who now serves on the boards of Procter & Gamble and General Motors. “You have to distill the strategy down to its essence for how

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we’re going to win, and what we’re really going to go after, so that people can hold it in their heads.” Operational narratives that cascade well. There is no single best approach to developing an operational narrative, and because of changing industry dynamics, the initial frameworks are unlikely to remain static. The most effective leaders constantly test and revise their operating assumptions using new information and insights. But the best operational narratives share several traits: • They provide a reliable and enduring decision-making process that can be explained briefly and applied at multiple levels and in many contexts. • They are based on operational realities, not theories, and create an overt, intentional definition of acceptable risk — which may be different from legacy definitions. • Because they are simple and aligned to the overarching strategy, they provide a gauge for measuring whether a meeting or process has furthered the organization or simply added make-work. Why emphasize this trait? The ability to simplify complexity may seem like a paradox, and that is precisely the point. The most difficult aspects of leadership are paradoxes, and executives must embrace them fully, and understand that leadership requires a “both/and” skill set. Implementing a simple plan for winning is easier said than done. Most leaders — even very good ones —try to accomplish too many things or get trapped in reactive mode by the problems that crop up or meetings that fill their calendars. True prioritization requires sustained intentionality and operational focus, and becomes a forcing exercise that provides the crucial link between simplifying complexity and operationalizing the leader’s insights. Once leaders have identified the top three or four priorities that are going to move the needle, they have to weave them into their operational narrative and communicate them constantly. “You can find yourself communicating the same thing so many times that you get tired of hearing it,” Christopher J. Nassetta, CEO of Hilton Worldwide, told the New York Times. “But you can’t stop. What might sound mundane and like old news to me isn’t for a lot of other people.”

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Driving clarity deep into the organization with an operational narrative, constant communication, and clear measures of progress is a gritty, relentless pursuit. Not all leaders are up for it.

2.

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One of the most powerful momentum-killers in organizations is the well-documented tendency toward silo behavior. We often identify ourselves as part of a small team, trusting only our immediate circle and perceiving colleagues in other parts of the business as competition for resources rather than part of the collective “us.” Such behavior focuses attention internally, rather than on winning in the marketplace, and can create enterprise blind spots. To step outside one’s silo and think across the enterprise means overcoming two fundamental human drivers: tribalism and the security that comes from navigating an area one knows well. Achieving enterprise-level thinking requires enough self-awareness to understand these impulses and enough selfdiscipline to overcome them. The company should be the only “us” that matters, and the discomfort of operating outside one’s area of expertise needs, The discomfort of paradoxically enough, to be a comoperating outside one’s fort zone for the exceptional leader. area of expertise needs to Several years ago, the leader of be a comfort zone for the a well-performing business unit in a exceptional leader. global pharmaceuticals company saw the need to shift the dynamic within his team. Although they always hit their financial goals, they operated in silos, a mentality that became apparent when they began to use senior team meetings to catch up on emails rather than listen to what their “outsider” peers were achieving. The leader challenged them to think about their role as contributors within the larger enterprise: What value were they missing in the marketplace by focusing narrowly on individual performance targets? This evolved into a cross-group conversation, and over a period of mere weeks the

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They Drive Ambition for the Whole Enterprise

3.

They Play Well on Teams They Don’t Lead

From the executive leadership ranks on down, teams are the organizing principle of companies. But a clear pattern has emerged from our work: Most business teams have given little thought to what it means to be a true team, despite the growing body of academic and strategic work about the power of the team. The very best leaders, long before they reach the C-suite, start conversations with their teams with certain questions. What do we need to work on together to accelerate the strategy? What are the three priorities that we must tackle as a team? The answers then drive meeting agendas, guide how decisions are made, and focus communications to the broader organization. “With people at this level of their career, it’s no longer about whether you are the smartest subject matter expert in the room,” said Lynn J. Good, CEO of Duke Energy. “It’s whether you can be effective in leading a diverse team.” The best C-suite candidates need to play well on teams they are not leading. That can be a challenge for many leaders. As they rise through the ranks, executives are encouraged and incentivized to lead teams. Yet as self-identified alpha types, they are rarely groomed to contribute as a teammate. The most effective executives emphasize the importance of leadership, both individual

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team members voluntarily redesigned their compensation structure to have more than 50 percent of their incentives measured by the overall performance of the business unit, rather than their individual silos. They also collaborated on stretch goals. As a result, the business unit surpassed its targets, and most of that team’s executives went on to bigger roles. The team leader who sparked the discussion became the CEO. “I tell people that once you get a job, you should act like you run the place,” David Novak, the former CEO of Yum Brands, told us. “Not in terms of ego, but in terms of how you think about the business.… Think about your piece of the business and the total business. This way you’ll always represent a broader perspective.”

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4.

They Build Leaders

In our experience, executives fall into one of two camps. One group sees the people who work for them as assets to help them advance their careers. The other sees the potential of their emA track record of grooming ployees, and takes ownership of the responsibility to develop them. It is not multiple effective leaders always easy for top leaders, board diis a reliable predictor of rectors, or human resources executives C-suite performance. to accurately discern which camp best describes a particular manager. Some people spend time managing up, creating an impression that they are thoughtful leaders, when they largely ignore the people who work for them. But there is one unambiguous measure for whether a leader builds leaders: his or her track record. Who inside the company has taken on increased responsibility after having worked for the executive? Our work with succession candidates indicates that a track record of grooming multiple effective leaders is an oft-overlooked measure of authentic leader-

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and collective, as a means of delivering on the strategy — and they focus their contributions to the team on the strategic, rather than on tactical maneuvering. Our polling of more than 100 senior teams in 2016–17 found that the teams that were making the greatest progress toward their stated transformational objectives self-reported that they were dedicating a little more than 50 percent of their time together discussing strategy; those C-suite teams that were moving more slowly were dedicating 90 to 95 percent of their time to tactical conversations. “The thing I was most focused on early on was, how am I maximizing the effectiveness of the leadership team, and what am I doing to nurture it?” said Satya Nadella of Microsoft, shortly after he took over the chief executive role in 2014. “Are we able to authentically communicate, and are we able to build on each person’s capabilities to the benefit of our organization?”

Developing X-Factor Leaders

These four leadership traits can be cultivated and measured on a variety of objective and subjective levels. Much of the data and capability to measure the traits already lies within organizations, which just need to prioritize what

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ship capability, yet a reliable predictor of C-suite performance. It is also a measure of self-awareness; people who rise quickly in an organization usually have bosses who are looking out for their best interests. “I don’t think there’s anybody who’s successful in their role today who hasn’t been mentored by somebody,” said Ilene Gordon, the former CEO of Ingredion, a supplier of ingredients to the food industry. A leader who develops leaders is also more likely to be someone who can retain and develop individuals whose perspectives differ from his or her own. The people a leader chooses to promote are an indicator of the ability (or lack thereof) to create diversity. Diversity isn’t a demographic nicety. It improves strategy execution, and encouraging it is a sign of a leader’s ability to build teams that can rapidly exploit emerging opportunities, and excel at healthy disruption of the company’s traditional ways of thinking and working. A disconnect between C-suite leaders and a more diverse rank and file hampers an organization’s ability to hear and process outside perspectives that the organization has worked hard (and often spent heavily) to recruit. This tension between the need for diverse perspectives and senior leaders’ struggles to hear and process voices that are different from their own is part of a new kind of talent war: the need for greater cognitive diversity everywhere and the increasing mobility of talent. Otherwise competent C-suite candidates who have no track record of grooming and promoting talent with views or profiles different from their own are unlikely to transform magically into champions of diverse thinking once they enter a top role. The best C-suite leaders actively recruit and engage differing perspectives within their team. They promote nontraditional candidates into stretch roles. Formally or informally, they mentor up-and-comers who are different from them, in appearance and in thinking. To win on multiple fronts in a complex world, leaders must build leaders.

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to look for. We see three guiding principles for developing the four leadership traits described above. First, organizations must decide if they are going to be explicit about reinforcing these traits as measures for success. If yes, the traits must be communicated and reinforced at three different levels to be effective: with the board, with the current C-suite, and within executive development strategies and architecture. This shared framework will drive clarity and alignment throughout a leadership pipeline. Second, companies should consider adapting the 70-20-10 legacy of traditional development programs for grooming senior leaders. Instead of 70 percent experiential, 20 percent coaching, and 10 percent training, the approach should be more integrated. We advocate a 90-10 model, in which the business strategy and on-the-job context is inextricably woven into any coaching. In this way, coaching avoids the pitfalls of becoming theoretical or strictly behavioral, and instead becomes tied in with experiential development. This 90-10 approach accelerates the “how” of leadership unique to the organization, and helps create separation between the competent and the very best leaders. Third, organizations must establish a simple but long-range metric or dashboard for tracking the leader’s performance or development of these traits over time and across different roles. Yes, there are clear core deliverables required of any new role, but organizations must also be developing and assessing the X factors of their performance during each assignment. Business success will always be measured by financial results. These are the “whats” that the leader has delivered, and are powerful lagging indicators. But they are one-sided: They neither qualify nor quantify the “how” of the achievements. Yet the “how” can be the best predictive indicator of a leader’s future performance. X-factor leaders create a clear world view — nimble constructs and operational narratives — that everyone buys into. They win by setting the right priorities, building effective teams, and helping components of the organization step outside their silos to act as one. And they create diverse sets of leaders and teams — not as an intellectual or civic pursuit, but because they view doing so as key to outperforming the market today and tomorrow. Identifying and developing

David Reimer is CEO and managing partner of leadership consultancy Merryck & Co Americas. He edits the Executive Roundtable column in the SHRM journal HR People+Strategy.

Adam Bryant is managing director of Merryck & Co and a former New York Times journalist who created the “Corner Office” interview series. He is author of Quick and Nimble: Lessons from Leading CEOs on How to Create a Culture of Innovation and The Corner Office: Indispensable and Unexpected Lessons from CEOs on How to Lead and Succeed.

Harry Feuerstein is president of Merryck & Co Americas and the firm’s head of global services. He is a former CEO of Siemens Government Services and managing director of privately held firms.

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New from Rotman-UTP Publishing “The Innovation Navigator provides an approachable foundation for an innovation framework with practical guidelines for customizing and putting the process into action.” Edmond Mesrobian, former Chief Technology Officer, Tesco and Expedia

“A must-read for any leader determined to challenge the status quo within their organization.” Chris Ferguson, CEO, Bridgeable ISBN 9781487501709

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The Rotman School of Management is located in the heart of Canada’s commercial and cultural capital and is part of the University of Toronto, one of the world’s top 20 research universities.

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such leaders should be a galvanizing and energizing imperative for organizations seeking to ensure long-term strategic performance. +

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How to lead the disruption of your own enterprise. By Al Kent, David Lancefield, and Kevin Reilly

Illustrations by Miguel Montaner

New industrial platforms, geopolitical shifts, global competition, and changing consumer demand are reshaping your world. You face upstart competitors with high valuations encroaching on your business, and activist investors looking for targets. Meanwhile, you have your own aspirations for your company: to be a profitable innovator, to seize opportunities, to lead and dominate your industry, to attract highly committed talent, and to carve out a socially responsible role in which your organization makes a difference. You also probably want to clear away the deadwood in your legacy system: practices, structures, technologies, and cultural habits that hold your company back. The conventional response is a transformation initiative — a top-down restructuring, accompanied by across-the-board cost cutting, a technological reboot, and some reengineering. Maybe you’ve been through a few such initiatives. If so, you know firsthand how difficult it is for them to succeed. These efforts tend to come in late and over budget, leaving the organization fatigued, demoralized, and not much changed. They don’t take into account the fundamentally new kinds of leverage available to businesses that have emerged in the last 10 years: new networks, new data gathering and analysis resources, and new ways of codifying knowledge (see “Leading a Bionic Transformation,” by Miles Everson, John Sviokla, and Kelly Barnes, s+b, Winter 2018).

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If you are a business leader, you are probably thinking about radical change.

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David Lancefield david.lancefi[email protected] is a partner with PwC UK and a thought leader for Strategy&. Based in London, he advises senior executives of media, entertainment, and technology companies on transformational change. He writes regularly on strategy, innovation, leadership, and culture.

Kevin Reilly [email protected] is a partner with PwC Australia, based in Sydney. He is a global leader in PwC’s transformation domain, and has helped shape some of the largest public- and privatesector transformations in Asia-Pacific.

Successful transformations may be relatively rare, but they do exist — and yours can succeed as well. A transformation, in this context, is a major shift in an organization’s capabilities and identity so that it can deliver valuable results, relevant to its purpose, that it couldn’t master before. It doesn’t necessarily involve a single major initiative (though it could); but the company develops an ongoing mastery of change, in which adaptability feels natural to leaders and employees. An effort of this sort can take place on a large or small scale; it can involve the front, middle, or back office; it can be conducted by any type of enterprise, from a startup to a global enterprise; and it will affect every aspect of the organization’s structure, including such functions as innovation, finance, marketing, sales, human resources, and operations. At any scale, it requires a cultural shift and highly engaged leaders, who take control of the organization’s future in these four ways: • Create a strategic identity. Articulate a single desirable future for your enterprise and focus all your efforts on achieving it. • Design for trust. Develop ways to attract and deserve the commitment of everyone related to your enterprise — particularly customers and employees. • Master the pivot from sprint to scale. Test new practices in an intensive, experimental, startup-style manner. Pick the approaches that work, and rapidly implement them throughout the larger system. • Treat your legacy as an asset. Save the best of your past, divest the rest for advantage, and use the income to fund the future.

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Al Kent [email protected] is a principal with PwC US and an advisor to executives for Strategy&, PwC’s strategy consulting business. Based in Florham Park, N.J., he focuses on major transformations in the oil and gas and industrials sectors. He is a leader in PwC’s engineering and construction advisory practice.

Also contributing to this article were PwC global advisory markets leader Randy Browning; PwC US principal DeAnne Aguirre (US Strategy& leader); PwC US partner Paul Gaynor; PwC global markets director Daniel B. Garcia; PwC campaign leaders Jennifer Bhagwanjee and Virginia Colamarino; and s+b contributing editor Theodore Kinni.

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We think of these as the basic building blocks of any successful transformation. They aren’t specific steps, stages, or organizational designs. Those will vary from one enterprise to the next. Rather, they are ways of thinking about influence and change: perspectives on how to shift organizational and individual behavior in a more productive, competitive, and engaging direction. We identified these elements through a comprehensive research and synthesis project that took place early in 2018. We convened a broad, global group of PwC’s most knowledgeable experts on organizational change, particularly change at the nexus of business strategy, customer experience design, and advanced digital technology. At an extended in-depth session with 35 members of this group, we studied examples of successful transformations and articulated the factors common to them. Then we tested our findings in follow-up research and discussions with other experts, inside and outside PwC, and with clients. Though the cases varied widely — by region, industry, circumstance, and personality — the four building blocks were consistently pivotal to success. The transformation initiatives we studied (described here and included in our library of case studies on the PwC website) have helped companies shake free of their self-imposed shackles, adopt dynamic new business models, and raise their game in a swiftly changing world.

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Every company today needs to make a distinctive mark.This is a matter of building not just a brand, but a powerful identity.

Every company today needs to make a distinctive mark. This is a matter of building not just a brand, but a powerful identity, in which the company’s value proposition, core capabilities, customer and employee experience, and culture all reinforce one another. Companies with a fully coherent, differentiated, strategic identity — the likes of Apple, IKEA, Starbucks, and Honda — become iconic. They make an absolute commitment to a single overarching way of doing business, and to a grand vision of the company they need to be. Sean Connolly, president and CEO of Conagra Brands, offered his view about this sort of organizational change in a 2016 interview with the Chicago Tribune: “[It] is not for the faint of heart.” At the time of that interview, Conagra was still in the early stages of its celebrated transformation — from a diffuse, US$18 billion conglomerate of agricultural and food-related businesses (described in the press as a potential takeover target) to a focused $8 billion purveyor of consumer food brands in North America. Connolly had been hired in April 2015 after serving as the CEO of Hillshire Brands. At Conagra he was charged with refocusing the company’s

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Create a Strategic Identity

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mission and turning it around. That mandate intensified a few months later, when the activist hedge fund Jana Partners bought a stake in Conagra and gained two seats on its board. On the most practical level, Conagra’s transformation initiative involved deals and structural moves: selling a private-label business, spinning off a vertically integrated potato business, relocating headquarters, resetting the cost structure, acquiring contemporary brands, realigning its operating model, eliminating unprofitable legacy practices (including the indiscriminate use of discount promotions), and changing the company name from ConAgra Foods to Conagra Brands. At the heart of all this activity was a new concept of the company’s identity: a nimble innovator, with (according to its vision statement) “the most energized, highest-impact culture” in the food industry. Conagra’s brands would now be required to be the first or second in their sector, and to be known for attracting highly loyal followers (for example, Hunt’s, Peter Pan, Orville Redenbacher’s, Reddi-wip, Slim Jim), defining a prepared food niche (Bertolli, Hebrew National, Marie Callender’s), or emphasizing quality ingredients and health (Alexia, Blake’s, Frontera, Healthy Choice). “This is a totally new era,” Connolly told stock analysts in October 2016. “We are not the ag business that we started as almost 100 years ago. We are certainly not the global conglomerate that we’ve been for decades. For the first time in our history, we will be a branded CPG pure play.” The related new body of operations practices, dubbed the “Conagra Way,” was modeled after smaller, more flexible companies. The new IT system, built on a cloud-based infrastructure, was oriented toward rapid innovation and communication across internal silos. “Where there is friction [in the digital infrastructure], there is opportunity,” CIO Mindy Simon told CIO Magazine. “How can we use analytics to help our chefs develop new products? How can we use sensors to improve our distribution?” The results include more than $300 million in annual savings and quick growth in financial metrics, including more than 40 percent growth in total shareholder return between May 2015 and May 2017. Employees and retailers describe Conagra Brands as an entirely different company. And its 2018 acquisition (for $10.9 billion) of Pinnacle Foods (with brands such as Birds

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Link your strategic identity to your most distinctive capabilities and skills.

If you take a hard look at your core business, you’ll probably find it’s not a core at all. Rather, it’s a portfolio of non-synergistic offerings, often requiring very different capabilities. This transformation is your opportunity to focus on what you’re really good at, and cut back the rest. Everything you do afterward, including your digitization, cost management, and product and service line development, should relate directly to these distinctive strengths. For example, Bosch

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Eye, Gardein, EVOL, and Smart Balance) makes Conagra the second-largest frozen food company in the U.S., after Nestlé. The Conagra story shows how a well-considered shift in identity can take hold in even the largest and most established companies. As you take on the mind-set of an upstart, and articulate a bold new vision to establish your company’s new identity, keep these precepts in mind: Tell a good story. All too often, the leaders of a transforming company use dry, technocratic language to explain the change and its rationale. But in a successful effort, the business leader sets the tone by translating the company’s new strategic identity into vivid, everyday language — so that everyone can see how their jobs contribute, and why each part of the change matters. This may well mean articulating a company purpose that goes beyond making money. Employees and customers understand that enterprises are powerful, and that they exist to achieve something with that power — connecting people, producing wealth, creating products and services, or bringing new forms of value to society. When there is a clear, evocative statement of how the company creates value, not just for the shareholders and owners but for the greater world around it, employees feel a connection with the new identity. They understand how it will help them prosper and make them proud to be associated with it. Use symbolic gestures to represent this clarity of purpose and bring the identity to life. For example, Conagra consolidated all its Chicago-area suburban offices into one downtown building to attract talent, create a high-energy collaborative environment, and accelerate decision making. Connolly explained it this way: “[We can] see each other in the hallway, and get business done in five minutes, rather than on a conference call five days later. Everything [is] recharged.”

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Rexroth, a global electronics and engineering company based in Germany, is creating a new identity as the hub of an Industrial Internet platform. Grounded in its sensor and Internet of Things businesses, the identity is aimed at “smart city” projects and middle-market companies. The company is demonstrating its value by using its expertise in sensors and analytics to trim its own operational expenses. Company leaders talk of saving ¤1 billion (US$1.2 billion) internally by 2020 and thus building a company that can uniquely offer comparable savings to its customers. Stretch your aspirations. When explaining the need for transformation, don’t just talk about threats or “burning platforms.” Fear paralyzes and distracts people. It creates a toxicity that can take years to remove. Instead, talk about the company you want to (and may need to) create — a company that can do things it can’t do now. Show how your people’s strengths and talents are uniquely qualified to realize this vision, and how you can build or buy the collective capabilities to support them. To really inspire commitment, the new aspiration should be a genuine stretch — one that will take unprecedented energy and skill to fulfill, and will deliver an equally unprecedented payoff. Hearing it described should make your company’s leaders, employees, and other primary stakeholders feel simultaneously intrigued, energized, and uncomfortable; otherwise, it’s probably not complete. The state-owned insurance company Accident Compensation Corporation (ACC) in New Zealand is transforming itself this way — from being an established facilitator of claims to bing, in the words of the 2017 annual report, a company dedicated to “improving quality of life by minimizing the incidence and impact of injury.” It is building the capabilities to help New Zealanders prepare for crisis and prevent accidents, not just recover from them. Invite participation. Talk to employees; invite them to put their fingerprints on the future and to help design aspects of it with you. People are more likely to adopt what they help to create. Other stakeholders may also have powerful contributions to make. Investors, for instance, recognize the market forces driving change for your company as few others do. If they’re interested in long-term involvement with your enterprise, they’ll appreciate the power of a truly viable strategic identity.

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Invite employees to put their fingerprints on the future and to help design aspects of it with you. People are more likely to adopt what they help to create.

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only the ability to employ three sales associates where once you had five. You might need a breakthrough in revenues, a step change in safety and reliability, the ability to compete in a new arena (a geographic market or a customer group), or a boost in customer loyalty. Consider every option for dealing with those challenges, including the formerly unthinkable. Call out the trade-offs you face, and the difficult choices you have to make. Name the choices you’re not going to pursue, and explain why. Choose your financial targets and milestones carefully, to show sustained movement toward your goal, not just good results for a quarter or two. Similarly, pick tough targets for improving your reputation — e.g., would a customer, competitor, or community member who’s been observing your company over the last few years agree that it has improved? Connect with the community. You are remaking your company to be the kind of enterprise your employees want to be associated with. They will be concerned about its reputation (and their own) outside the company walls. Consider what social values your company should adopt. They may involve environmental quality, sustainable use of resources, frugality, integrity, ethics, community leadership, or other ways of serving society. Metrics such as Total Impact can help you identify opportunities that fit your company’s staff and capabilities. Take on only those goals your company can authentically stand behind. Bring it all together into a “critical few” elements. Resist the temptation to include everyone’s ideas. Tell a simple, clear story that gets to the heart of the

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Name the challenges you face. You’re seeking not only greater efficiency, or

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company you will create. In their forthcoming book, The Critical Few: Energize Your Company’s Culture by Choosing What Really Matters, Jon Katzenbach, James Thomas, and Gretchen Anderson suggest that you can distill all the complexity of change into a few cultural elements. Pick two or three traits that represent the company you want to become (such as Conagra’s nutritional consciousness, Bosch’s technological acumen, or ACC’s proactive approach to its customers); a few behaviors that you’ll need to realize the new company’s success (such as faster decision making or better collaboration across internal boundaries); and a few key people from throughout the enterprise who exemplify the new approach. It takes time to winnow the many down to the critical few. But once you’ve done this, you’ll be able to move forward much more quickly, and everybody will be able to operate more effectively, because they will understand the new company’s identity and how their job fits into it.

Design for Trust It’s often possible to tell how a transformation is going by the way people feel about it. Many difficult options may be on the table, including selling part of the firm, reducing staff, and making radical shifts in strategy. But if people see reason for hope, they will invest their time and effort in building the new identity. They will trust the enterprise to deliver what it has promised. Building trust is not just a matter of gaining buy-in. You put psychology first: designing every move so that it resonates with customers, employees, investors, regulators, and other stakeholders. This requires care, planning, and an attitude about people that often goes against the grain. Many executives believe, deep down, that people are “fixed”: once set in their ways, they will not budge. But the truth is that people can shift even their most fundamental attitudes, beliefs, and behaviors if they recognize the value of doing so and are given the op-

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portunity to develop their skills. Stanford University psychologist Carol Dweck calls this perspective the “growth mind-set.” If you don’t believe in the flexibility of your company’s employees, you won’t believe in the transformability of your company. Such disbelief is likely to become a self-fulfilling prophecy. How do you learn that people will change? By designing an approach that gives you and your employees reason to trust one another. Dwˆr Cymru Welsh Water, the sixth-largest of the 10 regulated water and wastewater utilities in England and Wales, accomplished this when it transformed its retail business in 2015. To reduce an excessive level of bad debt and drive its costs back into line, the company required more than 3,000 employees to reapply for their jobs; 40 percent of them were not rehired. Yet when Welsh Water conducted an employee engagement survey afterward, the remaining employees responded in record numbers, and the company’s engagement score (a measure of satisfaction and commitment, derived from that staff survey) rose substantially. There was also a significant improvement in cost-to-serve, an increase of more than 20 percent in capacity per pound invested, and a 73 percent improvement in cash collection rates. The factors that made a difference were intangible, but all related to building trust. Welsh Water’s leaders were clear with employees about the criteria for being rehired. These leaders demonstrated a growing competence in their own managerial decisions, in part because of improvements in the way they used data. Data about customer use and operational efficiencies had been kept in organizational silos; as a result, finances had been mismanaged, excessive debt and

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If you don’t believe in the flexibility of your company’s employees, you won’t believe in the transformability of your company.

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overhead had accumulated, and customer experience had declined. To fix these issues, the company released a series of dashboards — electronic scorecards available to employees in which they could see, for the first time, key performance indicators related to their job. By calling this new approach the “Welsh Water Way of Working,” and rolling it out in a series of three-month waves, the company gave employees a clear signal that new behaviors would be valued and rewarded, and gave them time to adjust. The new practices also built trust in the community. More than 5,000 customers who had been in arrears are now on a reasonable payment plan, with many more expected to follow, reducing the debt burden on other customers’ bills. Moreover, as employees saw customers’ lives improve (particularly those with little means who needed help), and as their own workday became easier and more rewarding, they gained more pride and confidence in the company. These precepts can help you get similar results from your own transformation. Start at the top. Your culture takes its cue from the leadership team. Are they in sync and capable? Or are they visibly uncomfortable with one another and distant from everyone else? If the latter, then you should help that group improve its leadership, perhaps through intensive coaching and conversation. Redesign your HR motivators. Translate trustworthiness into tangible incentives such as salary, promotion, and perks. Incentives don’t have to be expensive; they could include flextime, educational opportunities, participation in a highgrowth part of the enterprise (with the challenges and career prospects that go with that), or access to particular mentors or projects. Find out what different people want from this transformation, and tailor your menu of incentives, structures, relationships, and practices across that range. Perhaps the most commonly overlooked motivation is autonomy. Set things up so people can control their own budget or part of the system, with clear accountability and open communication about how they might contribute to the new strategic identity. Foster the kind of workplace that encourages what London Business School professor Dan Cable calls the “seeking system”: the part of the brain that craves experimentation and creativity as a way to learn. Treat resistance with respect. Some visible key people will inevitably remain beyond reach, opposed to your new strategy. There is a reason they object;

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can you engage with them, find out why, and make a good-faith effort to win them over without compromising your strategy? If you must lay people off, ensure that they are given the support they need to find new roles elsewhere. Even if you need opponents to leave, seeing you treat them fairly will give others more reason to commit to the new enterprise wholeheartedly. Build trust with customers. Too many companies have undermined their customers’ respect and interest with careless use of data or duplicitous practices. Set an example for competence and genuine commitment to trustworthiness. Embody this in the quality of the online and offline customer experience you design. Devote the resources and attention needed to accomplish this and make it profitable. feature strategy & leadership 72

New ideas need time and space to incubate; in their early stages, they must be protected from the larger system’s interference. But if they remain isolated, they’ll inevitably be marginalized. It takes a great deal of on-the-ground skill to resolve this paradox. Successful transformational leaders build in that resolution from the beginning. By combining the speed and agility of a startup with comprehensive full-scale execution, they acquire, develop, and sustain the capabilities they need to differentiate themselves. Pernod Ricard, based in Paris, is the world’s second-largest wine and spirits company (after Diageo). Its many well-known brands include Absolut, Beefeater, Glenlivet, Jacob’s Creek, Jameson, Kahlua, and Seagram’s. In 2016, with the goal of becoming world leader, it began to transform its marketing and operations organizations. Among its tools was Briefcase, a distribution app that replaced paper binders and digital spreadsheets. With Briefcase, sales teams can

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pull up comprehensive sales data on their smartphones, along with sell sheets and cocktail recipes for particular accounts and brands, and connect through social media with their colleagues around the world. Because independent distributors that supply retailers, bars, and restaurants work with Pernod Ricard, they too are part of the Briefcase system. In years past, it might have taken a long time to develop this app. Instead, Pernod Ricard brought together a dedicated team of internal and external professionals to create it on a cloud platform. They tested it rapidly with a target group of salespeople, implemented their suggestions, and rolled it out in key territories within a few months. Briefcase is credited with a 300 percent increase in account visits, a key sales metric for any customer-oriented consumer products company. “This is a game change,” said Marc Andre, vice president of IT solutions at Pernod Ricard North America. “We now have all the information and tools we need to manage each distribution channel.” A successful transformation involves a continual series of small innovations, each building on the concepts that worked before. They can include new products or services, entries into new markets, operational improvements, new ways of tracking results, explorations of new business models, or new ways of working that emulate (or improve on) those of upstart technology companies. Typically, you will develop and try out each new approach on an experimental basis, and then syndicate those that prove themselves, implementing them at full scale. As you raise the bar a bit each day, the organization shifts much more easily and effectively than it would if you set up a grand dramatic scheme for demanding behavior change across the enterprise. Some precepts for accomplishing this follow. Adopt the methods of agile innovation. Small groups can try out multiple new ways of working, and introduce new products and services, using the same development techniques that are common in tech companies and research universities. In a typical sprint-and-scrum process, a small cross-functional group of stakeholders and knowledgeable people is given a period of time, perhaps three to six weeks, to come up with the necessary innovation. The team should be diverse, representing every relevant function and skill — strategists, design thinkers, operational experts, finance professionals, and technologists. They converge on the

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problem, ignoring their other responsibilities, and develop a first-phase prototype. Then they test it in some real-world setting, perhaps with a few variations. New Zealand’s ACC, for example, set up “innovation labs” — pockets of activity where people experimented with the use of analytics and new customer services. These served as incubators in the firm’s transformation. Avis is similarly prototyping 33 potential new revenue streams, each as its own mini-enterprise. “We’re making a portfolio of bets,” Ohad Zeira, Avis’s head of fleet ventures, told Wired. “When I came in, there were a ton of ideas. My job was picking the right ones.” In our own firm’s Experience Center design sessions, we bring together experts in business strategy, consumer and employee experience, and technology to work intensively as a team, building and prototyping new ways of solving problems. These prototypes are fast and imperfect by design, the equivalent of alpha releases in software; we then refine them, test them, and rapidly move the better ideas forward. Plan for scale. Protect new ideas from interference, but only until they prove themselves. Then, replicate them quickly throughout the enterprise, replacing existing operations at every level. You will probably have a small, authoritative senior group set up to pick which ideas get scaled — not all at once, but when each is ready. The senior group may assign new team leaders at that point; the characteristics of experimenters and implementers are very different. Provide enough guidance for teams around the world to implement each new approach wholeheartedly. Build your personal knowledge of customer needs. In many large, established firms, the innovate-then-scale approach is countercultural. Thus, you often see ideas emerge that should get picked up, but don’t; overly programmatic oversight that stifles the prototypes before they have a chance to take hold; or ideas that turn out to be impractical because operations people haven’t been involved. The best solution for any of these problems is deeper awareness of your customers and their needs, so that you can tailor and develop these ideas with more confidence. The practices of design thinking and in-depth customer research — in which you visit, work with, and develop relationships with representative purchasers of your products and services — are very useful. If you integrate that kind of activity with your own prototyping efforts, it becomes an enormous

confidence builder for your teams. Even if you get an individual project wrong, your ove all hit rate will increase, as you learn how to learn about your customers more effectively.

Your existing company has a great deal of value; otherwise, it could not have thrived thus far. Now it is moving into a new form. It is time to dispassionately and creatively determine how to make the most of the value you’ve created. Inevitably, some elements of your old organization must be left behind as the company moves on. These services, processes, practices, brands, and even subsidiary enterprises will not fit your new identity and operating model. The attention you pay to managing your legacy can affect the entire transformation. Moreover, while you shift to a new identity, the old business must stay in motion; the company depends on its revenue and profits. You thus need a clear and effective plan for harvesting the best of your past, while fixing up and divesting anything that will distract your new organization. These precepts can help. Maximize value throughout the enterprise. This precept includes parts you divest. Some of your businesses and assets may contribute to revenues or market share, but not as well as they would as part of a company with more appropriate capabilities. For instance, in 2011, McGraw-Hill was a broad and scattered media and information services provider under fire from activist investors. The company leaders knew they had to sell off the businesses that didn’t fit, particularly the large education publishing business. But rather than hurriedly dismantling the company, they mapped out a multiyear program in which they restructured costs, put new management in place (even for the businesses that would be

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Treat Your Legacy as an Asset

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divested), and transformed their operating model. The divestitures, when they happened, contributed strongly to the bottom line. The resulting company, focused on financial information and rechristened S&P Global, increased its market value by $23 billion. Balance nostalgia and foresight. Managing the legacy entails much of the most wrenching work in transformation. Suddenly, people are told that activities in which they have invested years of their lives are being jettisoned. For example, if your company enthusiastically switches to cloud-based interoperability, people who have held the old proprietary IT system together may wonder if they have wasted their time. Communicate your appreciation for the value that they created in the past, and make sure there is a path available for those employees to work productively in the new regime. At the same time, don’t say yes to emotionally driven pleas for the status quo. You may have to stop doing many things that served your company well in the past. Focus on the distinctive value proposition and capabilities that you need to develop now. Put bold and talented people on the front lines of legacy management. The legacy management aspect of transformation is frequently treated as a backwater. But it is as critical to transformation success as the other three building blocks, and probably only a small group of executives in your company have the critical thinking skills and dispassionate temperament to master it. This can be a plum temporary assignment, in which people learn how to distinguish your company’s strategic capabilities from everyday activities; divest elements that aren’t needed; and integrate the right legacy and future-oriented capabilities together.

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Don’t say yes to emotionally driven pleas for the status quo.You may have to stop doing many things that served your company well in the past.

The Transformative Way These four elements are all crucial to your design, no matter what type of company you have. The way you apply them depends on your unique situation; your industry, your company’s geographic footprint, and the circumstances of your company can affect the way you sequence these elements. The first step is akin to the due diligence you would do on another company while considering an acquisition, but is performed on your own company. Ask yourself questions like these: Creating a strategic identity:

Designing for trust:

• How do our employees and customers see us, and what has led them to see us this way? • How can this transformation help us tap into the full potential of our people? • How can this transformation help us deliver more consistent and reliable value to customers? • How should we communicate the transformation to resolve the gaps in employee and customer trust? Mastering the pivot from sprint to scale:

• What are the most promising things our company can do to deliver value — including products, services, practices, experiences, and capabilities — that it isn’t doing now? • How can we best prototype those new ideas? Where? And with whom? • How do we select the best ideas to nurture and scale, and then redistribute resources in the enterprise to support them?

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• What is the enterprise we most want to create? • What value would this new identity offer customers and the world at large? • What are the critical few elements — attributes, behaviors, and key people — we could draw on to move forward? • Why do we care about the enterprise we’re building? • Why should our constituents care?

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Putting the Building Blocks to Work

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1. Create a strategic identity

2. Design for trust

3. Master the pivot from sprint to scale

4. Treat your legacy as an asset

A familyowned business that is shifting to professional management

You may already have a strong, focused identity, loyal customers, and deeply held values. But is your company as differentiated as it needs to be? What should it be known for?

Consider the nonfamily members on whom your company depends. What kinds of equity and incentives must you offer? How do you build employee and customer loyalty?

Pick two or more experimental efforts championed by young, engaged family leaders and invest in them.

Which family values remain most important for the company’s identity? Which legacy activities no longer fit and should be strengthened and sold?

A startup that is maturing into “grownup” status

What do you want to be famous for two years from now — apart from your technical capability? What is your purpose and your path to profitable growth?

What are your customers looking for in your product? How will you foster an inclusive, diverse culture that attracts great people?

Focus on scale: Assign a team to develop a way to scale up your ideas and practices. Develop systematic performance measurement practices and discipline on objectives and results.

Imagine you were going to let only part of your business be acquired by a larger tech firm. Which part would you keep?

A company based in an emerging economy that is just entering global markets

Which aspect of your identity is relevant to those outside your home region?

Build a board that ensures local knowledge, highcaliber oversight, and reach toward global markets. Distribute responsibility across the enterprise while increasing informal connections.

Look for partnerships with external enterprises that can help you innovate and scale.

What aspects of your company have worked in your original region, but would be less effective elsewhere?

An industrial resources company (in oil and gas or metals)

Your industry is paying more attention to social and environmental impact. Where can you make a mark that demonstrates leadership?

Rethink the mix of internal and external constituents. What voices are you not hearing? What risks (for example, with interest rates or logistics) do you need to consider in new ways?

Find ways to better electronically model new ventures (such as digital twin technology) without as much capital investment.

Which long-term assets have value that can be unlocked with digital capabilities?

A retail, media, or financialservices company that is facing digital disruption

What strategic identity would increase your engagement with end-users and consumers, while building on your established brand and strengths? Should you provide a platform for your competitors’ brands?

What “critical few” behaviors could build your digital acumen?

Intensively create a smartphone-based customer experience interface, knowing from the start how you will scale it to the entire enterprise.

Conduct a “parking lot” exercise: Imagine every business activity moved out of the building. Which would you bring back in as critical, and which could be divested?

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A transformation initiative is a call to action — and the sequence of events should be tailored to your own circumstances. Here are five archetypal company situations, and how the four building blocks might apply.

• Are we prepared to learn from our experience as we go along? What practices for observation and feedback do we need to put in place? Treating your legacy as an asset:

• If we were designing our enterprise from scratch, which of our current activities would we still choose to undertake? • How well do our legacy activities fit with our future strategic identity? • Where is the latent value in our legacy activities? • What would we have to do to realize that latent value, either by integrating those activities into our core business or by divesting them?

Resources DeAnne Aguirre and Micah Alpern, “10 Principles of Leading Change Management,” s+b, June 6, 2014: These time-honored precepts all reinforce the value of designing for trust. John Berisford and Jack Callahan, “Finance and HR: The Executive Partnership That Transformed a Company,” s+b, July 24, 2017: How two executives new to their jobs led the strategic transformation that remade McGraw-Hill into S&P Global. Vinay Couto, Deniz Caglar, and John Plansky, “Building Trust while Cutting Costs,” s+b, Jan. 10, 2017: Rumors and fear can diminish the value of your legacy asset. You can reduce the turmoil by informing, empowering, and inspiring employees. Elizabeth Doty, “Starting a Transformation? Don’t Change Everything,” s+b, Jan. 16, 2016: Three conversations that can help you articulate your strategic identity. Amity Millhiser and Art Kleiner, “Inside a Major Tech Company Transformation,” s+b, Nov. 5, 2018: Symantec CIO Sheila Jordan recounts how the company reoriented itself to focus on cybersecurity. Tom Puthiyamadam, “Failure Is an Option,” s+b, Mar. 12, 2018: Tells how Jeff Bezos pivoted to scale at the Washington Post, and how you can do the same. PwC case studies library: www.pwc.com/gx/en/services/advisory/case-studies.html.

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These questions deserve deep reflection, because the answers can allow your company to fulfill its short-term and long-term objectives. The better you understand your strategic identity and the priorities it demands, the more certain you can be about the changes you need to make — and thus the more confidently you can double down on them. That’s why in a successful transformation effort, fear is not your ideal motivator. Fear leads you to hedge your bets, and that makes your change less effective. Vow to set up your transformation initiative to emphasize aspiration, not fear. Every day, employees and other stakeholders are asking you how they can help build the company you wish to lead. If you remain resolute in your answers, one day not too long from now, you will discover you are already leading that company. +

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THREE NEW KINDS OF CAPITAL GIVE COMPANIES

Illustration by Mark Matcho

by Miles Everson, John Sviokla, and Kelly Barnes

What is it about companies such as Alphabet, Amazon, Apple, and Alibaba? No matter where they turn their attention — cars, banking, groceries, healthcare, media, retail, trucking — industries quail before them. Company leaders start wondering if their moats are deep enough. Investors flee before the drawbridges rise. These companies are among the largest and richest in the world, and they use this leverage to become larger and richer still — in 2018, Apple and Amazon became the world’s first trilliondollar companies. These powerhouses attract huge numbers of extremely talented people to work for them, and they generate one innovation after another. But none of that explains the source of their industry-disrupting power.

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A NEW SOURCE OF LEVERAGE AND POWER.

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John Sviokla [email protected] is an investor, board member, consultant, and author based in the Boston area and in Chicago. A retired partner with PwC US, he leads the firm’s executive think tank, the Exchange.

Kelly Barnes [email protected] is the health industries leader for PwC US and the global network. Based in Dallas, she is a partner with PwC US.

Also contributing to this article were PwC UK partner Will JacksonMoore, PwC Thought Leadership Institute economist Craig Scalise, and s+b contributing editor Theodore Kinni.

There are probably 100 companies around the world — including at least 40 “unicorns,” startups with a market capitalization of US$1 billion or more — with similar qualities. They are known for rapid, exponential success. Most are in the U.S. and China right now, but they will probably become more common elsewhere soon. We think of them as bionic enterprises: a name that evokes the fusion of technological and biological systems for extraordinary performance and growth. These companies compete in unprecedented ways by combining digital prowess, human ingenuity, and strategic purpose, as if they were the corporate equivalent of superhuman cyborgs such as Marvel Comics’ Iron Man. Over the past year, as we’ve been researching and writing about the nature of bionic companies (see “The Bionic Company,” by Miles Everson and John Sviokla, s+b, Feb. 22, 2018), it’s become apparent that no company has a monopoly on this way of doing business. A few companies are out in front, but many others will follow. Some will be part of consortia; some will take advantage of highly capable platforms. You can lead your own company toward a bionic transformation if you think about changing your business in the following ways. • From a business model based on managing the supply of your product or service to one based on providing whatever customers demand, using any means possible • From an operational approach based on stocks of information that you hold and capture, to one based on flows of knowledge that you collaborate on and share

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Miles Everson [email protected] is PwC’s advisory and consulting leader for the firm’s global network, and the leader of advisory and consulting services for PwC’s AsiaPacific and Americas cluster. He is a partner with PwC US.

I

n the 19th century, when the modern corporation emerged, its

success stemmed from the management of three long-standing forms of capital. These sources of wealth had existed throughout history, but now could be developed with unprecedented speed at unprecedented scale. They are natural capital (land, water, and other environmental resources), human capital (the

development and deployment of talent), and financial capital (money, in all its forms). The steam engine, the telegraph and telephone, the railroad, and the other technological advances of that time allowed large enterprises to deploy these forms of capital in new ways. This spurred yet more innovation and dramatically transformed the world, generating vast amounts of new wealth. Today’s new industrial revolution, as it is sometimes called, involves a similar release of wealth, again in the form of innovative as-

sets. To be sure, companies today still deploy natural, human, and

rapidly as circumstances change. One of the most successful

financial capital as their predeces-

generators of behavior capital is the

sors did. But the secret of their

Waze navigation app (acquired by

success lies in three new forms of

Google in 2013). Originally devel-

capital, brought to life by today’s

oped in Israel, it found early use in

integrated technologies:

restricted zones, where maps are

Behavior capital: The collec-

unreliable and dangerous situations

tion, aggregation, and modeling of

may develop. It ultimately found a

data, in a way that yields valuable

passionate audience among com-

insights. Sources of data have pro-

muters and others seeking to avoid

liferated with the Internet of Things,

traffic delays. The information that

an infrastructure embedded with

Waze provides is generated in part

sensors and other data-gathering

from machine learning; it knows

devices. The assets generated from

what the traffic patterns have been

this data often take the form of digital

and how they might change. It also

models of real-world activity, reveal-

incorporates data from its users’

ing how people, machines, and sys-

speed and behavior; when they slow

tems have behaved in the past, how

down in a traffic jam, that informa-

they are likely to behave in the future,

tion instantly becomes part of the

and how that behavior can

Waze model. Waze users can also

be influenced.

report on road conditions; as they

Behavior capital gives com-

participate in the Waze system, it

panies visibility into their systems

becomes more accurate. Its behav-

that they otherwise wouldn’t have.

ior and users’ behavior interact.

It reduces error and risk: A deci-

Cognitive capital: This asset

sion maker can take chances in the

gains its value from computability,

virtual world that would be unbear-

the automation of cognitive tasks.

able in real life. It raises the ability of

Most companies have established

companies to control their operations

great reservoirs of practical knowl-

more effectively and substitute new

edge; now they can transfer that

products for old ones more easily and

(continued on next page)

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Wealth in the 21st Century

83

knowledge into autonomous enti-

tal twin — and, through the simula-

net emerged, the value of network

ties, which can act on it at scale. As

tion, learn in advance what types of

capital rose dramatically. Unlike

decision-making capabilities move

preventive maintenance would allow

broadcast networks, Internet-based

into software, embedded not just in

the plant to best weather the storm.

networks can manage many-to-

computer systems but in intelligent

Cognitive capital has been avail-

devices, robots, vehicles, and mas-

able in rudimentary form for years;

participants to communicate not just

sive industrial platforms, an enter-

any interactive voice-response phone

with the central hub, but also with

prise can operate at vastly greater

system represents a kind of cognitive

one another.

scale. When this phenomenon is

capital. But it takes on much more

managed responsibly, it creates

value when it is sophisticated. Banks,

engine, for instance, links people

enormous value.

for example, can use algorithms to

through their product reviews. Many

model how different customers will

people have gotten into the habit of

is the digital twin, a computer-based

respond to new financial-services

looking up reviews on the network

virtual simulation of technological

offers, taking into account their

before buying anything significant.

and business systems. Thanks in

circumstances (for instance, how far

An Amazon apparel-buying service

part to its use of machine learning,

they are from retirement), along with

called Echo Look has gone further

the simulation can embed all the

sociodemographic, health, and finan-

with network capital. When trying on

knowledge typically used to operate

cial factors derived from data about

clothes at home, customers can use

and maintain its real-world equiva-

millions of people. The algorithm can

Echo Look to ask other people across

lent, including the information that

then offer new services to its cus-

the Internet for their opinions. All

is hard to codify. Then it can use that

tomers, tailored to their priorities.

those opinions are captured for

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information to simulate responses

Network capital: Companies

Amazon’s recommendations

use in Amazon’s R&D and marketing,

to changing conditions. Thus, for ex-

by their nature are hubs, connecting

which further extends its

ample, if you want to know how your

their customers, their employees,

behavior capital.

refining plant would operate in flood

and those who generate information

conditions, you can adjust your digi-

about their projects. When the Inter-

• From a competitive position based on a stable landscape of rivals to one based on platforms where a single winner dominates the system Underlying these three shifts of mind is a quiet revolution in the sources of wealth that businesses deploy and create — the first such major shift since the Industrial Revolution. These new intangible (but very powerful) assets are behavior capital, the awareness and insight developed by tracking ongoing activity; cognitive capital, knowledge codified into digitally managed routines; and network capital, the human and technological connection points available to an enterprise (see “Wealth in the 21st Century”). When you deploy these three forms of capital effectively, you transform your enterprise. Just a year or two ago, transformation was seen as a response to disruption. You changed the way you operated so you could escape being disrupted — or

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One example of cognitive capital

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many communications: They allow

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perhaps so you could disrupt your rivals. Now, the goal of transformation is to find an identity that will allow your company to thrive in a bionic environment: to create value in ways that weren’t possible before, taking advantage of the infrastructure of the Industrial Internet, as new to our world as electricity and skyscrapers were in the late 19th century. More and more companies are making this shift, more rapidly than you might expect. Individual enterprises that hold back will find themselves swept forward anyway by their customers, competitors, employees, and investors — and, if they continue to resist, ultimately by their acquirers. Beyond Individual Enterprise

One example of broad-based bionic transformation is occurring in an industry that until recently was widely held to be one of the slowest and most unyielding to change: healthcare. As Robert M. Wachter, chair of the department of medicine at the University of California, San Francisco, put it in his book The Digital Doctor, “The simple narrative of our age — that computers improve the performance of every industry they touch — turns out to have been magical thinking when it comes to healthcare.” Just three years ago, when Wachter published those lines, there were reasons to be skeptical of healthcare technology. Early efforts to set up electronic patient records faltered; the attempted monetization of patient data didn’t pay off; and competition among providers, payors, and other industry participants created high levels of mistrust. But Wachter’s conclusion was premature. Since he published his book, a

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group of technology companies, including Amazon, Google, and Microsoft, have announced their entrance into healthcare businesses. Some health industry firms are restructuring themselves to play more platform-oriented roles. Case in point: the merger of CVS and Aetna. Change is happening at the consortium level, because no single company can gather enough data to create the necessary behavior capital, and no single hospital can reach enough people with its cognitive capital. The data sources of a region or a country must be integrated together. As we write this article, the necessary consortia are beginning to come together. (Disclosure: Our firm, PwC, is participating in the creation of consortia like these in healthcare, using a platform known as DoubleJump Health.) Wachter himself says he sees these platforms finally changing the way the health system works. “We are learning to use [digital] technology in new ways, and we are starting to make headway,” he recently told strategy+business. One major consequence of the emergence of digitally enabled healthcare platforms is the growing ability to understand all the factors that affect individual health — not just physiological factors, but the behavior of patients, their social systems, and the quality of nearby environments. Data about these factors is being accessed and analyzed across geographies, industries, and institutional boundaries, so that previously unseen interrelationships are revealed and recognized. In South Texas, for example, where diabetes is prevalent, significant barriers have prevented people from obtaining quality care. A current project at the University of Texas (conducted in collaboration with PwC) is seeking to bring more digitally and socially connected care to this region. The project leaders learned that those who have diabetes are unlikely to schedule a visit with their doctor. Instead, they turn for support to relatives and close friends, and to social groups such as their church or community centers. Through partnerships with retailers and community programs, the project set up screening and prevention

Bionic transformation turns every company’s business strategy on its head. It leads a company to reinvent what it does and who it benefits.

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programs in convenient and affordable locations. The data from these screenings is captured, tracked, and combined with available medical records from clinics and hospitals. Individuals can assess their health status on a mobile app, check their blood glucose and measure their blood pressure in nearby retail stores, and attend community-based lifestyle management classes — all while being supported by an expanded care team engaging them virtually to help them better control their disease. These seemingly small efforts gain power because they are interconnected: Together, they represent a step change in life management for anyone affected by diabetes. Healthcare is only one of many industries undergoing major bionic change. In 2018, Amazon began partnering with General Motors and Volvo, both of which have proprietary electronic communications systems (called OnStar and On Call, respectively), to arrange package deliveries to cars. A car’s trunk is unlockedusing a cloud-based verification protocol shared by the two companies, so the goods can be placed inside without the driver having to be present. Innovative banks deliver financial services from other institutions to their customers; universities without walls offer courses for credit from instructors around the world; and leading-edge supply chains combine 3D printing and comprehensive logistics to generate and deliver specialized products, continually accumulating process data to cut costs and improve the quality of everything they do. Bionic transformation turns every company’s business strategy on its head. It leads a company to reinvent what it does and who it benefits. Walmart is a good example. For years, it applied technology effectively to continuously im-

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Supply to Demand

Conventional shopping — at a department store or grocery, for example — is designed to optimize supply. Business leaders evaluate their opportunities by estimating the size of the addressable market for their products and services. How many potential customers exist, strategic analysts ask, and how much of this market can our company grab? They then seek distributors, retailers, and marketers that can attract the consumer to their wares. But this approach constrains

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prove its supply chain and drive down unit costs, attracting customers through low prices without much attention to shopper experience. Then Amazon and other online competitors reinvented the shopper experience: no physical store, access to insight from fellow customers, delivery to the shopper’s door, and easy returns. Walmart is responding to Amazon’s innovations with its own bionic transformation: Through the acquisitions of Jet.com (2016), Bonobos (2017), Flipkart (2018), and other online retail businesses; a partnership with Microsoft to develop a cloud computing–based retail platform; and experimentation with new businesses such as primary care clinics, Walmart is reinventing its identity from an everyday low-cost superstore to a center for managing one’s life. How can your company begin a similar transition? Focus on three shifts of behavior: from supply-oriented to demand-oriented marketing, from knowledge stocks to flows in your R&D, and from head-to-head competition to a platformoriented mind-set, in which one or two companies dominate.

What Stitch Fix CEO Katrina Lake calls “data science” is what we call behavior capital: wealth in the form of steadily accumulating insight about what customers want to buy.

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a company to the customers who want its portfolio of offerings — a market which is, by definition, limited in size. Bionic companies feel no such market constraint. Instead, they ask a more ambitious question: What markets do we want to create? They create demand by changing the boundaries of existing markets or creating new markets of their own. Take Stitch Fix, an apparel aggregator founded in 2011, and marketed as an online shopping service (though it could also be seen as a new type of retail store). Customers fill out a style profile, and algorithms are designed to emulate a stylist and pick a selection of clothing, shoes, and accessories tailored to the individual’s preferences. As s+b technology columnist Kevin Maney has pointed out, “AI and data make it possible to create a personal relationship without there actually being [a person] — which is what allows the concept to scale.” In addition, the concept reframes the experience of shopping. People’s bedrooms become, in effect, the fitting room; they keep what they want and return the rest in the seller’s prepaid package. This business model can work only for a bionic company. As Stitch Fix CEO Katrina Lake put it in a 2018 Harvard Business Review article, “Data science isn’t woven into our culture; it is our culture. We started with it at the heart of the business, rather than adding it to a traditional organizational structure, and built the company’s algorithms around our clients and their needs.… Stitch Fix wouldn’t exist without data science. It’s that simple.” The company makes a point of featuring its team of 80 data scientists, whose leader, chief algorithms officer Eric Colson, is a Netflix alumnus reporting directly to Lake.

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What Lake calls “data science” is what we call behavior capital: wealth in the form of steadily accumulating insight about what customers want to buy. The system fine-tunes its selections based on its ever-expanding use of machine learning (an example of cognitive capital). Stitch Fix does not have to purchase items on the basis of estimates of what will sell. It can purchase items on the basis of what it calculates its customers will ask for next. The organization of its value chain is not based on factories and warehouses (although it has both in its system); the center point is the proprietary engine that matches clothing to prospective consumer, aligning company identity and individual identity. In effect, the bionic age has changed the relationship between supply and demand. Ellen Levy, the managing director of the network capital–building firm Silicon Valley Connect, notes that consumers used to have to organize themselves around the supplier’s operations. In the future, the fulcrum of a shopping transaction will be demand; the supplier will increasingly have to organize around the customer. The more opportunities people get, the more easily and rapidly they will shift the nature of demand, and thus open the door to new businesses. One of the best-known examples is shared-ride services. When the first such service, Uber, opened for business in San Francisco in 2010, the city had a $100 million taxi market. Nearly a decade later, the variable transportation business in San Francisco is a $300 million market. Did the population of San Francisco triple? It may seem that way to longtime residents, but it’s grown by only about 10 percent since 2009. What changed in San Francisco — and

The new forms of capital have shifted the basis of competition. Platforms are transformational greenfields in which companies can stake new claims. Those that succeed become dominant players.

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a host of other cities — was the experience of getting a ride. The way in which ride-sharing companies utilized behavior, cognitive, and network capital allowed them to deliver a user experience that blew open the demand structure of the taxi market and brought in new ventures. More recently, app-based ride-sharing services for taxis, such as Curb, have expanded their services and scope. They allow riders to summon conventional cabs and pay their fares with smartphones. Other transit apps have similarly improved the user experience for mass transit and auto rentals. Ultimately, some interoperable demand-based platform could merge all these together, helping people get around cities and suburbs seamlessly, paying one fare to use whatever form of transportation is available.

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From Knowledge Stocks to Flows

Traditionally, knowledge has been an asset that companies held close. But the new forms of capital enable companies to deploy knowledge in a more fluid way. Knowledge stocks can be unlocked and freely shared, and counterintuitively, this flow of shared information (drawing on the company’s network capital) can become an appreciating, self-renewing asset. GitHub is a company of about 800 employees that is based on nothing but knowledge flows. It hosts the world’s largest open software platform, which has attracted more than 28 million developers, who are working on nearly 50 million projects on any given day. In June 2018, a decade after GitHub’s founding, Microsoft announced that it was acquiring the company

Winner Take All

Traditionally, companies have tried to define a competitive market position that they can occupy and defend profitably. This approach has required a loyal group of customers and a relatively stable competitive landscape. Now, the new forms of capital have shifted the basis of competition. Platforms are transformational greenfields in which companies can stake new claims. Those that stake a claim successfully — either by being first or by having a distinctive value proposition that overtakes early rivals — become dominant players. They allow others to survive as dependent enterprises. New economic research from PwC confirms that this dynamic does, in-

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for $7.5 billion in stock. “Developers are the builders of this new era, writing the world’s code. And GitHub is their home,” explained Microsoft CEO Satya Nadella in a blog post. This represented a reversal for Microsoft. For decades, it had operated as a knowledge stock company and its leaders considered the open source software movement anathema. This acquisition made clear the extent to which knowledge flows, not stocks, will drive innovation in the tech industry in the future. Knowledge flows are a key element in transformational visions that are aimed at solving complex problems. In August 2018, for instance, Amazon, Google, IBM, Microsoft, Oracle, and Salesforce announced that they would adopt common standards when building healthcare products to make it easier for companies to share medical data. That will enhance the ability of medical professionals to use data in their efforts to diagnose and treat patients, as well as create the kinds of free-flowing data streams needed to put artificial intelligence and machine learning to work in healthcare. Collaborative healthcare environments, such as DoubleJump Health, will coordinate the flow of information among organizations in a way that accentuates communication while managing privacy and other legal and ethical issues.

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deed, happen when the computability of an industry rises far enough. The Corporate Gini Index is a barometer of a competitive landscape. In other words, it measures the strength of the all-or-nothing force in an industry. The higher an industry’s index score, the more dominant a few players are within it. In those industries in which digitization has had the greatest effect, the Gini Index tends to be high. The correlation is related to the widely observed phenomenon that the nature of competition has changed in many industries as computability increased. In a growing number of sectors, one industry winner, maybe two, and occasionally three are increasing the gap between themselves and the rest of the pack. There is only one Apple, one Alphabet (Google), and one Amazon. Large competitors may arise (such as Microsoft or Walmart), but their value propositions are different enough that they each carve out their own slice of the competitive landscape, not fighting for the same core customers. To be sure, there are exceptions. In the field of home entertainment, a multifaceted competition rages among Netflix, Hulu, Amazon, Apple iTunes, HBO, and the video platforms of various television networks. In oil and gas, and in banking, there are multiple competitors. However, it’s hard to imagine that all of these companies will survive the evolution of their industry in their current form. The phrase “winner take all” may not be literally accurate in some industries, but it suggests the direction in which each industry is moving. Technology-related industries, as one might expect, have had a head start in winner-take-all consolidation. Of the seven industries with the highest Gini Index, five are in the technology, media, and telecommunications arena. They are

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Toward a Bionic Future

These concepts — the three new forms of capital, plus organizing around demand, using knowledge flows, and a winner-take-all position — can help you develop a strategic identity for your company. For many companies, that’s the first step of a successful transformation (see “The Four Building Blocks of Transformation,” by Al Kent, David Lancefield, and Kevin Reilly, s+b, Oct. 22, 2018). For example, you might reorganize your company around behavior capital, as Stitch Fix does, so that you gain distinctive and keen insight into your customers. You might develop new forms of cognitive capital specific to your business — for instance, your own digital twin that represents your operations and the risks you are considering. You might base your business on shared information, using network capital to expand in ways that purely financial investment would not cover. Learn to compete on your bionic competence. Look for new metrics that portray these types of capital, or make significant changes to your existing mea-

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technology hardware (including storage and peripherals), telecommunications, consumer electronics, Internet and direct marketing retail, and systems software. But other industries are catching up fast. In 2017, industries with high Gini scores included such nondigital categories as tobacco manufacturers, food distributors, soft drink purveyors, food retail, home furnishings companies, and makers of heavy electrical equipment. And more than half of the cross-industry rise between 2006 and 2017 occurred in the final year alone. A growing number of industries have seen just one company capture a majority of the sector’s growth in enterprise value over the past decade. All of this suggests that the winner-take-all style of consolidation is accelerating, perhaps driven by digital network platforms as they spread across industries beyond technology and telecommunications. If that’s true, then the nature of competitive advantage will not return to multifaceted competition.

Resources Miles Everson and John Sviokla, “The Bionic Company,” s+b, Feb. 22, 2018: An introduction to the three new forms of capital. Art Kleiner, “A Doctor’s Prescription: Data May Finally Be Good for Your Health,” s+b, Oct. 8, 2018: Interview with The Digital Doctor author Robert Wachter, focused on the computability of the health industry. Anand Rao, Digital twins beyond the industrials, PwC, Feb. 13, 2017: How AI-based virtual replicas can help financial institutions better predict customer behavior.

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sures to value them. Currently, conventional business measures are leading most companies astray: Such measures undervalue the relationships and connectivity a company has built (network capital) or the insights into human activity captured in its decision making (behavior capital), or the routines and automation that are more effectively deployed at your company than anywhere else (cognitive capital). In the end, the critical factor is the imagination of you and your colleagues. The transformation of business is just beginning. Today’s unicorns have no monopoly on bionic practices. Indeed, many powerful bionic practices, making full use of behavior, cognitive, and network capital, have yet to be developed. You can’t know in advance whether you’ll come out on top in a winner-take-all competitive environment, but you can be sure that with the right kinds of capital in play, you have a far greater chance to thrive. +

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1000

With careful attention to six key areas, companies can make the most of their R&D investment and outpace the competition.

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What the Top Innovators Get Right

Illustration by Adam McCauley

by Barry Jaruzelski, Robert Chwalik, and Brad Goehle

A project team from Stanley Black & Decker, a US$12.7 billion diversified manufacturing firm, noticed something problematic when observing customers using the company’s products at construction sites. Tools such as miter saws and table saws needed higher voltage than the 20-volt systems commonly used for hand tools such as drills and circular saws. As a result, contractors were using extension cords or gasoline generators. But the former were inconvenient and created hazards, and the latter brought noise and pollution. After making these observations, Stanley Black & Decker developed the DeWalt line of “FlexVolt” cordless power tools and battery packs. They’ve been quickly embraced by professional contractors — generating $300 million in incremental sales since the line’s 2016 introduction.

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Robert Chwalik [email protected] is an advisor to executives in the automotive, industrials, and oil and gas sectors for Strategy&, helping them improve both topline growth and bottom-line performance in such key operational and strategic areas as global engineering and product innovation. He is a principal with PwC US and is based in New York.

Brad Goehle [email protected] is an advisor to executives on innovation and product development for Strategy&, helping companies in the aerospace and defense, automotive, and industrial sectors with product and portfolio strategy, engineering, and enterprise transformation. He is a managing director with PwC US and is based in Arlington, Va.

“Cords are one of the biggest pain points on a construction jobsite,” says Stephen M. Subasic, vice president of human resources at the company’s global tools and storage unit. “Our customers were telling our teams they wanted more cordless options.” But end-users had an additional constraint: They had made large investments in existing 20-volt tools and were unwilling to give them up. The FlexVolt system solved the problem. “We were able to marry some emerging technologies in motors and batteries so that the FlexVolt system automatically adjusts to the voltage of the tool,” says Subasic. “It’s a single-battery platform that addresses the pain point, and spans both the next generation and the current generation of tools.” Few companies are able to bring this kind of rapid breakthrough innovation from concept to market success. But Stanley Black & Decker has consistently developed winning products for years, and has been doing so while spending its R&D dollars more efficiently than its industry peers. In this year’s Global Innovation 1000 study — our annual analysis of the 1,000 publicly held companies that spend the most on research and development (R&D) — we look at a subset of companies like Stanley that we call “high-leverage innovators.” These are companies that outperformed their industry groups on seven key measures of financial success for the previous five years, while at the same time spending less on R&D as a percentage of sales (see “2017 High-Leverage Innovators”; to explore the 2007, 2012, and 2017 high-leverage innovator lists in an interactive format, visit strategy-business.com/topinnovators). Achieving high performance is difficult in any given year, and remarkably (continued on page 100)

strategy+business issue 93

Barry Jaruzelski [email protected] is a thought leader on innovation for Strategy&, PwC’s strategy consulting business. Based in Florham Park, N.J., he is a principal with PwC US. He works with high-tech and industrial clients on corporate and product strategy and the transformation of core innovation processes. He created the Global Innovation 1000 study in 2005, and in 2013 was named one of the “Top 25 Consultants” by Consulting magazine.

1000

2017 High-Leverage Innovators

North America

Europe

Japan

China

Rest of World

GN

Geely

*Ametek

Grifols

Hangzhou Hikvision Digital Technology

**Apple

HeidelbergCement

Hengtong Optic-electric

AT&T

*Hexagon

Jiangsu Hengrui Medicine

BCE

Hikma Pharmaceuticals

Jiangsu Zhongtian Technology

Eastman

*Ingenico

Leshi Internet Information & Technology

*Ecolab

Jazz Pharmaceuticals

NetEase

Entegris

Kion Group

Power Construction Corporation of China

*Hologic

KONE

Shanghai Construction

Mallinckrodt Pharmaceuticals

Lonza

Shanghai Fosun Pharmaceutical

Mylan

*LVMH Moët Hennessy — Louis Vuitton

Sino Biopharmaceutical

ResMed

Medtronic

Tencent

*Reynolds American

Playtech

Xinjiang GoldWind Science & Technology

Sealed Air

Schindler

*CSL

Skyworks Solutions

Sky

Daewoong Pharmaceutical

SS&C Technologies

Sunny Optical Technology

Embraer

**Stanley Black & Decker

Svenska Cellulosa Aktiebolaget

Ford Otomotiv Sanayi

Thermo Fisher Scientific

Daikin Industries

Glenmark Pharmaceuticals

Tyson Foods

DIC

Hanon Systems

Valeant Pharmaceuticals

KDDI

*Hyosung

Walgreens Boots Alliance

*Keyence

Lupin

*Adidas

Kubota

Mahindra & Mahindra

Amadeus IT

Obayashi

Pegatron

Amer Sports

Santen Pharmaceutical

Pou Chen

Assa Abloy

SoftBank

Siliconware Precision Industries

Burelle

Subaru

Sun Pharmaceutical Industries

Dürr

Sumitomo Heavy Industries

*Taiwan Semiconductor

Essilor

*Sysmex

Zydus Cadila

Fiat Chrysler

AAC Technologies

*Fresenius Medical Care

Dahua Technology

Note: The 2017 high-leverage innovator analysis was performed for the period 2012–17. Recent events or a change in financial status can impact the ratings. Source: Bloomberg data, Capital IQ data, Strategy& analysis

*Appeared on 2 out of 3 High-Leverage Innovator lists **Appeared on 3 out of 3 High-Leverage Innovator lists

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Altria

99

strategy+business issue 93

feature innovation 100

difficult to sustain. But the success of these high-leverage innovators reaffirms a finding of our study that has held true over time: There is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance. Instead, what matters is how companies use that money and other resources to create products and services that connect with their customers. Also important is the quality of companies’ talent, processes, and decision making. R&D spending among the Global Innovation 1000 overall increased 11.4 percent in 2018, to a record high of $782 billion, reflecting R&D spending increases in all regions and nearly all industries (see “Profiling the Global Innovation 1000,” page 102). If we carve out the high-leverage innovators, we see that the 88 companies that earned that classification in 2017 had sales growth 2.6 times as high as other companies on the Global Innovation 1000 list from 2012 to 2017 and growth in market capitalization 2.9 times as high, while their R&D intensity (R&D expenditures as a percentage of sales) was lower than their industry median. These high-leverage innovators can be found in all regions and industries. They include household brands such as Apple, Adidas, and Stanley Black & Decker, and companies that may be less familiar to readers, such as Amadeus IT Group, a global provider of travel solutions and software based in Spain, and DIC Corporation, a Japan-based specialty chemicals company. We tailored our analysis this year to determine what sets high-leverage innovators apart from their competitors, interviewing innovation leaders and studying the innovation programs at a number of companies on the list. We also surveyed a sample of leaders and managers — 869 in all — to gain insights about where they are focusing their innovation efforts, how their innovation approaches are changing, what different innovation models they are pursuing, and how well they are succeeding. We separated out those companies that reported they were out-performing their competitors in terms of growth and profitability, and noted how their innovation practices contrasted with those that reported growth similar to or slower than that of their peers. Our analysis reveals that both the high-leverage innovators and the larger universe of companies that report relative high performance have six key char-

1000

Inside the High-Leverage Innovators

We first conducted the high-leverage innovator analysis in 2006, finding 94 companies that fit the criteria, and then created the list again in 2007, identifying 118. For this year’s study (when we found 88 such companies), we compared the list across three years — 2007, 2012, and 2017 — to provide a 15-year performance window (each list draws on the previous five years of data). Only two companies qualified as high-leverage innovators in all three years: Stanley Black & Decker and Apple — Silicon Valley’s poster child for innovation excellence and the perennial leader of our “10 Most Innovative Companies” list. One of the notable changes to the high-leverage innovator list since its ear(continued on page 104)

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acteristics. The first five are widely understood, though executed to varying degrees. The sixth is something that only the best innovators accomplish. 1. They closely align innovation strategy with business strategy. 2. They create company-wide cultural support for innovation. 3. Their top leadership is highly involved with the innovation program. 4. They base innovation on direct insights from endusers. 5. They rigorously control project selection early in the innovation process. 6. They excel at each of these first five characteristics and have been able to integrate them to create unique customer experiences that can transform their market. For companies looking to improve the reach and results of their R&D investment, examining the strategies of those that consistently perform at the top of their game offers invaluable insight.

101

Profiling the Global Innovation 1000

also the case last year, by Alphabet,

space and defense and chemicals and

with R&D expenditures of $16.2 billion

energy, all industries increased their

(see “The Top 20 R&D Spenders”).

R&D spending in 2018. R&D spend-

Facebook posted the biggest climb

ing rose in the four industries that

on the top 20 list, up six places from

accounted for 76 percent of total R&D

its 2017 position to number 14. Sanofi

spending — computing and electron-

he companies in the Global

and Siemens rejoined the list this year,

ics, healthcare, auto, and software

Innovation 1000 spent US$782

after falling outside the top 20 in 2016

and Internet, the same four that

billion on R&D in 2018. This repre-

and 2012, respectively. Four industries

dominate the top 20. But the spending

sented record-high spending, and

— software and Internet, auto, health-

growth trajectories for these indus-

an increase of 11.4 percent over

care, and computing and electronics

tries have shifted.

2017. Year-on-year growth in 2018

— accounted for more than 97 percent

was nearly four times as high as

of the top 20’s R&D spending.

T

than five years in the computing and

Taking a broad look at industry

growth between 2016 and 2017, when

electronics industry up to 2017, and

spending, with the exception of aero-

spending increased by 3.2 percent.

Spending had been flat for more

we predicted in last year’s study that

1000 also increased by 11.4 percent,

The Top 20 R&D Spenders

leaving R&D intensity, or innovation

Total R&D spending by the top 20 companies was $214.5 billion in 2018. Amazon topped the list with expenditures of $22.6 billion.

spending as a percentage of revenue, unchanged from 2017 (at 4.5 percent)

Companies in RED have been among the top 20 R&D spenders every year since 2005.

and maintaining the 14-year high (see

RANK

“R&D and Revenue”).

2018 2017

R&D spending Company

Total R&D spending by the top

2018 US$ Billions

% of Revenue

Change from 2017

1

1

Amazon

$22.6

12.7%

40.6%

2

2

Alphabet

$16.2

14.6%

16.3%

the Global Innovation 1000. For the

3

5

Volkswagen

$15.8

5.7%

14.1%

second year in a row, Amazon led

4

4

Samsung

$15.3

6.8%

6.8%

the top 20 list, with spending of $22.6

5

3

Intel

$13.1

20.9%

2.8%

billion — up a massive 40.6 percent

6

6

Microsoft

$12.3

13.7%

-5.7%

from 2017. It was followed, as was

7

9

Apple

$11.6

5.1%

15.3%

8

7

Roche Holding

$10.8

18.9%

-8.7%

9

12

Johnson & Johnson

$10.6

13.8%

16.0%

In 2018, both revenue and R&D spending among the Global Innovation 1000 continued to climb.

10

8

Merck

$10.2

25.4%

0.8%

11

11

Toyota

$10.0

3.9%

2.6%

Indexed to 2005

12

10

Novartis

$8.5

17.0%

-11.1%

13

15

Ford

$8.0

5.1%

9.6%

14

20

Facebook

$7.8

19.1%

31.0%

15

14

Pfizer

$7.7

14.6%

-2.7%

16

13

General Motors

$7.3

5.0%

-9.9%

17

16

Daimler

$7.1

3.6%

-9.2%

18

19

Honda

$7.1

5.4%

8.7%

19

24

Sanofi

$6.6

15.1%

5.8%

20

23

Siemens

$6.1

6.2%

4.9%

$214.5

11.6%

7.3%

20 companies was $214.5 billion, or 27.4 percent of the total spending by

102

R&D and Revenue

2.0 1.9 1.8 1.7

Revenue

1.6 1.5 1.4

R&D Spending

1.3 1.2 1.1

R&D Spending as a % of Revenue

1.0 0.9 0.4 2005

2010

2014

2018

Source: Capital IQ data, Thomson Reuters Eikon data, Strategy& analysis

TOP 20 TOTAL

Note: Sums may not equal totals shown due to rounding. Source: Capital IQ data, Thomson Reuters Eikon data, Strategy& analysis

strategy+business issue 93

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Revenues for the Global Innovation

1000

healthcare would

The Global Sector Spending Breakdown

likely take the number

North American companies made up 61 percent of the software and Internet companies in the Global Innovation 1000 in 2018, and 49 percent of the healthcare companies.

one spot in 2018. Instead, a $13 billion R&D spending surge in computing and electronics — almost a third of

8%

9% 17%

19% 9%

6%

11%

22%

3%

29%

6%

Rest of World

17%

China

2% Japan

15%

which was attributable to increased spending at Samsung and Apple

5% 4%

34% 31%

— kept computing and electronics

15%

Europe

61%

North America

31% 15%

27%

22%

companies on top, despite continued 15%

growth in healthcare. Software and Internet companies, whose research and development spending has been

34%

24%

27% 49%

47% 38%

rising sharply for several years,

20%

Instead, R&D spending in the auto sector, likely focused on electronics, software, and autonomous vehicles,

Aerospace and Defense

Auto

Chemicals and Energy

Computing and Electronics

Healthcare

Industrials

Software and Internet

Note: Percentages may not total 100 due to rounding. Source: Capital IQ data, Thomson Reuters Eikon data, Strategy& analysis

jumped $16 billion. That was a 15.2 percent year-over-year increase, and it kept auto in third place. The growth

list (see “R&D Spending by Industry”). Companies headquartered

trajectory of software and Internet

in R&D spending increases by a wide margin, up 34.4 percent. They also

companies, however, continues to

in all regions increased their R&D

registered the biggest increase (16

suggest they will rise higher on the

spending in 2018 (see “R&D Spend-

percent) in the number of companies

ing by Region”), but the most vibrant

on the Global Innovation 1000 list (see

innovation investment was in China

“China’s R&D Success Story,” page

and Europe. Chinese companies led

108). European companies were sec-

R&D Spending by Industry Companies in the healthcare and software and Internet sectors demonstrated sustained growth in R&D spending, which has been increasing for years in both cases. US$ billions $200

Healthcare

$180

Computing and Electronics

$160 $140

Software and Internet

$120

Auto

ond in both R&D spending growth (14 percent) and gains in the number of

R&D Spending by Region At 34 percent and 14 percent, respectively, companies headquartered in China and Europe demonstrated the most significant growth in R&D spending.

$350

North America

Change 2017–18 +7.8%

$300

$60

est.

Chemicals and Energy

Europe

$200

+14.0%

Japan

$150

Aerospace and Defense

$20 $0

+9.3%

2010

2015

2020

Source: Capital IQ data, Thomson Reuters Eikon data, Strategy& analysis

+8.6%

Rest of World

$50

+34.4%

China

$0 2005

North American, Japanese, and R&D spending growth in the single digits, and all three regions saw

2005

2010

2014

on the list. North America did retain the lead in the number of innovators in several sectors, including software

$100

$40

(7 percent).

declines in the number of companies

$100 Industrials

entries in the Global Innovation 1000

“rest of world” companies all had US$ billions

$250

$80

feature innovation

auto companies’ spending in 2018.

17%

15%

similarly seemed poised to surpass

2018

Source: Capital IQ data, Thomson Reuters Eikon data, Strategy& analysis

and Internet companies (61 percent), healthcare (49 percent), aerospace and defense (47 percent), and computing and electronics (38 percent) (see “The Global Sector Spending Breakdown”).

103

One of the notable changes to the highleverage innovator list since its earlier iterations has been the dramatic rise of companies headquartered in China.

The 10 Most Innovative Companies 104

A

innovative companies has a distinctly

auto company on the list is Tesla,

digital feel. Three companies are in

whose Model 3 electric car was

the computer and electronics sector

described in a Washington

(Apple, Samsung, and Intel), and five

Post review as an “iPhone with

are in the software and Internet sec-

wheels.” The only traditional indus-

fter ceding its lead position to

tor (Amazon, Alphabet, Facebook,

trial company on the list, General

Alphabet in 2017, Apple was

Microsoft, and Netflix). The single

Electric, has taken pains in recent

once again selected by our Global Innovation 1000 survey respondents as the most innovative company in 2018 (see “The 10 Most Innovative Companies”). Apple also became the first publicly listed U.S. company in history to achieve a US$1 trillion market capitalization in 2018. We would argue that it’s not a coincidence: What’s driven Apple’s commercial and financial success, after all, is its ability to design and develop distinctive new products and services and bring them to market successfully. Overall, the list of the 10 most

strategy+business issue 93

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lier iterations has been the dramatic rise of companies headquartered in China, from 3 percent of the total in 2007 to 17 percent in 2017 — a net increase of more than 400 percent (see “China’s R&D Success Story,” page 108). The number of high-leverage innovators in Europe also increased significantly, from representing 18 percent of the total number in 2007 to representing 30 percent in 2017. Meanwhile, the number of high-leverage innovators fell 45 percent for

1000

Amazon — which in Septem-

But innovation, as we’ve long argued, is not primarily a reflection

ber 2018 became the second U.S.

of how much you spend. Apple spent

company to cross the trillion-dollar

less in 2018 on R&D as a percentage

value mark — was first voted onto

of sales than eight of the other nine

the list by respondents to our 2012

companies selected by respondents

survey, appearing in 10th place. It

as the most innovative — a mere 5.1

has climbed ever higher by dominat-

percent of sales, compared with 20.9

ing the booming e-commerce sector

percent for Intel, 19.1 percent for

Innovating vs. Spending Companies selected by respondents as the most innovative outperformed the biggest R&D spenders on a range of financial metrics. HIGHEST POSSIBLE SCORE: 100%

105

Normalized performance of industry peers 57% 49%

47%

48% 37% TOP 10 SPENDERS

industrial company.”

$16.2 billion.

TOP 10 INNOVATORS

years to describe itself as a “digital

36% 29%

and developing its successful cloud

Facebook, 14.6 percent for Alpha-

computing business, Amazon

bet, and 12.7 percent for Amazon.

Web Services. The company, which

(General Electric had the lowest

was ranked the second-most innova-

R&D intensity, at 4.0 percent.) Apple

tive company in 2018, also led the

was also the only company from the

list of the biggest R&D spenders this

2017 high-leverage innovator list to

year, with innovation outlays of

be selected by survey respondents

$22.6 billion — a year-over-year

as being among the most innovative.

the 10 most innovative companies

increase of 40.6 percent. Alphabet,

Adidas, another 2017 high-leverage

outperformed the 10 biggest R&D

number three on this year’s 10 Most

innovator, fell just outside the top 10

spenders on revenue growth, gross

Innovative Companies list, was

(number 11).

margin, and market cap growth (see

second in spending, with outlays of

Comparing financial metrics,

feature innovation

North American companies, 8 percent for Japanese companies, and 23 percent for the “rest of world” countries. Among industries, the number of high-leverage innovators rose between 2007 and 2017 in telecommunications, consumer goods, healthcare, industrials, autos, and aerospace and defense, while the numbers fell in chemicals and energy, computing and electronics, and software and Internet. Looking at all three years, in

LOWEST POSSIBLE SCORE: 0%

Revenue Growth 5-yr. CAGR

Gross Margin Ł Market Cap Growth 5-yr. CAGR 5-yr. CAGR

Source: Capital IQ data, Thomson Reuters Eikon data, Ł Strategy& analysis

“Innovating vs. Spending”).

Performance index for high-leverage innovator companies/rest of Global Innovation 1000 companies 3.0

2.9

2.5

2.5

2.6

2.4

2.0

2.1

1.5

1.0

1.0

1.1

0.5

0.0

Source: Bloomberg data, Capital IQ data, Strategy& analysis

strategy+business issue 93

feature innovation 106

2007 the industry with the largest presence on the list was computing and electronics, in 2012 it was computing and electronics and healthcare (tied), and in 2017 it was healthcare. High-leverage innovators had operating and gross margins similar to those of other Global Innovation 1000 companies for the five years ending in 2017, but significantly outperformed them on five other financial metrics, including gross profit growth (which for high-leverage innovators was 2.1 times as high as that of other companies) and market capitalization growth (2.9 times as high) (see “High-Leverage Innovator Performance Index”). During the three five-year peHigh-Leverage Innovator Performance Index riods ending in 2007, 2012, and When compared with the rest of the Global Innovation 1000, the 88 companies that ranked as high-leverage innovators in 2017 2017, high-leverage innovators’ outperformed across most key financial metrics. relative outperformance decreased on two key measures — gross profit growth and operating income growth — although relative total shareholder returns increased slightly. This likely reflects a general improvement in the overall performance of the Global Innovation 1000 companies over time. Relative Operating Sales Gross Average Average Market Total Profit Operating Gross Income Growth Cap But the data also reveals a starReturn Margin Growth Margin Growth Growth tling fact: The high-leverage in-

1000

High-Leverage Innovator Performance, 2007–17 novators vastly outperformed other The companies on the 2012 high-leverage innovator list — which includes data from the years during and directly after the Great Recession — significantly companies in the 2007–12 period, outperformed the rest of the companies in the Global Innovation 1000. which spans the last major busi2002–07 2007–12 2012–17 ness downturn and the first years of the current expansion. This suggests that during the Great Recession, high-leverage innovators recovered more quickly and robustly. In fact, they blew the doors off the competition in gross profit growth (which was 6.6 times as high as that Gross Operating Relative Total of other companies), operating inProfit Growth Income Growth Shareholder Return come growth (7.0 times as high), and total shareholder returns, which were 13.4 times those of the rest of the companies in the Global Innovation 1000 (see “High-Leverage Innovator Performance, 2007–17”). Performance index for high-leverage innovator companies/rest of Global Innovation 1000 companies 14

13.4

12 10

8

4

3.7

2

2.7

2.1

2.5

2.2

2.4

0

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7.0

6.6

6

Note: Each performance year (2007, 2012, and 2017) includes data from the previous five years. For example, the 2017 list is based on data from 2012 to 2017. Source: Bloomberg data, Capital IQ data, Strategy& analysis

107

Characteristics of Successful Innovators

In analyzing our survey respondents’ answers to questions about innovation practices and strategies, we found sharp differences between companies reporting fast revenue growth (43 percent of respondents) and those reporting similar or less success than their peers (48 percent said they were growing at the same rate as their peers and 9 percent said they were growing more slowly). Moreover, survey respondents who reported that their companies were outperforming their competitors have many of the same approaches and attitudes toward innovation that the high-leverage innovators exemplify. Strategic alignment. Respondents who reported that their companies were outperforming their industry groups were far more likely to report strategic

China’s R&D Success Story by Patrick Hui and Barry Jaruzelski

W 108

hen we first published the

Chinese companies also carved

China’s R&D activities have

out a sizable stake of the high-

placed it toward the top of other lists

leverage innovator list, making up

as well. In 2018, China broke into the

17 percent of this group in 2017,

list of the world’s 20 most innovative

compared with 3 percent in 2007

economies, according to the Global

— a net increase of more than 400

Innovation Index (GII), an annual

percent. Notably, Europe was the only

ranking of innovation competitive-

Global Innovation 1000 study other region for which the number of in 2005, only eight companies on the high-leverage innovators increased;

ness (note: PwC’s Strategy& was a

list were headquartered in China,

North America, Japan, and the “rest

and 2018). Coming in at number 17

accounting for a negligible amount of

of world” category all saw declines

(of the 126 economies ranked), China

R&D spending. In 2018, 145 Chinese

(see “2017 High-Leverage Innova-

was the only middle-income country

companies were among the top 1,000

tors,” page 99).

to make the top 20. The GII report

Knowledge Partner of the GII in 2017

spenders, and their innovation spending increased 34.4 percent over 2017 — or nearly three times the overall rate of increase among the Global Innovation 1000 between 2017 and 2018.

Strategy Alignment by Region Survey respondents from companies based in China overwhelmingly reported that their innovation and business strategies were highly aligned. High alignment

Medium alignment

R&D spending by Chinese companies

4%

is concentrated (representing 86 percent of total spending) in industri-

11%

22%

than any other region — software and Internet, auto, and computing and electronics.

11%

14%

25%

als — where China has a larger share of Global Innovation 1000 companies

Low alignment

27% 78%

China

31%

57%

42%

71% Europe

45%

62%

North America

Note: Percentages may not total 100 due to rounding. Source: Strategy& analysis

Japan

Rest of World

strategy+business issue 93

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alignment. Of that group, 77 percent said their innovation strategies were highly or closely aligned with their business strategies, compared with 54 percent of respondents who reported growth typical of their peers, and 32 percent of respondents who reported slower growth. Similar differences hold true for companies that reported higher profitability. We also found differences when it came to strategic alignment among the three innovation models into which we have segmented companies over the past 11 years: Need Seekers, Market Readers, and Technology Drivers. In our survey this year, need seekers made up 34 percent of total respondents. (Note: Figures have been rounded.) These companies engage customers directly to generate

1000

noted, “In absolute values, and in

information technology, and ad-

tive team’s involvement in innovation

areas such as R&D expenditures and

vanced medical equipment. Recently,

strategy and company-wide cultural

the number of researchers, patents,

trade tensions with the U.S. have led

support for innovation programs.

and publications, China is now 1st or

the Chinese government to spur in-

2nd in the world…. China presents

novation in semiconductors — mak-

seeker strategy is a more prevalent

an impressive example for other

ing multibillion-dollar investments in

innovation model in China than in

middle-income countries to follow

startups to ensure that China’s tech-

other regions (44 percent among

as they seek to join the echelons of

nology companies are not dependent

companies headquartered in China,

high-income economies. With this

on U.S. suppliers.

versus 34 percent for all companies

success in mind, China’s attention is

Another critical factor underly-

We also found that the need

in our survey). The need seeker model

now turning to the quality and impact

ing China’s R&D rise reflects Chinese

— which previous research found

of innovation.”

companies’ focus on some of the

was also most prevalent among Sili-

innovation success factors that this

con Valley innovators — is the most

an R&D leader is simply the vibrancy

year’s study identifies. In our 2018

common model followed by com-

of the country’s economy in the 21st

survey, Chinese companies reported

panies that report higher revenue

century. China’s GDP has expanded at

an alignment of innovation and busi-

growth and profitability than their

rates not seen in most other regions

ness strategy that was better than

industry peers.

for many decades. The Chinese gov-

those in other regions: For example,

ernment has also consistently made

78 percent of Chinese companies said

R&D a top agenda item for the five-

their strategies were highly or closely

year plans that set the economy’s

aligned, as compared with 62 percent

direction. Business sectors singled

for North American companies (see

out for innovation investment and

“Strategy Alignment by Region”).

incentives in China’s current five-year

Companies headquartered in China

plan include newenergy automotive,

lead other regions by similar margins

high-end robotics, next-generation

on indicators such as their execu-

One reason for China’s rise as

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new ideas, then develop original products and services and get them to market first. Market readers, accounting for 23 percent of our respondents, are fast followers. They typically generate ideas by closely monitoring their markets, customers, and competitors, focusing largely on creating value through incremental innovations to current products. Technology drivers, 44 percent of our respondents, depend heavily on their internal technological expertise to develop new products and services, driving both breakthrough innovation and incremental change, in hopes of meeting the known and unknown needs of their customers via new technology. It is helpful to consider the breakdown of responses by innovation model,

Patrick Hui [email protected] is a partner with PwC China, based in Shenzhen and Hong Kong. He works with multinational corporations and public organizations to conduct large-scale operations transformations, improve their supply chain operations, and enhance their product innovation capabilities.

109

Need seekers are far better than market readers and technology drivers at turning their corporate culture to their advantage.

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given need seekers’ own percep- Need Seekers Embrace Strategic Alignment respondents from companies identified as need seekers tion of relative success: 65 per- Survey were much more likely to report high levels of alignment between their cent of need seekers report they business and innovation strategies. High alignment Medium alignment Low alignment have higher profitability than their peers, as compared with 38 percent of market readers and 43 percent of technology drivers. And need seekers also report higher Need Seekers Market Readers Technology Drivers revenue growth (59 percent) than market readers (35 percent) and technology drivers (36 percent). It is significant, then, that 84 percent of need seekers say their innovation and business strategies are closely aligned, whereas this is true for only 48 percent of market readers and 53 percent of technology drivers (see “Need Seekers Embrace Strategic Alignment”). Conversations with innovation leaders at high-leverage innovator companies revealed a similar focus on alignment. At Amadeus IT, “our ambition is to have a strong alignment between our business strategy and the innovation strategy,” says Marion Mesnage, head of research, innovation, and ventures. “We’ve increased the alignment and are strengthening it.” In the past, R&D at the company — a $5.8 billion global travel software and information technology business headquartered in Spain — tended to be technology-centric, Mesnage says. But it is shifting its focus more toward understanding customer needs and 2%

15%

14%

11%

48%

37%

53%

36%

84%

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Source: Strategy& analysis

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identifying growth opportunities within the company’s business units, which serve airlines, hotels, tour operators, insurers, car rental and railway companies, ferry and cruise lines, travel agencies, and individual travelers. “Right now,” says Mesnage, “we are running strategy sprints to gather people in the same room from different business units with the end goal of co-creating our next wave of innovation themes.” At DIC, a Japan-based global manufacturer of printing inks, organic pigments, and synthetic resins, top management has also moved in recent years to align the company’s R&D activities more closely with its business strategies. DIC splits R&D operations into two divisions. The direct-to-customer technology division, which focuses on incremental innovation, is always in sync with the business strategy and works closely with the business units. “The organization of these activities is quite closely linked,” says Kiyotaka Kawashima, executive officer and general manager of R&D. “The budget control and administration are both done by the business units, and they approve the themes of technology and R&D.” A separate division, which focuses on basic innovation, has also been more closely aligned with the business strategy in recent years, but has more leeway in deciding which projects to pursue. Cultural support. Seventy-one percent of respondents who reported that their company’s revenues were growing faster than competitors’ revenues said their corporate culture was highly or very aligned with their innovation strategy, compared with 53 percent of companies that reported the same growth as competitors, and 33 percent for companies that reported slower growth. The differentials on cultural alignment were similar for companies that reported higher profitability. We also found differences in cultural support by innovation model. Need seekers are far better at turning their corporate culture to their advantage: 82 percent said their organization’s culture was highly supportive of the innovation strategy, compared with 48 percent for market readers and 47 percent for tech drivers.

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CEO Tim Cook of Apple (which we have long identified as a need seeker) has said that innovation is in the company’s DNA, and that its culture is not something that can be formulaically copied. But he has given some clues about how Apple fosters that culture — for example, by hiring smart people who can collaborate cross-functionally. “You look for people that are not political,” Cook said in a 2013 interview with the dean of Duke’s Fuqua School of Business (Cook’s an alumnus). “You look for wicked smart people...who appreciate different points of view…. The reason Apple is special is we focus on hardware, software, and services. And the magic happens where those three come together…. It’s unlikely that somebody that’s focused on one of those in and of itself can come up with magic, and so you want people collaborating in such a way [that] you can produce these things that can’t be produced otherwise.” Amadeus IT is focused on building cultural support across its 45 locations worldwide (the company’s main R&D hubs are in France, Germany, India, the U.K., and the U.S.). “We are made up of people who have a great appetite for new things, for exciting technology, and for new opportunities,” says Mesnage. Innovation teams are very multicultural, she adds, “which creates a great ground for creativity and for exchanging different perspectives.” One of the practices Amadeus has adopted is creating a system of innovation champions within its R&D and business units, whose role is to promote and foster the company’s innovation approach at their site, and to encourage people to submit ideas — and then collect those ideas to make sure they’re visible to the rest of the organization. Executive involvement. Survey respondents reporting higher revenue growth than competitors were much more likely to say their company’s executive team was closely involved with the R&D program — 78 percent said their executive team was highly or closely aligned with R&D investment and strategy, compared with 62 percent for same-growth companies, and 53 percent for slowergrowth companies. Among innovation models, most need seekers reported that their leadership teams were plugged into their innovation programs: 84 percent of need seekers reported that their executive team was highly involved in decision making regarding R&D investment and strategy, compared with 63 percent of market

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readers and 57 percent of tech drivers. All the high-leverage innovators we interviewed or analyzed said their executive teams were highly aligned with their innovation programs. Stanley Black & Decker is a case in point. “The executive team is involved in innovation right from the top,” says Tim Hatch, chief technology officer at Stanley Engineered Fastening. “Our CEO mentions breakthrough innovation whenever I hear him speak in a group. Whenever we have project reviews or product reviews, he is always asking questions around where we are with breakthroughs and how we are commercializing the ideas that have been generated by the teams. And as you go down from his level to the business unit level, there are similar levels of engagement.” At Apple, innovation has always been a top executive-team agenda item. It helps to start with a visionary founder (the late Steve Jobs), but Apple has also elevated innovation — and specifically, design — within the organization. Jony Ive, for example, who has run Apple’s design studio since 1996, was named chief design officer in 2015. He reports directly to the CEO, and his responsibilities include the look and feel of Apple hardware, user interface, packaging, and major architectural projects such as Apple Park and Apple’s retail stores, as well as new ideas and future initiatives. Focus on customer insights. All of our survey respondents — those who reported their growth as faster, slower, or the same as that of their peers — value deep customer and consumer insights in their innovation programs. They ranked consumer and client insights as the most important capability during the ideation stage. However, interestingly, respondents who reported revenue growth that was the same as or slower than that of their peers believe they are most competent in this capability, whereas those who reported faster revenue growth ranked it as a capability in which they have the second-most competence. This may seem counter intuitive, but actually makes a good deal of sense. Those who reported slow or similar growth compared with their peers’ growth seem to

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think that they have done enough in this area. Those who reported fast growth see further opportunities for improvement. Looking at the innovation models, need seekers — which rely heavily on customer insights — also chose customer insights as their second-best competency. But market readers and tech drivers chose it as their top competency. Overall, the top innovators seem to recognize that when it comes to gathering customer insights, no company is ever done learning. DIC has focused on gaining direct customer insights into some of its most successful innovations. One of the company’s main businesses is producing components and materials for the color filters of liquid crystal displays used in TVs, computers, and other devices — especially the red, blue, and green pigments they utilize. Technology in this field has advanced rapidly over the last 10 years, according to R&D general manager Kawashima, and typically a long supply chain distances the end-users from the process and materials providers such as DIC. The innovation team sought end-user feedback at a very early stage of development for its latest color filter innovations, and was able to incorporate the insights and utilize its production know-how to create pigments superior to its competitors’ offerings. Today, DIC’s market share for green pigment is 80 percent, and it is 50 percent for blue. Direct end-user input played a major role in the turnaround of Adidas that began in the 1990s (see “How Adidas Found Its Second Wind,” s+b, Aug. 24, 2015). A new management team set out to recapture the innovation mojo that had characterized the athletic footwear company during the leadership of the founder, Adi Dassler, who died in 1978. Dassler had started the company with a simple approach: He observed athletes, talked to them about their needs, and then experimented with novel ways of solving their problems. The new team renewed Dassler’s approach, focused on performance-related design and industrial craftsmanship, and rebuilt Adidas’s product line. Adidas is now focusing on open source innovation and co-creation with customers to develop new ideas. Says CEO Kasper Rørsted: “We look at all kinds of collaborative creation as valuable — not only within our company, but with external partners as well. We are clear about the borders of our brand, because the brand is sacred to us. But we also recognize that if we have only the inspira-

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tion and creativity of people within our own organization, we miss a lot of what’s going on in the marketplace. We articulate this point by saying that we need to be consumer-obsessed and to create the best product for the consumer. If that is your endgame, then you have to be able to confront sacred cows, and open yourself up to ideas that you might not have been open to in the past.” Adidas’s innovation approach has been key to its return to the ranks of top innovators and financial performers — and its ranking as one of our high-leverage innovators for the 2012–17 period. Focus on project selection. When asked which stage of the innovation process — ideation, project selection, product development, or commercialization — was most important, 35 percent of our survey respondents chose project selection, followed by 31 percent for ideation. This “front end” of the innovation process is indeed critical to success. For one thing, most of the longterm costs of product development — as much as 70 percent, in our experience — are locked in at the ideation and project selection phases. And even great operational capabilities and business management cannot overcome poor decisions about which ideas to move into development and production. Companies reporting relatively faster growth said they were most competent at the ideation and project selection stages, but they were more likely than those reporting slower growth to see even more potential improvement in their project selection capabilities: 42 percent of the fast-growth companies saw project selection as the stage with the most opportunity for improvement in their company, compared with 30 percent of same-growth companies and 31 percent of slower-growth companies. Need seekers are also more eager to improve the project selection phase of the innovation process — 42 percent said this is the innovation stage where most improvement is needed, compared with 29 percent of market readers and 33 percent of tech drivers — while they put less emphasis on improving product development.

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The New Innovation Excellence Not long ago, companies that aimed for innovation excellence might have felt it was sufficient to be good at most of the five characteristics discussed above, and best-in-class at one or two. But the standard for innovation excellence has been rising as businesses have become more competitive in the 21st century — which the Global Innovation 1000 studies have shown for many years. Companies that aspire to the highest level of innovation leadership today need to excel at every

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Stanley Black & Decker is among the group of companies hungry for more. “I would agree that project selection is the area where we have the biggest opportunity for improvement,” says Hatch, the CTO of Stanley Engineered Fastening. The core product development teams are challenged to find the next iteration or big step from a current product, and then are measured very tightly on delivering on the product time line, he says, “100 percent, on time, on cost, on delivery.” The breakthrough innovation teams, however, are challenged to go after projects that might not be a success. “If everything we do is a success,” Hatch says, “then we’re not trying hard enough and not going far enough from the core.” Amadeus IT has a similar focus. Innovation leaders track the portfolio precisely and have explicit criteria for project selection. “It’s not like we create something and then commercialize it,” says Mesnage, head of research. “It’s all about making sure that we have a problem–solution fit — that we’ve really found a problem worth solving, that we have a solution in mind that can solve it, and that there is a business appetite, so that we know there are enough people willing to pay for the solution we are proposing.” One recent product innovation that grew out of the company’s revamped innovation approach is Amadeus Video Solutions, an interactive video player that enables travel providers to show consumers videos about travel destinations and pause the video at any time to see the location on a map; check and price travel, lodging, and activity options nearby; and make purchases without leaving the platform.

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aspect of innovation. And they need to make them converge in a way that pushes the boundaries of market expectations and transforms the customer experience. Here we can revisit the two companies that made the high-leverage innovator list throughout the entire 15-year performance window of our analysis. Apple’s innovation mind-set is thoroughly integrated in the mission as well as the organization of the company. When asked in a Fast Company interview what outsiders might misunderstand or underappreciate about Apple, CEO Cook said: “The thing they might miss is how different Apple is versus other technology companies. A financial person just looking at revenues and profits may think, ‘They’re good [at making money].’ But that’s not who we are. We’re a group of people who are trying to change the world for the better…. For us, technology is a background thing. We don’t want people to have to focus on bits and bytes and feeds and speeds. We don’t want people to have to go to multiple [systems] or live with a device that’s not integrated. We do the hardware and the software, and some of the key services as well, to provide a whole system.” As noted earlier, Apple emphasizes the importance of cross-functional collaboration. When the company built its new $5 billion headquarters (completed in 2018), which has been likened to a spaceship, the architecture and building design revolved around encouraging creativity and innovation, in much the same way that some of the icons of innovation architecture — the mid-20th-century Bell Labs model of collaborative workspace and MIT Media Lab’s technology research hub — were designed to encourage interdisciplinary interaction. Stanley Black & Decker has long been known as a product innovation leader in its field, but CEO James M. Loree has set ambitious goals. He told The Street in August 2018, “We want to be known as one of the world’s most innovative companies. So we have created an enormous wave of innovation at this point… embedded in the culture of Stanley Black & Decker. We have stepped up and we are doing breakthrough innovation activities. We are doing venture investing. We are doing accelerators for entrepreneurs externally and internally.” In the

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Methodology

innovation spending. In prior years,

relevant period; for data on share

both capitalized and amortized R&D

prices, we used the exchange rate on

expenditures were excluded. Start-

the last day of the period.

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s it has in each of the past 13

A

ing in 2013, we included the most

editions of the Global Inno-

recent fiscal year’s amortization of

one of nine industry sectors (or

vation 1000, this year Strategy&,

capitalized R&D expenditures for

“other”) according to Capital IQ’s in-

PwC’s strategy consulting busi-

relevant companies in calculating

dustry designations, and into one of

ness, identified the 1,000 public

the total R&D investment, while

five regional designations, as deter-

companies around the world that

continuing to exclude any non-am-

mined by their reported headquar-

spent the most on R&D during the

ortized capitalized costs. We have

ters locations. To enable meaningful

last fiscal year, as of June 30, 2018.

now applied this methodology to all

comparisons across industries, the

To be included, companies had to

previous years’ data; as a result,

R&D spending levels and finan-

make their R&D spending numbers

historical data referenced in the

cial performance metrics of each

public. Subsidiaries that were more

studies from 2014 onward will not

company were indexed against the

than 50 percent owned by a single

always align with previously pub-

average values in its own industry.

corporate parent during the period

lished figures for the 2005 through

were excluded if their financial

2012 studies.

results were included in the parent

All companies were coded into

Finally, to understand the ways in which global R&D is and will be

For each of the top 1,000 compa-

conducted at companies across mul-

company’s financials. The Global

nies, we obtained from Capital IQ and

tiple industries, Strategy& conducted

Innovation 1000 companies col-

Thomson Eikon the key financial met-

an online survey of 869 innovation

lectively account for 40 percent of

rics for 2013 through 2018, including

leaders and managers around the

the world’s R&D spending, from all

sales, gross profit, operating profit,

world. The companies participating

sources, including corporate and

net profit, historical R&D expendi-

represented more than US$130 bil-

government sources.

tures, and market capitalization. All

lion in R&D spending, or 17.1 percent

sales and R&D expenditure figures

of this year’s total Global Innovation

adjustments to the data collection

in foreign currencies were converted

1000 R&D spending; all nine of the

process in order to gain a more

into U.S. dollars according to an aver-

industry sectors; and all five geo-

accurate and complete picture of

age of the exchange rate over the

graphic regions.

In 2013, Strategy& made some

company’s 2017 year in review for shareholders, Loree wrote that the company currently had “10 breakthrough innovation teams covering all businesses and multiple worldwide locations focused on developing innovations that each have the potential to deliver greater than $100 million in annual revenues.” Stanley is advancing its innovation ecosystem along many dimensions, including Stanley Ventures in Silicon Valley, which invests in innovative startups; an additive manufacturing accelerator program in Hartford, Conn., in partnership with Techstars; a digital accelerator in Atlanta; and an industrial incubator in Silicon Valley. “The innovation strategy is globally distributed and diverse, yet holistic and seamlessly integrated into our businesses,” says Mark Maybury, Stanley Black & Decker’s chief technology officer. “The reality we’re facing is

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that if we want to maintain or continue to grow our leadership position, we need to focus not only on the incremental innovations that pay the bills today, but also on the things that will shape the industries in which we compete.” The consistent success of Apple, Stanley, and the other star performers on our high-leverage innovators list sets a performance goal that all innovators can aspire to reach. But the fact that relatively few of the Global Innovation 1000 companies are able to hit that target in a given year — let alone repeatedly over time — is a reminder that innovation excellence isn’t something that can be bought by simply spending more on R&D. Rather, it’s the result of painstaking attention to strategy, culture, executive involvement, customer insights, and execution throughout the stages of innovation, all with an eye toward creating differentiated experiences. +

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Resources Barry Jaruzelski, “Why Silicon Valley’s Success Is So Hard to Replicate,” Scientific American, Mar. 14, 2014: Bay Area tech firms integrate their innovation strategies with their business strategies, leading to standout performance. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Nov. 30, 2006: The first year that the study created and analyzed a list of high-leverage innovators. Robert Safian, “Why Apple Is the World’s Most Innovative Company,” Fast Company, Feb. 21, 2018: An interview with CEO Tim Cook on the company’s track record of innovation success. All previous Global Innovation 1000 studies from 2005 to 2017, as well as videos, infographics, and other articles: strategyand.pwc.com/ innovation1000. Strategy&’s Innovation Strategy Profiler: https://surveys.strategyand.pwc .com/InnovationStrategyProfiler/index.php.

2018 | B E S T B U S I N E S S B O O K S

RULES OF ENGAGEMENT

‘‘LOW KEY

feel like books r making a comeback,” the Grammy-nominated R&B star SZA tweeted earlier this fall. She’s right. The more digital media pervades our lives, the more currency people seem to place on one of the oldest forms of media. work. S+b contributing editor Theodore Kinni finds that this year’s best management books offer conflicting (though not necessarily contradictory) advice on how to get the most out of employees — whether it is building a relationship-based managerial culture, mimicking high-performance organizations, or just making a habit of asking for help. Ryan Avent, a columnist at the Economist, looks back at deeply researched economic accounts of the fall of financial empires, from Rome to the humbling of the Davos crowd in the post-2008 environment. David Lancefield, an s+b contributing writer and a partner with PwC UK, sheds light on three books that each highlight a vital component of strategy: measurement, encouragement of creativity and rebel talent, and the leap from innovation to innovation. James Surowiecki, author of The Wisdom of Crowds, concludes that this year’s best books on innovation separate the wheat from the chaff on the trifecta of buzzwords that dominate so much of our conversation: AI, blockchain, and big data. Finally, Catharine P. Taylor spotlights a field that is being upended by advances in big data and technology: marketing. The best books in this genre this year offer concrete, sensible advice on how to integrate brand and culture, how to turn marketing costs into profits, and, perhaps most significantly, how more companies can pursue a profitable subscription model. We hope these features encourage you to subscribe — to our magazine and newsletter, to be sure, but also to our belief in the power of books. —DANIEL GROSS

best books 2018 introduction

According to PwC’s Global Entertainment & Media Outlook 2018–2022, books are the only form of physical media whose sales are growing — and are expected to continue to grow. The big-box bookstores that dominated the retail chain in the 1990s may be contracting, but the ranks of independent bookshops are growing. All of which serves to ratify the attention we lavish on books at strategy+business. Books require those who produce them to think deeply about their subject matter, to construct arguments and analytic frameworks carefully, and to muster mountains of data and evidence to support a contention. In short, books force their producers and readers to build and exercise their intellectual muscles. Of course, it’s easy to get bogged down by the sheer volume of new volumes. Fortunately, in this, our 18th annual Best Business Books collection, a series of learned guides have taken the time to identify the three most compelling reads in seven core genres. Bethany McLean, an ace narrative writer herself (a Vanity Fair contributor and author of Saudi America), kicks off this year’s edition with a look at a narrative of historical folly (the crash of 1987), an impactful tale about the contemporary struggles of a factory town in Wisconsin, and a voyage into the minds of the billionaires forging new commercial realities in space. Sally Helgesen, an s+b contributing editor and coauthor of How Women Rise, finds truly useful lessons on leadership from a book on historical figures, as well as inspiration from two authors who provide grounded, helpful instruction on how to inculcate more mindfulness and meaning in our

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1 | N A R R AT I V E S

AMERICAN

TALES by Bethany McLean

best books 2018 narratives

Diana B. Henriques, A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History (Henry Holt, 2017) A TOP SHELF PICK

Amy Goldstein, Janesville: An American Story (Simon & Schuster, 2017)

Christian Davenport, Space Barons: Elon Musk, Jeff Bezos, and the Quest to Colonize the Cosmos (PublicAffairs, 2018)

Illustrations by Martin León Barreto

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some ways, this year’s best business books told in the form of narratives couldn’t be more different. Diana B. Henriques’s A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History explains how the foundations of the financial sector were reshaped in ways that led to the stunning crash of 1987. The best among this year’s crop, by a very narrow margin, it will leave you pessimistic about our ability to learn from the past. Amy Goldstein’s Janesville: An American Story is about the closing, two days before Christmas of 2008, of the General Motors plant that supported the Wisconsin town. It will leave you deeply aware of how dependent our lives are on business. Christian Davenport’s Space Barons: Elon Musk, Jeff Bezos, and the Quest to Colonize the Cosmos describes the catalytic role private companies are playing in exploring space. It will leave you inspired about how business can expand human potential — and maybe even change the universe. What these books have in common is meticulous reporting. Each story is compellingly told through characters — and each story is larger than the characters. These are all deeply American stories, because what happens in them could not happen, for better and for worse, anywhere else. And all three of this year’s best narratives explore fundamental questions about how business can both make and break the world in which we live.

IN

best books 2018 narratives

Crash Course

Our financial system “was held together by invisible strands of trust — the confidence that debts would be paid, trades would be settled, institutions would

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function, money would circulate,” writes Henriques, a veteran New York Times journalist. “Shred that web of trust, and the system would not hold together.” On Monday, October 19, 1987, the system almost didn’t hold together. The Dow Jones Industrial Average, the major indicator of the market’s health, plunged a sickening 22.6 percent, which is still the largest single-day percentage decline in modern Wall Street history. In today’s terms, that would amount to a Dow loss of about 5,600 points. The terror in the market was a warning sign about the dangers of high leverage, a fragmented regulatory system, and the growth of huge players such as pension funds that could cause a stampede if they moved as a herd. It was also an early sign that there could be a dark side to financial tools such as futures contracts, which skeptics worried could “distort the way capital flowed through the stock market to finance the American economy.” Henriques, the author of The Wizard of Lies, the definitive book on the Bernard Madoff scandal, richly populates her newest book with characters. Among them is John Phelan, the chairman and CEO of the New York Stock Exchange, who some seven months before the crash was featured in an article in Investment Dealers’ Digest that discussed how he’d been “warning top officials in the securities industry of a program trading scenario — which he calls ‘financial meltdown’ — that could drive the market down hundreds of points.” Phelan told the publication, “At some point, you’re going to have a first-class catastrophe.” In that same article, Alan “Ace” Greenberg, then the CEO of Bear Stearns, called Phelan’s concerns “totally ridiculous” and added, “Don’t fix things that aren’t broken.” But as Henriques writes, that belief — that “‘markets cure themselves’ without government interference” — had “firmly taken root in Washington in the 1970s, and it would spread like kudzu over the policy-making landscape for decades.” Even as the 1987 crash percolated, a Goldman Sachs executive named Gary Seevers argued to Congress that market participants were “sophisticated entities, dealing among themselves,” so the best strategy was to “do nothing.” The crash of 1987 was also an early lesson in how theory and reality could diverge. What could sound better than the idea that you could use futures contracts to insure portfolios against losses? The concept that came to be known as

Company Town

Whereas Henriques foreshadows the 2008 financial crisis, Amy Goldstein’s book deals with its aftermath. As the resulting recession hit, auto companies, which were already struggling with decades of bad decision making, plunged into bankruptcy. Although there was a bailout for the auto companies, there was none for the citizens of Janesville, Wis., who saw their way of life evaporate when, two days before Christmas of 2008, the General Motors plant that had opened on Valentine’s Day in 1923 and survived the Depression, a strike, and more, suddenly closed. Forever. Janesville is a poignant portrait of how much our communities depend on

best books 2018 narratives

“portfolio insurance” gave the owner the right to sell a portfolio of stocks at a specific price in the future, thereby putting “a floor under any losses the whole portfolio incurred in a stock market decline.” But what if everyone’s program dictated selling simultaneously, and the selling begat more panicked selling? At a secret session of Congress, Phelan testified how important it was to realize that “when everybody wants to leave the room at the same time, it is not possible When the financial system to get out.” cracks, the motto of “free markets for free men” no The biggest lesson of all from the longer holds, because the crash — one that would resonate in our government has to step in. own time — is that when the financial system cracks, the motto of “free markets for free men” no longer holds, because the government has to step in. Even before the crash, then SEC commissioner Bevis Longstreth told Congress that “market discipline, which is much in vogue these days, can only assure soundness in an environment where institutions are permitted to fail.” But as Henriques details, in the months leading up to the crash of 1987, the government — namely, the Federal Reserve — had to get involved multiple times to save the system. Henriques writes, “The simple truth was that financial institutions could no longer be allowed to fail — the links among them were [in the words of Longstreth] ‘simply too extensive to prevent one failure from triggering another.’” Somehow, in 2008, that came as a shock.

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the success of the businesses that support them. When the plant closed, jobs that existed as part of its ecosystem also disappeared — including those at Lear, which built seats; Logistics Services, which sequenced parts and delivered them to the plant; and Allied Systems Group, which hauled GM vehicles to car dealers throughout the Midwest. Laid-off workers took the jobs of those who used to work at Burger King or Target so that “as middle-class families have been tumbling downhill, working-class families have been tumbling into poverty.” Even as that happened, Janesville’s long-standing charitable efforts, such as the holiday food drive that provided Janesville illuminates groceries and toys to needy families, the yawning gap between also disappeared. the high-flying rhetoric of Janesville is a hard book to put politicians and the grim down because Goldstein, a Pulitzer reality lived by those on Prize–winning longtime Washington the ground. Post journalist, tells the stories through such captivating characters. Kristi Beyer and Barb Vaughn, both of whom are laid off from Lear, have had very different lives. But both discover in themselves a fierce competitive spirit as they navigate their way in middle age through the criminal justice program at Blackhawk Technical College and get coveted jobs at the local jail. Then, their stories diverge in shocking ways. In the fall of 2009, Blackhawk saw a 54 percent surge in students, but Goldstein reports, stunningly, that at least in the time frame of her book, the laid-off workers who went to Blackhawk actually fared worse than the ones who did not. “The people at Blackhawk know a grittier, ground-level truth,” Goldstein writes. “Retraining laid-off factory workers is not easy.” Goldstein also traces the trajectory of Matt Wopat, who becomes what’s known as a Janesville gypsy — someone who takes a job at another GM plant hours away. It is far from ideal for his family, but Goldstein writes that “every time [Wopat] has rethought the exceedingly hard question of whether he missed a clue, whether he overlooked some narrow passageway that would have led him out of the maze, he came to the conclusion that he had not.” Janesville also illuminates the yawning gap between the high-flying rhetoric of politicians and the grim reality lived by those on the ground. In 2010, Presi-

Into Orbit

The third book is, by contrast, a narrative of success. Space Barons, in essence, is about the prospect of business getting things right on a grand scale. After the 1967 Apollo moon landing, the U.S. government, perhaps unintentionally, largely abdicated space. “It was as if Columbus had discovered the New World and no one followed,” writes Christian Davenport, another longtime Washington Post journalist, who covers defense and space. But in an age of public austerity, a handful of self-made billionaires, including Virgin founder Richard Branson and Amazon founder Jeff Bezos, are betting “vast swaths of their enormous fortunes that they could make space available to the masses,” find new sources of energy, and perhaps even ensure the survival of the human species. “Getting to orbit, that’s just a huge milestone,” Musk says after his company, SpaceX, has successfully launched a rocket into orbit. “There are only a few countries that have done it. It’s normally a country thing, not a company thing.” Some of the entrepreneurs involved believe there is something uniquely

best books 2018 narratives

dent Obama gave a stirring speech about how his administration had stood by auto workers. “We said yes to the American worker! They’re coming back!” In reality, the person dispatched by the Obama administration to solve the problems of communities like Janesville paid one short and heavily orchestrated visit to the city, quit shortly thereafter, and was not replaced. A harsh report by the Government Accountability Office on the effort noted that no one even kept track of any government efforts to help workers. In 2013, Congressman Paul Ryan, who represents Janesville (his hometown) in Congress, was the keynote speaker at a dinner in the city where “at each place setting is prime rib with hollandaise and, as a party favor, a clear tumbler with green printing that says, ‘We See the Glass More Than Half Full.’” It went unmentioned that the county still had 4,500 fewer jobs than when GM announced it was closing the plant. Writes Goldstein, “Over a few years, it became evident that no one outside — not the Democrats nor the Republicans, not the bureaucrats in Madison or in Washington, not the fading unions nor the struggling corporations — had the key to create the middle class anew.”

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American about this endeavor. And they’re right — whether it’s the glorious ambition driving the whole affair or the occasional self-inflicted wounds. Space can be incredibly dangerous, and a deeply emotional moment in the book comes when a pilot is killed. “The freedom to kill yourself in all manner of stupid ways was part of the American way,” writes Davenport. Davenport’s story is also rich in characters, such as Andy Beal, a Texas banker billionaire and poker player who poured his fortune into space before deciding that he couldn’t compete with companies that were subsidized by the government. At the center of the tale are Elon Musk and Jeff Bezos, who Davenport ultimately concludes need each other as much as Russia and the United States once did. “Rivalry, it turned out, was the best rocket fuel,” he writes. Musk and Bezos are similar in some ways. Both have been obsessed with space since childhood and want to recapture the lost glory of 1969, when Neil Armstrong and Buzz Aldrin landed on the moon (Bezos was 5 years old; Musk was 2). “We all have passions,” Bezos tells a group of schoolchildren. “You don’t get to choose them; they pick you. But you have to be alert to them. You have to be looking for them. And when you find your passion, it’s a fantastic gift for you because it gives you direction.” Both are pursuing the “holy grail” — rockets that can dramatically lower the cost of space travel because they can fly, land, and fly again. Both men are willing to rethink everything about space travel. Bezos, in fact, was so willing to start from scratch that his company, Blue Origin, even considered using a bullwhip to launch a space capsule, whereas SpaceX has “an obsession with finding ways to do things cheaply and efficiently, and an almost instinctive contrarian bent that questioned everything — the price, the rules, the old way of doing things.” But in some ways, the men are very different. Musk’s strategy has been to seek publicity and adopt an aggressive, in-your-face approach to the existing industry, which has even included suing NASA over contracts. SpaceX COO Gwynne Shotwell says that from the beginning, SpaceX’s approach was to “set audacious, nearly impossible goals and [not] get dissuaded. Head down. Plow through the line.” Bezos, on the other hand, who has funded Blue Origin by selling about

Bethany McLean [email protected] is the coauthor of The Smartest Guys in the Room and All the Devils Are Here. Her most recent book is Saudi America: The Truth About Fracking and How It’s Changing the World (Columbia Global Reports, 2018).

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US$1 billion of Amazon stock each year, has pursued a path of “obsessive, disciplined silence.” The company’s motto is “Gradatim Ferociter,” which translates as step by step, ferociously, and Davenport writes that “perhaps none of its symbols was more important than a pair of turtles reaching up toward the stars — an homage to the winner of the race between the tortoise and the hare.” Despite some massive failures and continuing questions over the achievability of Musk’s grand goals — namely, flying human passengers to Mars by 2024 — by some important measures, the entrepreneurs in Space Barons have already been hugely and importantly successful. They’ve revitalized the interest in space. Investment dollars are now flooding into the industry, and at Purdue University, applications for the undergraduate aerospace engineering program have jumped 50 percent in recent years. When SpaceX successfully brought a rocket back to landing, the company erupted into a cheer of “USA.” “It was perhaps an odd choice for a cheer — this was the feat of a single, private company, not a nation,” Davenport writes. “But in the unbridled exuberance of the moment, it also felt right, as if what they had accomplished extended far beyond the company’s headquarters.” Indeed, Space Barons is an inspiring reminder that although business gone wrong can leave wreckage in its wake, business done right leads humanity forward in a way that goes far beyond profits. +

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2 | LEADERSHIP

ENGAGEMENT ANNOUNCEMENTS by Sally Helgesen

Fred Kofman, The Meaning Revolution: The Power of Transcendent Leadership (Currency, 2018) A TOP SHELF PICK

Nancy Koehn, Forged in Crisis: The Power of Courageous Leadership in Turbulent Times (Scribner, 2017)

Jeffrey A. Kottler, What You Don’t Know about Leadership but Probably Should: Applications to Daily Life (Oxford University Press, 2018)

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importance of finding meaning in the workplace is all the rage in the C-suite, at all-hands meetings, and in the leadership section of bookstores. This is not surprising, given the all-consuming nature of work today. Tethered to their offices and colleagues 24/7 by technology, more people are asking: Why am I doing this? When they lack a satisfactory answer, individuals are likely to feel overwhelmed and confused, which can lead them to disengage. As a result, employee engagement has become the greatest talent challenge in organizations; Gallup found that just under 30 percent of U.S. workers feel engaged by their work. By contrast, 50 percent reported feeling disengaged. They have either checked out emotionally and show up just for the paycheck, or, worse, are actively hostile to their employers. Each of this year’s best business books on leadership provides an illuminating lens on the subject of meaningfulness. Fred Kofman, an economist and consultant who is now a leadership development advisor at Google, addresses it head-on, delivering startlingly pointed insights. Nancy Koehn, a historian at the Harvard Business School, offers beautifully researched lessons on the motivating power of meaning by presenting five portraits of powerful historical leaders whose lives and work were suffused with a sense of purpose. And Jeffrey Kottler, clinical professor of psychiatry at the Baylor College of Medicine, delivers psychological insights that cut through the clutter of so much leadership-speak.

THE

Fred Kofman starts The Meaning Revolution: The Power of Transcendent Leadership, the best of this year’s crop, with a bang by identifying four fundamental “hard problems” that chronically bedevil organizations. He then proceeds to demonstrate why only leaders who are able to transcend these problems by infusing a sense of meaning into the enterprise have any hope of succeeding over time. Transcendence is required to address the hard problem of disengagement, which Kofman notes is usually the result of “the leader being a soulless jerk.” He defines a jerk as someone who imagines that people are motivated only by money and therefore don’t care about a sense of purpose and contribution. Pay them enough, the thinking goes, and they will show up and do the work.

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Transcendence

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But what’s the best and fairest way to pay them? That’s another hard problem, especially in complex organizations where talented people with specialized skills do much of their work in teams. Kofman notes that the exclusive focus on monetary rewards inevitably leaves organizations fighting a fierce but losing struggle to balance individual and team results. Rewarding high performers serves the imperatives of accountability and excellence but can undermine alignment and cooperation among team members. Yet basing pay on team results in order to incentivize collaboration often ends up inadvertently rewarding subpar individual performance and penalizing individual excellence. Neither approach helps the larger enterprise succeed. By infusing people’s lives HR departments and consultants with a sense of meaning, expend great effort trying to address the transcendent leader is this reward paradox. But Kofman, a able to leverage “moral and trained economist, believes the conethical goods” to balance flict cannot be solved with numeric forperformance and cohesion. mulas. It must instead be managed by leaders who engage “nonmaterial incentives” in the service of inspiration. These include getting recognition, being part of a larger community, having the chance to form deep relationships, gaining opportunities for learning, doing work that makes a positive difference in the world, and getting support in reaching one’s full potential. By infusing people’s lives with a sense of meaning, the transcendent leader is able to leverage what Kofman calls “moral and ethical goods” in order to balance performance and cohesion.

Forged in Crisis

The transcendent leadership that Kofman advocates is exemplified in the five detailed historical case studies of leaders that make up Nancy Koehn’s excellent

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How can you become a transcendent leader? After thoroughly describing the hard problems, Kofman examines five soft solutions. He does so not by offering the generalized exhortations so common in leadership writing (Be inclusive! Be empathic! Walk the talk!) but by describing in rich detail the specific behaviors that inspire and engage others at their core. Chief among these is what Kofman calls “response-ability,” the willingness to recognize that you consciously choose your responses, no matter the circumstances, rather than feeling victimized by events or seeking to place blame. He shows how you can shift self-perception from passive to active player by making highly specific changes in how you describe events. Being response-able is a necessary precondition to leading with integrity, which Kofman notes is both expressed by and perceived through how one approaches commitments. Here, Kofman offers advice on how to make a commitment, how to keep a commitment, how to ask for a commitment, how to renegotiate a commitment, how to apologize, and how to hold others to account. In Kofman’s view, the first step to transcendence is transcending yourself: practicing humility and actively confronting your own mortality. Only by getting over yourself and realizing the extent to which the world will continue to spin without you can you lead an organization in which others will find purpose and meaning. It is not sufficient for a leader alone to demonstrate these behaviors, however. He or she must hold everyone who manages a division, unit, team, or function accountable as well. Kofman makes clear that one of the hard problems of leadership is that an organization is only as strong as its weakest leader. Even those inspired by an exceptional CEO or division head will grow cynical if their immediate boss fails to foster a sense that the work being done is meaningful and serves a larger purpose. When an appreciation for the key role of nonmaterial incentives does not cascade across levels, the enterprise will be reduced to fiddling with algorithms in hopes of finding a reward system that will stop the rot of disengagement.

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Forged in Crisis: The Power of Courageous Leadership in Turbulent Times. Like Kofman, Koehn makes clear that great leaders always act from a highly developed sense of purpose that others find inspiring. But she adds an important corrective to how a pure mission focus is often viewed by showing that some of the most effective and purpose-driven leaders the world has ever seen demonstrated surprising flexibility. They did so by remaining open to new information, constantly refining their understanding of Koehn is especially strong facts on the ground, and shifting their in analyzing the role that notion of what was possible and what serious setbacks and would constitute a successful outcome. extreme discouragement This flexibility is so profound that play in the forging of it can change the definition of the miscourageous leaders. sion, leading to a highly intentional form of what might otherwise be viewed as mission creep. Consider Abraham Lincoln. During the lead-up to and early portion of the Civil War, he understood its purpose as simply the preservation of the Union as it had existed since the 1787 Constitutional Convention, even if that meant upholding slavery where it legally existed. By mid-1862, given the length and bloodiness of the engagement, along with early Southern success in battle, he became convinced that a negotiated return to the status quo ante had become impossible. For the Union to survive, it must strive to become “a more perfect Union,” guaranteeing the right to life, liberty, and the pursuit of happiness to all its citizens. This realization, combined with the pressing Northern need for more troops, which only the enlistment of freed African-American slaves could meet, persuaded Lincoln to issue the Emancipation Proclamation on January 1, 1863. His ceaseless efforts to “make sense of the war” and his capacity for patient reflection kept him open to reconsidering even the war’s ultimate purpose. Koehn is especially strong in analyzing the role that serious setbacks and extreme discouragement play in the forging of courageous leaders. Her leaders, who include environmentalist Rachel Carson, abolitionist Frederick Douglass, and explorer Ernest Shackleton, experience periods of great loneliness and outright despair as the complexities of their respective undertakings threaten to overwhelm them. But even terrible grief serves to instill resilience and patience,

What You Don’t Know

A less dramatic manifestation of this commitment forms the thread of Jeffrey Kottler’s thoughtful and engaging book, which focuses on how leadership manifests itself in everyday life. It’s a refreshingly down-to-earth approach that

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while also teaching leaders to manage their emotions in times of great duress. Forged in Crisis is at its most compelling when showing the complexity that ethics can take on in charged situations. Koehn offers a riveting study of Dietrich Bonhoeffer, the brilliant theologian and charismatic pastor who fiercely resisted Hitler’s rise and rule, and paid for it with his life. Born into an illustrious family and superbly educated, Bonhoeffer spent his young adulthood as an academic star and pastor in the German Evangelical Church, the mainstream Lutheran denomination in his home country. During Hitler’s ascent in the 1920s, he taught and preached that the Nazi creed was incompatible with Christianity; when Hitler assumed power in 1933 and required leaders of the established church to swear loyalty to him, Bonhoeffer founded the Confessing Church as an alternative to what became known as the Reichskirche and worked with ecumenical leaders across Europe to oppose the Nazis. Harassed and threatened, Bonhoeffer fled to New York in 1939, where he accepted a position at the Union Theological Seminary. Yet almost as soon as he’d settled in, Bonhoeffer made the startling decision to return to Germany to join the resistance. Once home, he not only continued to preach and write in defiance of the Nazis, but also actively worked with senior diplomats and military intelligence officials plotting to assassinate Hitler, undertaking missions on their behalf while serving as spiritual advisor to the conspirators. Koehn’s examination of how Bonhoeffer reconciled active engagement in repeated murder attempts of those he judged purely evil with a lifelong commitment to Christian ethics as articulated in the Sermon on the Mount should be required reading for any leader negotiating challenging moral terrain. She notes that his unceasing examination of his own motives and actions, along with a willingness to admit rather than rationalize away the moral ambiguity of his choice, resulted in a profound self-awareness and a redoubling of his commitment to be “faithful to the things of daily life.”

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complements Kofman’s and Koehn’s work by keeping the conversation free of grandiose proclamations and putting the focus squarely on behavior, ethics, and self-awareness. Kottler also does a superb job of showing how effective leaders embed themselves within the larger culture and reflect the values of those in their care. But unlike the first two authors, he finds that those who lead by force of charisma, brilliance, and unquestioning self-confidence usually succeed despite, rather than because of, their personalities. Just as Kofman does, Kottler takes as his starting point the pervasive problem of disengagement, which he says shows how out of touch most leaders are with the needs of those in their care. The advent of the virtual workplace has exacerbated this detachment, and Kottler argues that few leaders have been trained to assume their roles in a virtual universe. It’s a problem likely to grow more acute over time. What You Don’t Know about Leadership but Probably Should: Applications to Daily Life is satisfyingly specific, offering detailed insights into how to get the tasks of leadership right. These include mundane but essential skills such as leading a great meeting, knowing when and how to intervene in disagreements, managing interruptions with grace, taking the right lessons from mistakes, telling persuasive stories, and “talking to larger groups without boring them to death.” Much has been written about the need for self-awareness in leaders. Kottler supplies needed specifics on this topic, including techniques for checking your self-perceptions against what others see by using informed inquiry and reflective listening. He presents a useful frame for engaging in constructive selftalk, avoiding the twin poles of castigating yourself for human failures and rationalizing your own less-than-optimal responses. These skills are key to modeling the kind of emotional resilience and centeredness that Kottler says people seek from leaders. The author also sees a continuum between the personal life and the public role of the leader, a topic that is usually entirely neglected or treated with excessive reverence or condescension. Kottler’s decades of experience have convinced him that leaders who are inattentive to family and friends cannot succeed in their public roles over time. He makes clear that exhibiting consistency between

Sally Helgesen [email protected] is an author, speaker, and leadership consultant. Her most recent book is How Women Rise: Break the 12 Habits Holding You Back from Your Next Raise, Promotion, or Job (coauthored with Marshall Goldsmith; Hachette, 2018). She is a contributing editor of strategy+business.

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public and private roles can be challenging for leaders, citing research showing that outsized success strongly correlates with entitled, demanding, and arrogant personal behavior. Too frequently, leaders wind up neglecting the emotional needs of those at home while assiduously supplying their material needs. Doing so can seriously undermine an otherwise promising and talented leader because the incongruent behaviors have the effect of diminishing self-awareness. Kottler’s specificity is especially helpful in his extended discussion of trust: why it matters, how it’s earned, and how it’s lost. Here, again, he notes that a lack of self-awareness can be particularly problematic because it blinds a leader to instances in which self-interest and personal need may supersede the interests and needs of the larger community. This can result in abuses of power or breaches of trust that quickly destroy the best intentions and the loftiest aspirations. Written from the diverse perspectives of economics, history, and psychology, each of this year’s best books offers a bracing perspective on the top leadership challenges of our — or any — day: ethical judgment and behavior, balancing reflection with action, self-awareness, the management of emotions, and the capacity to fully harness the talent, hearts, and minds of disparate individuals in the service of reaching a collective goal. Read alone or as a group, the books incisively demonstrate what these skills look like in action, and offer a template for reversing the scourge of disengagement. +

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3 | MANAGEMENT

REVISING THE MANAGERIAL

PLAYBOOK by Theodore Kinni

best books 2018 management

Edgar H. Schein and Peter A. Schein, Humble Leadership: The Power of Relationships, Openness, and Trust (Berrett-Koehler, 2018)

Morten T. Hansen, Great at Work: How Top Performers Do Less, Work Better, and Achieve More (Simon & Schuster, 2018)

Heidi Grant, Reinforcements: How to Get People to Help You (Harvard Business Review Press, 2018)

A TOP SHELF PICK

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managers were the wizards of business. They learned profitability and productivity incantations at various branches of the Hogwarts School of Business. They were privy to arcane corporate knowledge that was withheld from the mere mortals in the rank and file. They pointed their wands, and the workforce did their bidding. Tomorrow, it’s likely that employees will manage themselves. The incantations and knowledge that were once the manager’s stock-in-trade will be at their fingertips, perhaps on their smartphones. With the help of computers imbued with artificial intelligence, they will decide their own direction. But what should managers be doing today? The authors of this year’s best business books on management offer conflicting answers. MIT professor emeritus Edgar Schein and his son Peter, now colleagues at the Organizational Culture and Leadership Institute, see a new, relationship-based managerial culture emerging. University of California at Berkeley management professor Morten Hansen identifies practices that defined high performance in the recent past and urges contemporaries to copy them. And social psychologist Heidi Grant of the NeuroLeadership Institute offers managers a way to develop a skill that they will surely need at some point — no matter what their future holds.

YESTERDAY,

Like Edgar Schein himself, Humble Leadership: The Power of Relationships, Openness, and Trust is quietly, but fundamentally, subversive. “We see leadership as a complex mosaic of relationships, not as a two-dimensional (top-down) status in the hierarchy, nor as a set of unusual gifts or talents of ‘high-potential’ individuals,” declare the Scheins. They argue that conventional management has reached its limits. “We see U.S. business culture continue to espouse the individual hero myth leader, and a machine model of hierarchical organization design that not only undermines its own goals of employee engagement, empowerment, organizational agility, and innovative capacity, but also limits its capacity to cope with a world that is becoming more volatile, uncertain, complex, and ambiguous.” In addition, say the

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Relationship Management

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authors, the social and work values of younger workforce cohorts are simply incompatible with conventional top-down management practice. Humble Leadership proposes establishing and maintaining relationships as the new measurement of managerial effectiveness. Leadership is a collective endeavor, write the Scheins, “a process of learning, sharing, and directing new and better things to do in the dynamic interpersonal and group processes that increasingly characterize today’s organizations.” In this scenario, managers exert influence through building personal relationships with employees. Personal relationships? If that makes your inner manager vaguely uneasy, it’s understandable. It’s the rare company that still encourages managers to dominate and coerce employees — a relationship that the Scheins identify as “Level Minus 1.” But lots of companies expect managers to keep employees at arm’s length, maintaining a “Level 1” relationship that most of us will recognize as “professional.” A Level 1 relationship is a good insulator, especially when a manager is called upon to deliver a lousy performance review or a pink slip. But it won’t be enough to get things done when the day comes when managers can’t just order people about. To thrive in that environment, managers will need to establish “Level 2” relationships, which the Scheins define as “personal cooperative, trusting relationships as in friendships and in effective teams.” The authors credit Ken Olsen, who cofounded Digital Equipment Corporation (DEC), with using Level 2 relationships to build the computer company over several decades. “Having hired the best technical talent, [Olsen] accepted

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his vulnerability (of not having all the answers as the founder) but trusted his experts to make the best technical decisions while he created a personal environment of openness and trust,” they write. “He empowered his key employees and made himself reliant on them. He wanted the market to decide whether the decisions were good ones or not. He humbled himself both to his employees and to the realities of the market.” It worked. DEC, founded in 1957, was IBM’s biggest rival for a while in the 1980s. But there’s a cautionary postscript to the story: As the company grew more successful, the young engineers whom Olsen had empowered became powerful managers themselves, and they didn’t always internalize the message. “[They] build their own empires, and begin to fight with each other,” write the Scheins. “At DEC, trust eroded very quickly.… In the end Ken was increasingly sidelined by the very people he had empowered.” In 1992, Olsen was forced out of the company he had founded. The lesson: Conventional management culture is powerful, and it can easily undermine more enlightened approaches. To create Level 2 relationships, managers need to practice personization. The Scheins define the coined term as “the process of mutually building a working relationship with a fellow employee, teammate, boss, subordinate, or colleague based on trying to see that person as a Humble Leadership proposes whole, not just in the role that he or she may occupy at the moment.” establishing relationships What’s the benefit of personizing as the new measurement of managerial effectiveness. work relationships? “Our basic argument,” explain the authors, “is that you would want to do this in order to maximize the possibility that you will be open and honest with each other and will feel safe in reporting when things are not going well, when you don’t understand each other, when you don’t agree with each other, and, most important, when you need each other’s help.” For its conception of an alternative managerial culture and as a fitting capstone to Edgar Schein’s prior books, Helping and Humble Inquiry, Humble Leadership is the best business book on management this year.

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Morten Hansen’s approach to management is the polar opposite of the Scheins’. He extrapolates a view of managerial excellence from past performance and presents it in a style that closely echoes the work of Jim Collins. This is unsurprising: Hansen coauthored Great by Choice, an exploration of organizational agility and adaptability published in 2011, with Collins. Great at Work: How Top Performers Do Less, Work Better, and Achieve More reports the findings of what Hansen bills as “one of the most comprehensive research projects ever undertaken on individual performance at work.” Hansen and colleagues conducted a five-year study of 5,000 managers and employees. Hypotheses were formulated and confirmed; behaviors were identified; links to high performance were established. This is all described in a 30-page research appendix presented in a suitably minuscule font — an unmistakable signal that it can be skipped. The research yielded a “work smart” theory composed of seven practices, which are the subject of the book proper. (“It always seems to be seven, doesn’t it?” asks Hansen parenthetically.) The first four practices are aimed at mastering your own work, and the last three practices are focused on mastering working with others. The latter three speak directly to the role of managers. “Analyzing our data,” writes Hansen, “we found that the top performers mastered working with others in three areas: advocacy, teamwork, and collaboration.” In terms of advocacy, Hansen found that high performance is associated with “forceful champions,” who, he says, “effectively pursued their goals at work by mastering two skills to gain the support of other people. They inspired others by evoking emotions, and they circumvented resistance by deploying ‘smart grit.’” You evoke emotions by upsetting people about the present and exciting them about the future. You deploy smart grit by sticking to your guns and tailoring your tactics to persuade opponents that you’re right. Managers get teams working effectively by first encouraging good fights, according to the author. “When teams have a good fight,” explains Hansen, “team members debate the issues, consider alternatives, challenge one another, listen to minority views, scrutinize assumptions, and enable every participant to speak up without fear of retribution.” Then, managers require them to unite — that is, to

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The Good Fight

Help!

All managers, except the most authoritarian, will want to read Heidi Grant’s Reinforcements: How to Get People to Help You. It’s a slim book on a topic that shouldn’t, at first glance, merit a book-length treatment: asking for help. Yet it turns out that the topic is complicated, because asking for help is fraught with stress. Stanley Milgram, the Yale professor who famously discovered that our unwillingness to question authority extended to a willingness to zap each other with electricity, also found that for many of us, asking for help is profoundly uncomfortable. He learned this in the 1970s by sending graduate students into Manhattan’s subways to ask riders for their seats. “The good news: 68 percent of people willingly gave up their seats upon request,” reports Grant, a social psychologist by training. “The bad news: conducting the study was — to this day — among the worst, most traumatic experiences his students had had in their lifetimes.” Milgram didn’t buy the results of his research, so he tried it himself. When he finally mustered the nerve to ask for another rider’s seat, he said, “I was overwhelmed by the need to behave in a way that would justify my request. My head

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“commit to the decision taken (even if they disagree) and all work hard to implement the decision without second-guessing or undermining it.” You foster collaboration, says Hansen, by taking a “disciplined” approach to it. That means refusing to pursue collaboration as an end in itself, as the Scheins propose. Rather, writes Hansen, you adopt “a set of practices that allows you to first assess when to collaborate (and when not to) and to implement the effort so that people are both willing and able to commit to it and deliver results.” The prescriptive advice that Hansen offers in the three areas above is nuanced, but it is also clearly rooted in what Edgar Schein calls the current management culture. Managers who subscribe to Great at Work position themselves as the principal actors on the business stage. They are always pushing and pulling others to achieve goals that they set or that come down to them from higher up the ladder.

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sank between my knees, and I could feel my face blanching. I was not role-playing. I actually felt as if I were going to perish.” Why is asking for help so difficult? Grant calls out two commonly cited reasons and then proceeds to show why neither should hold us back. The first is that we assume our help requests will be refused. Grant cites numerous studies showing that not only do people want to be helpful, but they also are willing to devote more energy to helping us than we expect. It turns out that even people who have refused to help us in the past are apt to help us: People don’t want to seem unhelpful, and refusing a second request for assistance raises the likelihood of that. The second reason is that we assume asking for help will make us less likable or — in terms that might be more relevant to requesting help at work — less competent. But Grant says it does the opposite. If you help someone else, it’s hard to think poorly of that person, because that would create cognitive dissonance. As a result, you are likely to try to resolve that dissonance by bolstering your opinion of the person. Ben Franklin knew this: In the 1730s, he won over a political opponent by asking to borrow a rare book from his opponent’s library. Not only did he get the book, he got the man’s lifelong friendship. Grant devotes more than half of Reinforcements to describing how people can effectively enlist others’ help. Some of her advice is common sense: For instance, we’re all busy, so we may not notice you need help, or if we do notice, we may think that you won’t want our help. So, if you want help, you have to ask for it. Some of her advice is more nuanced: For instance, don’t try to con us into thinking that helping you whitewash the fence will be fun. It worked for Tom Sawyer, but that was fiction. Why should managers learn to ask for help? It’s all about the relationships. “Although the idea of asking for even a small amount of help makes most of us horribly uncomfortable, the truth about modern work is that we rely, more than ever, on the cooperation and support of others,” explains Grant. “No one succeeds in a vacuum, whether you are in an entry-level position or have a view from the C-suite.” The management vogue for cross-functional teams, agile project management, and new organizational structures that minimize hierarchy are pushing people to collaborate more, and thus “having to suffer the small agony

of asking people to help us on a regular basis,” she continues. “If you are a leader, you need to figure out how to elicit and coordinate helpful, supportive behavior from the people you are leading, too. Arguably, that is what management is.” Indeed. + Theodore Kinni [email protected] is a contributing editor of strategy+business. He blogs at Reading, Writing re: Management and is @tedkinni on Twitter.

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4 | ECONOMICS

VALUE-ADDED

HISTORY by Ryan Avent

Mariana Mazzucato, The Value of Everything: Making and Taking in the Global Economy (Allen Lane, 2018)

Kyle Harper, The Fate of Rome: Climate, Disease, and the End of an Empire (Princeton University Press, 2017)

Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (Viking, 2018) A TOP SHELF PICK

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years ago, the global financial crisis entered its most intense phase. The anniversary finds the world less engaged in sober reflection than standing dazed by the history that has unfolded since. Still, it is as good an excuse as any to muse on how the world arrived at this bewildering geopolitical moment. This year’s three best business books on economics — one short theoretical work and two magisterial histories (one ancient, one recent) — make excellent accompaniments to such efforts.

TEN

A Theory of Value

best books 2018 economics

An inquiry into the nature of value in an economy might not seem an obvious place to begin. Yet The Value of Everything: Making and Taking in the Global Economy, by Mariana Mazzucato, helps establish the intellectual roots of the odd history of the past decade. Mazzucato, an economist at University College London, made a splash in 2011 with the publication of The Entrepreneurial State, which examined the critical role governments play in the development of new technologies. After reprising some arguments from that book, The Value of Everything ultimately goes much further, building toward a broad and intriguing critique of the global economy. Though it can occasionally seem otherwise, the primary aim of government economic policy is to make everyone richer and better off. But achieving that goal, Mazzucato argues, requires a working theory of how economies genThe Value of Everything erate more value. That question is one builds toward a broad and intriguing critique of the that has addled economists for centuglobal economy. ries. The book provides an intellectual history of the debate covering the French physiocrats, proto-economists who reckoned that all value could be derived from the production of the agricultural sector; classical economists such as Adam Smith and David Ricardo, who sought a theory of value rooted in the productive application of labor; and the fateful innovations of the neoclassical economists of the late 19th century. The contribution of the latter group, including economic luminaries such as Alfred Marshall and Leon Walras, was to establish a model of an economy in which there is nothing intrinsic at all

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about economic value. Rather, value is best judged by the price the market will bear. In Mazzucato’s view, the elevation of this line of thinking has proven hugely consequential. It implies, for example, that the high incomes earned by workers in finance reflect those workers’ high contribution to the economy — and, similarly, that low wages are the just reward for workers whose jobs are of incidental import to the rest of us. It also means that activity that is hard to measure or that takes place outside markets is systematically underappreciated. This includes care work in the home, which most governments opt not to include in their national accounts data. It also includes much of the contribution of government to the function of society. The result is a skewed version of economic reality, which in turn leads to a skewed set of policy priorities. Government is largely seen as a burden to be minimized rather than an active contributor to prosperity through its funding of infrastructure and research, setting the standards and regulations that allow markets to function, and providing a social safety net. The enormous fortunes piled up by tech billionaires are more easily attributed to innovation and risk taking than to the luck, market power, and state support that are often just as important to their success. Mazzucato is highly critical of the finance industry. In the millennia prior to the Industrial Revolution, finance-related work was largely seen as parasitic. Not even the great economists of the 19th century considered finance a source of significant value. Yet the shift toward a framework in which money earned is

Empire Falls

The Value of Everything is a relatively short, businesslike book that efficiently guides readers through a number of modern debates. The Fate of Rome: Climate, Disease, and the End of an Empire, by Kyle Harper, is something altogether different. This compelling narrative of the fall of the Roman Empire proves a remarkably timely book for those hoping to understand the present moment. As Harper, a historian at the University of Oklahoma, is quick to note, the decline of the empire hardly seems under-explained by historians. Its basic trajectory is familiar. Over the course of Rome’s long life the proto-states beyond its frontiers grew in strength and sophistication. Encroachments on Roman territory increased the fiscal demands on the empire and simultaneously reduced the tax base, all while emboldening the barbarians at the gate. As pressure built, Rome could no longer concentrate its resources in response to threats and was overrun. Yet in retelling this story, Harper highlights several important and underappreciated aspects of Rome’s rise and fall. Rome’s extraordinary growth and even-

best books 2018 economics

synonymous with value created opened the door to a different perception. As the industry exploded in size after the deregulation of the 1970s and 1980s, national accounts practices also changed. More of the income generated within finance was reclassified as value added (rather than an input cost incurred by final producers). Thus, as the financial sector became ever better at imposing costs on its customers, both GDP and the contribution of finance to it rose. The strangeness of this dynamic became particularly clear during the financial crisis, as banks paid out billions in bonuses to their workers even as governments were obliged to mobilize trillions of dollars to prevent the industry’s collapse. In 2009, Mazzucato writes, CEO Lloyd Blankfein said, “The people of Goldman Sachs are among the most productive in the world.” They are unquestionably good at what they do. Yet we seem to have lost the ability as a society to judge whether what they do contributes to the common weal in any manner other than generating income for those in the business. We have arrived at this point, Mazzucato’s book suggests, through the atrophying of our ability to judge value by yardsticks other than money.

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tual decline were closely tied to natural phenomena over which the Romans had little or no control. The Holocene — the geological epoch during which human civilization arose — began with a sharp period of warming at the end of the last ice age, about 12,000 years ago. After that initial heat wave, or since about 8,000 years ago, global temperatures have been on a long downward trend, interrupted by occasional anomalies — including an odd bout of warming that coincided with the apex of the Roman Empire. This remarkably warm and wet period seems to have been an extraordinarily bountiful one for the Mediterranean basin. North Africa and the Levant were far more lush than they are now, and supported agriculture and dense civilization in areas now covered by desert. On Greek mountains, the remains of ancient olive presses have been found at elevations far above those that support olive tree growth today. This climatic good fortune contributed to an abundance and resilience that enabled the rise of the empire. But the fates would not smile on Rome indefinitely. The empire’s final centuries occurred as temperatures and precipitation declined, en route to a “little ice age.” This shift was compounded by climate havoc wrought by volcanic activity, and even more dramatically by pandemics. A double blow of viral epidemics preceded the “Crisis of the Third Century,” which saw the near collapse of the empire. The arrival of the plague during the reign of Justinian in 541–542, which probably killed around half of Europe, fatally weakened the Eastern rump of the empire, which had survived the collapse of the West. Unlike modern civilizations, the Romans had no way of knowing that the climate in which they had thrived was shifting, and had little room to take action to reverse the change. Yet we are only moderately ahead of the Romans in understanding our economic vulnerability to massive climate shifts, particularly given the highly unpredictable nature of interactions between climate change and political instability. And although germ theory, vaccines, and other health advances give us an edge over the Romans in our ability to confront pandemics, the integration of the global economy, which allowed plague to ravage Europe, is more complete today than ever before. Harper’s book also drives home the way in which economic integration and growing wealth feed on themselves. Contrary to popular belief, the Roman econ-

A Global Crisis

A reader moving directly from The Fate of Rome to Crashed: How a Decade of Financial Crises Changed the World, by Adam Tooze, is in for a deeply unnerving experience. The pace and tone of the two historical narratives are strikingly similar, as is the dark sense of foreboding that pervades the storytelling. Tooze’s book is an indispensable history of the past two decades, which escorts the reader from the geopolitical ructions of the early 2000s through the global economic crisis and on to the threats posed to the prevailing global order by political developments in the United States, Europe, and elsewhere. For those who lived through it all, the material will be mostly familiar. Yet the pure density of news across this period made the historical thread devilishly hard to follow in real time. Tooze, a historian at Columbia University, gives this history the exposition it deserves, bringing the period into sharper and more disconcerting focus. His book is the year’s best, and an unforgettable read. The connective tissue holding Crashed together is its focus on the emergence of a highly integrated transatlantic financial system. This financial system laid the groundwork for the spectacular financial crisis that reached its zenith in 2008. It also provided the bridge from that catastrophe to the ensuing crisis in the eurozone, and acted as a persistent influence on the governments struggling to manage the crises and their aftermath.

best books 2018 economics

omy was not merely extractive, transferring plunder from conquered territories to the idle masses in the capital. Expansion in trade during the Romans’ reign enabled economic specialization and the spread of knowledge, boosting productivity. Though the Romans never managed to achieve self-sustaining technological progress, real incomes across the empire rose meaningfully thanks to the creation of a broad, stable zone of exchange. Similarly, the size and diversity of the economy added to its resilience in the face of unforeseen threats. Yet both incomes and resiliency were placed under stress as the empire weakened and shrank. It was not fiscal overreach resulting from decadence that hamstrung the empire so much as the loss of economic potential. The increasing strain posed by this loss reduced the ability of Rome’s leaders to respond to crises of all sorts, until at last the entire edifice fell.

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As big European banks turned to U.S. money markets for funding, they helped channel capital from around the globe into the U.S. property market — and ensured that the housing bust would have global ramifications. The financial crisis left European banks and sovereigns in a weakened and vulnerable state. Fatefully, it also increased the interdependence between the two, as the European Central Bank (ECB) worked to replace lost money-market funding by lending generously to banks against European sovereign bonds. Those interconnections between European banks and their sovereigns became the conduits along which panic would spread from 2010 to 2012. Tooze reminds readers how much worse things could very easily have been. So much depended, in so many cases, on last-minute steps away from the brink taken by competent, well-intentioned leaders (a resource now in somewhat shorter supply). Crashed just as often, however, leaves the reader infuriated as it recounts the policy missteps that helped transform the pre-crisis world into the one in which we now find ourselves. The enthusiastically wrongheaded turn toward austerity from 2009 on is well known. The disastrous decision on the part of the ECB not to extend euro swap lines to Central European economies (as the Fed had extended dollar swap lines to the ECB) is less so. Tooze pays it the attention it deserves; the ECB’s decision exacerbated the acute economic pain around the Eastern periphery and led directly to the rise of illiberal governments such as that of Hungary’s Viktor Orban. Tooze’s narrative brings us, in rather grim fashion, to the geopolitical mess of today, in which transatlantic cooperation has faltered even as the diplomatic challenges presented by Russia and China grow ever more intense. Added to the risks that unavoidably accompany global financial integration is the growing threat that such interconnections will be weaponized. Strikingly, the response to the financial crisis — most notably the way in which the Fed showed itself willing to go to extraordinary lengths to support the dollar-dependent global financial system in its hour of need — helped entrench the dollar and U.S. government debt as the foundation of global finance. That fact looks ever more awkward as the U.S. threatens to entirely abandon the global leadership role that has helped underpin the world economy since the end of the Second World War.

Ryan Avent [email protected] is economics columnist at the Economist. He is the author of The Wealth of Humans: Work, Power, and Status in the 21st Century (St. Martin’s Press, 2016).

best books 2018 economics

The United States is not Rome, however often the analogy is made. But modern prosperity is built on a set of wildly complex interdependencies. It is hard to know exactly how much resiliency the system has. We can take courage from the fact that the global economy is still here, after the catastrophes of the past decade. The United States is not Rome, however often the But much of the geopolitical goodwill analogy is made. and cooperative spirit that helped prevent a more damaging collapse has been used up. And we cannot really know which is the support that, once broken, will lead to a much more thorough, nastier cycle of disaster. Ten years after the crisis is as good a moment as any for the world to try to regain its bearings, and rethink its direction. There might be other crises. Better be prepared. +

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5 | S T R AT E GY

MAKING

THE LEAP by David Lancefield

best books 2018 strategy

Howard Yu, Leap: How to Thrive in a World Where Everything Can Be Copied (PublicAffairs, 2018)

Francesca Gino, Rebel Talent: Why It Pays to Break the Rules at Work and in Life (Dey St., 2018) A TOP SHELF PICK

John Doerr, Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World with OKRs (Portfolio/ Penguin, 2018)

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can you innovate to avoid irrelevance? How can you nurture your best people, especially the rebels? And how can you set goals and objectives effectively to make sure your company succeeds? These are key questions for anybody charged with developing strategy for a large organization. And they are answered with clarity and verve in this year’s best business books on strategy. In Leap: How to Thrive in a World Where Everything Can Be Copied, management professor Howard Yu uses history to lay out a path for resisting disruption. In Rebel Talent: Why It Pays to Break the Rules at Work and in Life, Francesca Gino, a behavioral scientist and Harvard professor, upends the conventional wisdom on dealing with people who have difficulty adhering to norms. And in Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World with OKRs, John Doerr, a legendary venture capitalist, applies an engineer’s discipline to the thorny question of how best to use metrics.

HOW

When Howard Yu was studying for his Ph.D. at Harvard, Clayton Christensen was one of his supervisors. And to a large degree, Leap builds on Christensen’s work on disruptive innovation. “Is the displacement of early pioneering companies an inescapable fate in the modern economy?” Yu asks. The answer is yes — but not for those who can leap. The competitive advantage that accrues from scale, or great brands, or patents, is evanescent. But looking back through history, Yu has found that companies that survived dramatic shifts were able to leap from one knowledge system or foundational discipline to another. The book, which straddles business history and strategy, hangs on a simple but brilliant analytical frame: the knowledge funnel. As companies mature and scale up, they move (or leap) within the funnel from craftsmanship to mass production to automation. Think of Procter & Gamble, or Ford, or Yamaha as they first made soap, cars, and pianos by hand, then made them on an assembly line, and then automated production. But in order to survive dramatic shifts, successful companies also have leapt sideways into new areas of foundational knowledge. For Swiss pharmaceutical companies that trace their lineage to the 19th century, the leap has

best books 2018 strategy

Logical Leap

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been from organic chemistry to microbiology to bioinformatics and genomics. For P&G, the leap was from the discipline of mechanical engineering into the disciplines of consumer psychology (understanding marketing and advertising) and chemistry. Yu identifies five clear and pragmatic principles at the center of the leap philosophy: (1) understand your firm’s foundational knowledge and its trajectory; (2) acquire and cultivate new knowledge disciplines; (3) leverage seismic shifts; (4) experiment to gain evidence; and (5) dive deep into execution. It may sound simple. But making leaps successfully isn’t easy — they’re costly, from both a financial perspective and an emotional one. CEOs have to be willing to stake their personal and professional future on what may seem to be long-shot bets. Companies that leap have to continually reassess their foundational cores and seek to cannibalize their own success. In the second half of the book, Yu looks at 21st-century companies such as WeChat, and highlights the knowledge funnel they must follow: from the wisdom of the managerial few (craftsmanship), to reliance on the wisdom of the crowd (outside developers) to mass-produce apps; the leveraging of machine intelligence and artificial intelligence (automation). And he describes how John Deere, which in the 19th-century made the difficult leap from horse-powered plows to steam-powered tractors, is still leaping. The company is leveraging ubiquitous connectivity and artificial intelligence to build largely autonomous tractors that can fend off low-cost competition. “Climbing into the driver’s cabin feels a little like stepping into a spaceship,” he notes.

Rebel Yell

Not many strategy books open with the author describing a stint working in the kitchen of the restaurant run by the famous Italian chef Massimo Bottura. But Francesca Gino, perhaps fittingly given the title of her book, doesn’t follow the usual script. The youngest person to get full tenure at Harvard Business School, where she is Tandon Family Professor of Business Administration, Gino is a behavioral scientist by training. In some of her early research on why people cheat on taxes or exams, she began to notice (1) that people often are disengaged at work; and (2) that rule breaking is associated with innovation. The central premise of Rebel Talent is that rebels — people who consciously

best books 2018 strategy

Yu, who teaches at the International Institute for Management Development Business School in Switzerland, is a fluent and imaginative storyteller. He has a knack for the pithy phrase: “Strategy…is never about achieving perfection; it’s about shortening one’s odds, at best” and “Core competencies turned into core rigidities.” The substantive, detailed accounts he offers really hit home. That may be in part because the products he describes — pianos, cotton, soap — play an active role in family life. But it’s also because Yu makes an eloquent plea for the primacy of human judgment and influence. AI is “an augmentation technology,” he notes. The three big points of leverage he identifies for the future are ubiquitous connectivity, the rise of intelligent machines, and a stronger emphasis on human creativity. Indeed, in an age of big data, developing groundbreaking insights requires humans to empathize with the needs, frustrations, and experiences of customers and citizens. One of the most compelling case studies he offers is of the New York homeless-services organization Common Ground. The leaders, showing deep empathy, immersed themselves in the life circumstances of the population that was once called “service-resistant” and moved quickly to potential solutions that could ultimately be scaled up. It’s hard to cover a lot of ground in a short book. And if there were to be a sequel to Leap — Leapt? — it would be useful to hear more about how CEOs can create teams capable of leaping, the obstacles companies face, and what precisely goes through the minds of leaders when they are about to jump.

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don’t follow the rules, or have great difficulty doing so — are good for business. Why? “Rebels don’t believe they have limits on what they can achieve,” she notes. They challenge the status quo. She uses a memorable phrase that encapsulates the three acts in which rebels engage: “Break, transform, create.” Napoleon Bonaparte, a notable historic rebel, dispensed with centuries of clotted military thinking to devise his own highly successful tactics. In fact, studies show that people who violate norms — by, say, wearing hoodies to business meetings, or wearing colorful sneakers to teach a graduate school seminar — are often seen as more powerful. Rather than punishThe central premise of ing or trying to confine rebels, leaders Rebel Talent is that rebels should strive to create the conditions — people who consciously under which rebels can flourish. don’t follow the rules — are In an age of standardization, that good for business. may seem a difficult task. But Gino breaks it down by describing the five elements of rebel talent: novelty, curiosity, perspective, diversity, and authenticity. Rebel Talent is very much in the mold of behavioral economics classics, using academic studies, examples, and data to prove provocative points. Gino cites studies tying novelty to engagement at work. She highlights the example of Pal’s Sudden Service — a burger chain in Tennessee and Virginia known for its remarkably fast service and low turnover, where employees are continually challenged to do new tasks. The book, the most engaging of the three under review, comes into its own in the latter stages, in which Gino sets out eight powerful principles of rebel leadership, three of which I found most distinctive: encourage constructive dissent and open conversations; learn everything and forget everything by going back to fundamentals; and foster happy accidents by designing workplaces that enable collaboration. She emphasizes that rebels make time to think and wonder, even when they’re extremely busy, if they’re fully engaged in their work. They rebel against time itself, which is both a wonderful turn of phrase and a premise. Gino’s favorite rebel is clearly Bottura, the chef in Italy who breaks many of the rules adopted in the hierarchical restaurant business. Bottura unloads the food truck himself, plays soccer with the staff, and frees employees to work on a range of tasks rather than pigeonholing them.

Measure for Measure

In Measure What Matters, John Doerr, a pioneering venture capitalist, describes how a simple strategy playbook used to great effect by highly successful engineering companies can be deployed by anybody. Part memoir, part business book, and part guide for perplexed managers, Measure What Matters is a clear and very well-designed book (as befits its topic). For Doerr, it all comes down to the mantra he learned at the feet of his mentor and hero, longtime Intel CEO Andrew Grove: “Ideas are easy. Execution is everything.” To Doerr, execution relies on using OKRs (objectives and key results) effectively. OKRs, he writes, are “a collaborative goal-setting protocol for companies, teams, and individuals.” The objective is what you want to achieve, and the key results help you benchmark and monitor how you get there. Deploy-

best books 2018 strategy

Rebel Talent is informed by a rich seam of research and an intense passion for the subject, and for seeking knowledge and perspective. “When we open ourselves to curiosity, we are more apt to reframe situations in a positive way,” Gino writes. She challenges conventional wisdom in the workplace by setting out the benefits of giving employees space. The Italian typewriter company Olivetti, long before it was au courant, built playgrounds for workers’ children, gave employees long lunch hours, and encouraged employees to expand their intellectual horizons — all as a way of building up curiosity as a corporate discipline. The author is clearly on a mission, and in a bit of a hurry. (She finished her Ph.D. in three years.) Breezily written and easily digestible, the book is packed to the brim with examples. Its references run to 39 pages. At one stage we move from Ford to Gino’s family room and then to the BBC in the space of less than two pages. But Rebel Talent also stands out for its passion, personality, and insight. Gino peppers the text with personal and engaging stories of her family, her marriage, and her Harvard classroom. And she clearly believes there is more work to be done. She has created an online learning platform for others to share more rebel stories and hosts a test that enables users to self-diagnose their rebel type. Her work ultimately prompts the question of why more leaders don’t make it easier for rebels to flourish, and, if the argument is pushed further, why workplace cultures are not so inclusive that the word rebel becomes unneeded.

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ing this strategy requires four OKR superpowers: focus, alignment, tracking, and stretching. On a more inspiring note, OKRs are what “empower people to achieve the seemingly impossible together.” Doerr, the self-described “Johnny Appleseed of OKRs,” looks back over his incredibly successful career, telling stories of how and where and why he used — or encouraged the use of — OKRs. Google, in which Doerr was an early investor, figures prominently. But so, too, do the Gates Foundation, Adobe, Intuit, and Bono’s One Campaign. To a large degree, this book is aimed at startups desperately needing some structure and focus as they look to survive, and then scale. But everything he says is relevant to organizations of all sizes. And there’s cracking advice for leaders and managers throughout the book, and memorable quotes: “OKRs are adaptable by nature. They’re meant to be guardrails, not chains or blinders.” Doerr reminds us to aim high when we set objectives. As Google cofounder Larry Page put it: “If you set a crazy, ambitious goal and you miss it, you’ll still achieve something remarkable.” Stretch goals can galvanize an organization to outstanding performance. The OKR system is fascinating, as is the book. The idea may hardly be revelatory. But the focus on execution is. Managing in this way requires intense executive focus, far greater levels of transparency and accountability than are customary, and dialogue and teaming across often disparate organizations. Many executives will read While reading, I played out my own the book and think that career moments, and those of some of they apply the OKR system already. If they’re honest, the organizations I’ve been fortunate they’ll realize they haven’t. to work with, and realized that had we adhered to OKRs with more discipline we’d have been better off. I imagine many executives will read the book, and, at first blush, think that they apply this system already. If they’re honest, they’ll then read through the examples of startups, stories told through the eyes of the founders who’ve used the system, and realize they haven’t. For example, Doerr says that executives should ask much simpler questions of themselves and their team. Rather than project five years into the future, they should ask what the most important problems and issues are for the next three (or six, or 12) months.

David Lancefield david.lancefi[email protected] is a partner with PwC UK and a thought leader for Strategy&, PwC’s strategy consulting business. Based in London, he advises senior executives of media, entertainment, and technology companies. He writes regularly on strategy, innovation, leadership, and culture.

best books 2018 strategy

Measure What Matters is at its best when it gives us a peek behind the scenes of the early days of some of Silicon Valley’s success stories, and the interventions Doerr made. He encouraged then Google CEO Eric Schmidt to work with a coach, for example. The case studies are real, candid, direct, and credible. And instead of simply rehashing history, Doerr looks ahead. The second half of the book describes how OKRs can be deployed in the new world of work — how processes applied to software and machines can best be applied to humans. Here, he has another powerful three-letter abbreviation: CFR. That stands for “conversations, feedback, and recognition.” The way to give “OKRs their human voice,” he argues, is to dispense with annual reviews and instead continually connect and check in with colleagues and employees to make sure everyone is on the same page. Doing so won’t just improve morale — it will encourage the alignment, autonomy, and engagement that are necessary if companies are to pursue and achieve their OKRs. High-performing businesses, Doerr correctly notes, require continuous performance management. Though I would have liked to learn more about how the executives he worked with convinced their people to adopt the OKR system, Measure What Matters leaves readers with vivid, immediate, practical guidance on how to execute their strategy with the confidence that they’re following in the footsteps of some of the world’s most successful entrepreneurs. It certainly challenges conventional wisdom and practice. Perhaps Doerr, a member in good standing of the Silicon Valley establishment, is a rebel, after all. And his system is certainly a critical ingredient for companies looking to leap from one schema to another. +

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6 | I N N O V AT I O N

TECHNOLOGY

EMERGING by James Surowiecki

Nick Polson and James Scott, AIQ: How People and Machines Are Smarter Together (St. Martin’s Press, 2018)

best books 2018 innovation

Michael J. Casey and Paul Vigna, The Truth Machine: The Blockchain and the Future of Everything (St. Martin’s Press, 2018)

Viktor Mayer-Schönberger and Thomas Ramge, Reinventing Capitalism in the Age of Big Data (Basic Books, 2018) A TOP SHELF PICK

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substance from hype is perhaps the biggest challenge businesses face when thinking about new technology, because no other field is as riddled with exaggerated promises and utopian fantasies. This year’s best business books on technology and innovation look at three of the hottest drivers of change in today’s economy — AI, blockchain, and big data — and do their best to distinguish what’s real in these technologies from what’s just for show. Most books on AI fall into one of two categories: prophetic tracts forecasting the arrival of the utopia of self-driving cars and permanent leisure, or, more commonly, dystopian tracts envisioning a future in which robots take all our jobs and people are left to fend for themselves in a world without work. With AIQ: How People and Machines Are Smarter Together, Nick Polson and James Scott take a different, and much-needed, approach, offering up a rigorous yet surprisingly accessible explanation of how AI actually works, coupled with a keen interrogation of its strengths and weaknesses. Polson and Scott, statisticians who teach at the University of Chicago and the University of Texas, respectively, have gone light on the equations and heavy on the stories. Each chapter illuminates an important artificial intelligence process — conditional probability, pattern recognition, Bayesian updating, anomaly detection, and so on — by telling the story of a historical episode in which that process was especially useful. So they explain conditional probability, the core of things such as Netflix’s recommendation engine, by looking at how mathematician Abraham Wald helped figure out the best way of armoring military

SEPARATING

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bombers. The extraordinary story of a Navy man named John Craven finding a lost submarine in the middle of the Atlantic Ocean explains Bayesian updating, which self-driving cars rely on to get around. And Isaac Newton’s failure as warden of the Royal Mint is used to explain how computers have gotten so good at detecting anomalies, which in turn allow them to identify stolen credit cards, cybersecurity breaches, and insurance fraud. Rather than a radical break with the past, the authors argue, AI is the latest chapter in the long saga of using science and data to make sense of the world. And although making artificial intelligence work well is a very complex task, the math of AI, as Polson and Scott write, “is surprisingly simple.” As they put it, “When you get right down to it, it’s all just probability on big data steroids.” Why does this matter to business? It turns out that the mystification of AI — this sense that it’s intelligible only to a select few — has made it harder for companies to think clearly about how to take real advantage of it. To get the most out of AI, organizations need to remake their businesses so that they maximize the collaboration between humans and machines, ensuring that machines amplify humans’ abilities, rather than simply substituting for them. Too few organizations are doing that, which in turn means they’re less productive than they should be. Demystifying AI can also help dispel some of the fears and anxieties that have sprung up around the subject. Polson and Scott show how algorithms are already helping transform fields as disparate as agriculture and policing. But they’re skeptical that AI is going to make humans redundant, and agnostic about whether so-called human-level intelligence is even on the horizon. And they point to the fact that for all the talk about robots taking our jobs, unemployment has trended steadily downward over the past decade, even as companies’ investments in AI have ramped up. Artificial intelligence certainly threatens individual jobs, but it’s far from clear that it threatens jobs as a whole, at least anytime soon. As an explainer, AIQ is impeccable, brilliantly making a complicated subject understandable. And while it offers a glowing picture of how AI can get things right, it also clearly lays out how things can go wrong. As Polson and Scott put it, “Algorithms just do exactly what they’re told.” They aren’t capable of under-

standing when their results don’t fit reality, and they have no ability to recognize when the assumptions that they’re programmed with are profoundly flawed and biased. And algorithms, oddly, also rust — if they aren’t regularly updated and improved, their model of the world becomes less accurate, and they become less effective. These are problems that any business relying on AI needs to be vigilant in managing. Although they’re problems that humans create, they’re also problems that only humans can fix. Polson and Scott write, “It may seem like we depend on smart machines for everything these days. But in reality, they depend on us a lot more.” Artificially Intelligent Designs best books 2018 innovation

In the last few years, the fascination with AI has been rivaled by interest in blockchain. Blockchain first gained attention because it’s the underlying technology for cryptocurrencies such as bitcoin. But even as speculative interest in cryptocurrencies has flagged, the hype around blockchain has, if anything, grown. In a recent PwC survey of 600 top executives, 84 percent said that their organizations had at least some involvement with blockchain. Companies including JPMorgan Chase and Walmart have made major commitments to it. And blockchain’s most fervent advocates suggest it offers the prospect of revolutionizing not just businesses, but society itself. Yet most people, including most corporate executives, would have a hard time explaining exactly what blockchain is. The Truth Machine: The Blockchain and the Future of Everything, by Michael J. Casey and Paul Vigna, seeks to remedy that state of affairs. The authors, financial journalists whose previous work was titled The Age of Cryptocurrencies, are true believers in the power of blockchain. But beneath the book’s utopian rhetoric is a subtle, and useful, investigation of what blockchain is, and what we might reasonably expect it to accomplish. Blockchain is, in essence, a distributed, crypto-graphically secure ledger that can record transactions of all kinds, ranging from currency trades to contracts to the movement of products through a supply chain. Instead of residing on one centralized server, copies of the ledger exist on all computers with access to it. Every transaction is instantly visible, and not reversible. And every transaction needs to be verified and validated by the system as a whole before it can become

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part of that blockchain. Events that happen on that blockchain are therefore transparent, secure, and indelible — you can’t go back and rewrite history after something has happened. That’s why Casey and Vigna call it a truth machine. The real promise of blockchain, the authors write, is that in principle it can be applied to a host of substantive problems in the real world. For instance, in countries where property records are byzantine and government is untrustworthy, a blockchain property registry would allow people to easily prove ownership of their homes, cars, and other assets. Peer-to-peer payment systems set up on blockchain would allow people to exchange money without having to go through intermediaries such as credit card companies. Stock trades and interbank payments could be processed in real time, rather than taking two to In countries where property records are seven days as they now do. byzantine and government Casey and Vigna are most interis untrustworthy, a ested in the ways in which blockchain blockchain property could help remake society as a whole. registry would allow people As a result, they spend much of the to prove ownership of book looking at what they call “pertheir assets. missionless” blockchain ledgers. These are open ledgers, such as bitcoin, in which (in theory) anyone can participate by connecting a computer and becoming part of the network. Although permissionless systems get most of the attention, blockchain’s biggest impact, at least in the near future, is likely to come via so-called permissioned ledger systems that operate within and between corporations. (Corporate blockchain systems are typically permissioned because of concerns about privacy and competitive advantage.) Walmart is running a pilot program that uses blockchain to track its food products from the farms of its suppliers to its stores. When the company set up an experimental blockchain for suppliers, in which each step was recorded on a distributed ledger (and therefore instantly updated on every computer on the network), the company was suddenly able to get a full picture of the path of a single piece of fruit in a matter of seconds. A system like that would be highly valuable during an outbreak of a foodborne illness. But you could imagine simi-

Data Mines

Both AI and blockchain are ultimately about data — how to record it, manage it, manipulate it, and learn from it. Data has become central to the way most corporations work, even when they aren’t obviously in the data business. The ascendance of data represents a radical shift in the nature of business, argue Viktor Mayer-Schönberger and Thomas Ramge in Reinventing Capitalism in the Age of Big Data, the best business book of the year on technology and innovation. What we are witnessing, they contend, is the advent of an economy in which data matters far more than capital, a change that represents “a fundamental reorganization of our economy.” What does that mean in practice? The key insight of Mayer-Schönberger, the Oll Professor of Internet Governance and Regulation at Oxford University, and Ramge, a German technology journalist, is that up to this point, we’ve used price as the key determinant of how resources are allocated — what we make, how much of it we make, what we invest in, and so on. We’ve done this because prices convey information about supply and demand — how much people want to buy and sell things — in a condensed, easy-to-understand form. But for all its effectiveness, price is also a blunt instrument. It can’t fully convey the intensity

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lar applications with consumer products that would allow companies to attest to the origins and safety of their products and the conditions under which they’re made. Blockchain technology could also transform internal financial reporting, making it more difficult for people to game the system, and making it easier to do up-to-the-minute financial reporting. Of course, just because blockchain could significantly boost transparency and efficiency inside companies doesn’t mean it will. As Casey and Vigna make clear, the decentralized and distributed nature of blockchain has real costs — it takes a lot of energy and resources to maintain and protect these highly redundant systems. And although the PwC survey showed that the vast majority of corporations are interested in blockchain technology, we have yet to see widespread, large-scale applications developed. Even more than AI, blockchain is something most executives know they should care about, but haven’t yet really figured out how to use. Casey and Vigna’s book would be a good place to start.

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of people’s preferences. It can’t let businesses know what consumers might want instead of what they’re selling, or even how much they’d be willing to pay for the things they do buy. The advent of big data — by which Mayer-Schönberger and Ramge mean the combination of massive databases and algorithmic analysis — changes all this. Now, it’s much easier to get a clearer, if still imperfect, picture of what people actually want. It’s possible to understand individual demand, and to customize responses to meet that demand. And you can do this, in many cases, without ever asking individuals directly what they want. Instead, you can simply follow the traces they leave as they move through the digital world — the things they click on and the things they don’t, the amount of time they spend on one site rather The transaction costs of doing business outside than another. corporate walls are falling, Businesses can now get a much which means that the closer look at potential suppliers and economic case for the partners, as well as at their own internal traditional big corporation operations. (Think of how much simis getting weaker. pler it is for corporations to track the work of their employees than it once was.) It’s easier than ever to enter into, and successfully monitor, partnerships, and to outsource even core corporate functions to outside players. Intermediaries and brokers are less important. As a result, the transaction costs of doing business outside corporate walls are falling, which means that the economic case for the traditional big corporation (which exists in large part because of its ability to coordinate production with a minimum of transaction costs) is getting weaker. For Mayer-Schönberger and Ramge, this means that markets are becoming more important than firms, and the traditional corporation is at risk of becoming obsolete. That seems like an absurd conclusion, especially at a historic moment when big corporations are more profitable than ever, and when more and more industries are dominated by a small number of players. But Reinventing Capitalism in the Age of Big Data suggests that the future instead might be one of smaller, niche firms making customized products, coordinating production with one another through the market, and doing so as efficiently as big firms are able to. If

James Surowiecki is the author of The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations (Doubleday, 2004).

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there are hundreds or even thousands of companies that can, say, make an auto part or a computer chip, and you can vet those companies with ease and make a deal with any one of them with the click of a button, it’s not obvious that it makes economic sense to do the work in-house or to rely on just one or two main suppliers. Similarly, economies of scale matter less in a world where mass customization — discovering exactly what a consumer wants and delivering it to him or her — is possible. If the advent of big data clears the way for small companies to shine, though, some very big players will continue to enjoy advantages: the companies that are the gatekeepers to all that data. There’s a positive feedback loop at work in the data economy. The more data you have, the more AI can learn to make your algorithms better. The better your algorithms are, the more likely it is that you’ll deliver what consumers are actually looking for. The data-rich companies such as Google, Amazon, and Facebook will get richer. This is the great paradox of Mayer-Schönberger and Ramge’s vision of the future. On the one hand, they argue that “data capitalism” empowers consumers, erodes the power of the traditional corporation, and elevates the market above the firm. On the other hand, data capitalism gives a few big corporations extraordinary power. The authors recognize this, and argue for what they call a data-sharing mandate, whereby companies are required to share their data troves with competitors. That would help weaken these companies’ competitive strength; however, it seems unlikely to become law. But in lieu of such a law, or concerted antitrust action against these companies, the future of the data economy will likely look very much like the present of the data economy. Meet the new boss, same as the old boss. +

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7 | MARKETING

MARKETING IS DEAD! LONG LIVE

MARKETING! by Catharine P. Taylor

best books 2018 marketing

Tien Tzuo, Subscribed: Why the Subscription Model Will Be Your Company’s Future — and What to Do About It (Portfolio/Penguin, 2018)

Joe Pulizzi and Robert Rose, Killing Marketing: How Innovative Businesses Are Turning Marketing Cost into Profit (McGraw-Hill Education, 2018)

Denise Lee Yohn, Fusion: How Integrating Brand and Culture Powers the World’s Greatest Companies (Nicholas Brealey Publishing, 2018)

A TOP SHELF PICK

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a confession. Having selected the best business books on marketing for s+b for a number of years now, I must say: Nobody writes books about marketing anymore. Marketing hasn’t disappeared, exactly. However, to assume that some carefully crafted banner ads, 30-second television commercials, eye-catching billboards, and a mobile app are all it takes to move product — well, that idea of marketing is on the way out. Marketers continue to produce ads, but almost as air cover in case their efforts to engage customers through great digital, retail, and customer service experiences don’t pan out. Few are bold enough to completely abandon traditional marketing. And yet those old-school tactics are seldom discussed, unless the topic is how to do away with needing them. You’ll note that only one of this year’s books has the word marketing in the title. In an ominous sign, it appears after the word killing. What replaces marketing? Well, how about ongoing customer engagement in which attention and sales are earned? Tien Tzuo, author of this year’s best business book on marketing, Subscribed: Why the Subscription Model Will Be Your Company’s Future — and What to Do About It, explains: “I think everyone would agree that brands are still very important, but today you communicate your brand through experiences, not ads.” In this model, marketing isn’t an appendage to each enterprise’s business model — it’s at the heart of it. Tzuo is the founder and CEO of Zuora, which creates software that companies use to manage subscriptions. And to a degree, the book is an effective pitch for the company’s services. Yet Subscribed resonates so deeply because if you look closely, you’ll notice the subscription model has been building momentum in surprising places. Until recently, subscriptions were limited to magazines, newspapers, and the book- or wine-of-the-month club. But now, consumers can — and do — subscribe to makeup (Birchbox), razors (Dollar Shave Club), clothes (Stitch Fix), food (HelloFresh), socks (Sock Panda), and flights (Surf Air), along with any number of digital services, such as software (Adobe) and video entertainment (Netflix). The benefit for the consumer is obvious. The convenience of having razors, or carefully curated recipe items, or Drake’s latest release simply arrive on your doorstep or in your Spotify app is hard for today’s harried masses to resist.

FIRST,

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However, it could be argued the benefits that consumers reap from subscriptions pale in comparison with what companies gain: vital data that helps them constantly iterate offerings and deepen relationships with their customers, along with a recurring revenue stream that can be transformative for businesses. Subscriptions also enable companies to evolve from the 20th-century business of selling products to the modern model of providing services. Take the U.K.-based snack box company Graze, which sends its subscribers boxes of healthy snacks every few weeks and asks them to fill out a simple online form about what they liked and didn’t like. Because of the insights the Companies gain vital company has gained through this condata that helps them constantly iterate offerings tinual feedback, it saw no reason to imand deepen relationships mediately switch up its offerings when with their customers. it launched in the United States. “We just took our existing product line and dumped it on the U.S. market, because the system adjusts itself,” the company’s CEO, Anthony Fletcher, told Tzuo. Graze had no success in turning U.S. customers on to Marmite, a yeast extract spread — they soon made clear their preference for spicy barbecue snacks — but the CEO emphasized that expensive market research efforts made prior to entering a market had very often failed. With the market research “baked into the service,” as Tzuo notes, the feedback is immediate and comparatively cheap. Of all the marketing-related books I’ve read over the years, Subscribed is the first one to spend considerable time discussing how new business models impact the bottom line. Tzuo devotes an entire chapter to the need to change accounting practices for subscription services around the line item of annual recurring revenue, or the amount of revenue expected from the subscription base for the coming year. This idea has ripple effects throughout the balance sheet; Tzuo advocates for sales and marketing to become matched to future revenue, because the entire model is built on the premise of a business’s future with its subscribers, not the number of units sold — and sales and marketing costs incurred — in the previous quarter or year. If you, um, subscribe to the idea that marketing is now at the heart of business models, then giving it such weight in the back office makes sense.

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The Character of Content Killing Marketing: How Innovative Businesses Are Turning Marketing Cost into Profit provides a different spin on the idea that the path forward for marketers is to build long-lasting relationships with customers rather than bombard them with advertising messaging. Authors Joe Pulizzi and Robert Rose, founder and chief strategy advisor, respectively, of the Content Marketing Institute, contend that the path to success goes through — you guessed it — content marketing. Several marketing books published this year (and in previous years) make this case. But what differentiates Killing Marketing is its contention that content marketing can actually become a profit center, rather than just a more effective marketing method, for virtually any business. “We must rebirth a new marketing that makes its living from building audiences for long periods of time,” say the authors, “so that we might hold their attention through experiences that place us squarely in the initial consideration set when they are looking for a solution.” Doing so requires owning your media. That’s a fundamentally different approach from that of traditional advertising, in which audiences are essentially rented from the media properties in which marketers’ ads appear. An entirely new idea? Maybe not. But it is one made more resonant at a time when customer data is the coin of the realm. Those deeply immersed in the marketing business know that one of the biggest frustrations is the predominance of Facebook and Google in the digital advertising ecosystem; together these platforms account for about 90 percent of the industry’s growth, per Digital Content Next. In exchange for hoovering up all those dollars, they provide marketers only aggregated data on their customers that can’t be exported into their own databases. A sense of being held hostage by the duopoly provides reason enough for marketers to try their hand at the content business. Killing Marketing points out that content creation — similar to the subscriber bases championed in Subscribed — solves the data problem, and then some. Kraft, which publishes Food & Family Magazine, not only makes money from the publication but also uses the data it gathers to inform its digital media buying and make it more effective. Pulizzi and Rose believe content marketing can go one step further and become a profit center because “the new media business model and the new mar-

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keting business model are exactly the same.” Essentially, they believe that if you are in the business of building an audience for your products, you should be able to build a business for your content. The Walt Disney Company, the book notes, was one of the first to do this. Its movies and other content, such as comic books, built a fan base that was then leveraged to build an entire Disney experience, from merchandise to theme parks. In the consumer packaged goods industry, there’s energy drink maker Red Bull, whose Red Bull Media House includes print, Red Bull TV, documentaries, a content pool of premium imagery in sports, a record label, and Speedweek, a motor sports brand. Arrow Electronics, the largest distributor in the world of items such as circuit boards and semiconductors, is frequently cited as an example of a B2B company pursuing this strategy. The company supplemented some of its owned content by buying 16 engineering content properties from Hearst in 2015 and another portfolio of specialist publications from UBM in 2016. Must-reads for the electrical engineering audience, properties such as Robotics China and EE Times were nonetheless languishing at large media companies with limited funds and low interest in keeping them going. They are now housed in AspenCore, an entirely separate division of Arrow, creating a firewall between product and content. Content as a profit center is a strong idea. But I didn’t find Killing Marketing as compelling as Subscribed because its authors are asking companies to make a shift in their mind-set that is even more profound. After all, Subscribed pushes businesses to move to a new sales model for goods and services they already sell.

The Arrows and Red Bulls of the world are to be commended, but they may also be unicorns in their ability to separate church and state and maintain the editorial credibility of their content. As any business reporter will tell you, corporations don’t always understand how true, objective editorial content works. They often have extreme difficulty moving from messaging they control (advertising) to messaging they don’t (editorial content). Still, Killing Marketing is a worthwhile read because it’s brave enough to realize that marketing as we’ve known it is no longer enough — and to provide companies with an alternative. Culture Clubs best books 2018 marketing

Starbucks, Southwest, Patagonia. They are different brands, but those who closely study successful companies today might point to one similarity: These companies’ brands are the embodiment of their culture, and vice versa. Few brands actually achieve this state, but it’s a major quest these days. That’s why Denise Lee Yohn’s Fusion: How Integrating Brand and Culture Powers the World’s Greatest Companies is a welcome arrival. Unlike the other two books reviewed here, Fusion is not a manifesto — it doesn’t have to be, because its premise is accepted wisdom. Yohn writes, “When your culture and brand are interdependent and mutually reinforcing, there is a strong connection between how employees experience every aspect of their work life during their tenure in your organization…and how customers experience your brand.” This means Fusion can progress swiftly to the business of how companies can better merge their brand and corporate culture. And Yohn does so with great specificity, partially by offering a number of online assessment tools to move readers forward. Fusion is a highly detailed how-to. It is also loaded with examples of all types that can serve as inspirational touchpoints for the reader. In the chapter “Sweat the Small Stuff,” Yohn recounts what she experienced at a conference for a US$8.5 billion company. At the conference opening, “a man decked out in traditional Hawaiian garb appeared in the far corner and started blowing a conch shell.” Where was this? Salesforce’s annual Dreamforce conference, where Yohn witnessed a powerful example of how the software giant has built its culture around the Hawaiian concept of family.

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Catharine P. Taylor [email protected] has covered digital media since 1994, writing for publications including Adweek and Advertising Age. She also wrote the weekly Social Media Insider column for MediaPost for seven years, and is a program director for the Conference Board, managing some of its marketing-focused events.

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The conference wasn’t a one-off in which CEO Marc Benioff thought it might be fun to play around with Hawaiian symbolism for a few days. In fact, Hawaii is central to the company’s culture, expressing itself in ways big and small, from the routines at massive conferences to some employees’ tradition of donning Hawaiian shirts on Fridays. Yohn’s analysis of brand–culture fusion even works its way down to the employee manual. The staff guide for the iconic Ann Arbor, Mich.–based deli Zingerman’s instructs employees on how to properly clean a knife and lays out the company’s harassment policies. That’s not surprising. But, in keeping with its playful brand, “even those are written in such plain and clear language and presented in such a visually attractive manner that any employee who takes the time to read them might actually understand and value these policies,” Yohn writes. Rewriting your employee manual may not be the first thing you do after reading Fusion. But the book’s straightforward, detailed approach shows just how far a company can go to build a strong connection between brand and culture. In so doing, the book should give readers the level of confidence they need to take on a Herculean task that is becoming more essential to truly differentiating businesses. The most compelling thing about these three books is that although chief marketing officers and their teams should certainly read them and take their lessons to heart, so should many other executives. If you accept that marketing is no longer just about ads, it follows that as older forms of marketing are lessening in value, new forms are taking hold — and in every case, having new and profound effects across the enterprise. +

TOP SHELF

EC O N O M I C S

Diana B. Henriques, A FirstClass Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History (Henry Holt, 2017)

S T R AT E GY

LEADERSHIP Fred Kofman, The Meaning Revolution: The Power of Transcendent Leadership (Currency, 2018)

I N N O VAT I O N

MANAG EM ENT Edgar H. Schein and Peter A. Schein, Humble Leadership: The Power of Relationships, Openness, and Trust (BerrettKoehler, 2018)

best books 2018 top shelf

s+b’s Select Best Business Books 2018

N A R R AT I V E S

MARKETING

177 Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (Viking, 2018)

Francesca Gino, Rebel Talent: Why It Pays to Break the Rules at Work and in Life (Dey St., 2018)

Viktor Mayer-Schönberger and Thomas Ramge, Reinventing Capitalism in the Age of Big Data (Basic Books, 2018)

Tien Tzuo, Subscribed: Why the Subscription Model Will Be Your Company’s Future — and What to Do About It (Portfolio/ Penguin, 2018)

THOUGHT LEADER

The Thought Leader Interview: Natarajan Chandrasekaran The chairman of Tata Sons says simplicity, synergy, and scale are the company’s mantras for the 21st century.

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Photograph courtesy of Tata Sons

BY ART KLEINER

O

thought leader

ne of the world’s most venerable business organizations is celebrating its 150th anniversary this year, and the challenges it faces today are the same, in many ways, as those it faced at its beginnings. Then, its entrepreneurial founder started businesses across a variety of emerging industrial sectors; now, the group includes a diverse portfolio of companies, 30 of which are publicly listed, under a single holding company — Tata Sons — headquartered in Mumbai. From its Indian roots, Tata has evolved into a global powerhouse in multiple industries, with two main goals. On the one hand, it is fiercely oriented toward shareholder value: It has an aggregate market capitalization of more than US$160 billion and 4 million shareholders. On the other, it is a community-oriented company, with more than 60 percent of shares held by a set of philanthropic trusts that fund health, education, and development in the communities where it conducts business. Keeping these two goals in harmony in an age of technological disruption is the chairman of Tata Sons, Natarajan Chandrasekaran. Chandra, as he prefers to be called, came to his current role in February 2017 after eight years as CEO of Tata Consulting Services (TCS). Under his watch, TCS’s revenue nearly tripled, from $6.3 billion to more than $16.5 billion, as the company became India’s largest private-sector employer. It also moved to embrace new technologies, such as artificial intelligence, the Internet of Things, and blockchain. Over the past 18 months, Chandra has begun to organize the companies in Tata’s portfolio into strategic clusters within sectors: automotive, information technology, consumer and retail, financial services, infrastructure development, defense and aerospace, tourism and travel, telecom and media and investments and trading. Many Tata company brands are household names within India, and following two decades of high-profile acquisitions, some — TCS, Jaguar and Land Rover automobiles, Daewoo trucks, Tata Beverages, and Tata Steel (which entered a joint venture with Germany’s Thyssenkrupp in June 2018 to form the second-largest steel maker in Europe) — are leading global enterprises. This business empire evolved from a trading company launched by Jamsetji Nusserwanji (J.N.) Tata, a Parsi (Zoroastrian), who was born in 1839 in rural Gujarat. His liberal education gave him a lifelong passion for humanism: He believed that the elevation of the Indian people could best be achieved through business.

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

S+B: You’ve used the phrase “simplicity, synergy, and scale” to describe today’s priorities for Tata. What does this mean in practice? CHANDRASEKARAN: These capabilities are all related. As a business, you can’t

scale if you’re not simple. Simplicity has multiple implications: the number of entities you have, the levels of management, the footprint your company has in terms of the markets, the number of products and services you offer. With the

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“In a free enterprise, the community is not just another stakeholder in business,” according to J.N. Tata, “but is, in fact, the very purpose of its existence.” Raised in Tamil Nadu in the south of India, Chandra is the first non-Parsi to head Tata. He earned a postgraduate degree in computer applications and joined TCS as an intern. He is a dedicated marathon runner. As chairman, he presides over a complex corporate culture that combines past- and future-oriented, rural and urban, and outward- and inward-facing qualities. In the year and a half that he has been at the helm of Tata Sons, Chandra has pursued a “One Tata” strategy — using the synergies across Tata companies to increase efficiency and applying the same standard of financial discipline to all the Tata companies (some of which had faltered and grown bureaucratic). In July 2018, Tata’s Mumbai headquarters, known as Bombay House, reopened following a year of major modernizing renovations. That week, Chandra sat down with strategy+business in his Mumbai office. We asked him first about his priorities for Tata, and then about the two futures in which the company will play a pivotal role: that of India in particular, and that of the global economy in general.

Tata companies, we’ve been in business for a really long time, so every company has evolved. With time, always you get complexity. So simplification is a priority. It is not limited to operational processes; it encompasses everything. Simplicity across businesses — the “One Tata” initiative we have started — fosters synergy within the Tata group: with the parent company and intercompany as well. S+B: Does the adoption of digital technology play a role? CHANDRASEKARAN: In all of the Tata businesses, digitization is a top priority.

It is a question of thinking through your own business model. Typically, the digitization of any business will disrupt a set of processes throughout the chain. In each Tata company, we aim to have a chief digital officer, charged with thinking through what that industry’s digital platform means for them and their business. Each company has its own multi-agenda digital initiative. We don’t tell them one night: “By tomorrow morning, it must be this way.” They’ve got to figure it out. But digital is one of the three or four top items they’re thinking about — both for the here and now, and for the longer-term future. S+B: Is financial discipline another top item? CHANDRASEKARAN: Yes. That is more here and now.

thought leader

Throughout the history of the Tata companies, we have built businesses whenever we saw the need. When our founder, or any of our earlier leaders, started a textile or steel company, or an automaker or a hotel, I don’t think they sat and created a spread“Simplification is a sheet. India needed a steel mill, a bank, an priority. It is not limited to insurance company, or an airline — and operational processes; it the leaders created one. Pretty much the encompasses everything.” first companies in India in all these industries were started by Tata family members. Once the need was there, they figured out a way to run the companies profitably. We are still balancing these two imperatives. On the one hand, the business need is important to resolve. On the other, we need the financial discipline to run a good, solid balance sheet. That applies to all the Tata companies, regardless of how they have been performing.

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The 21st-Century Conglomerate S+B: Are the financials different for Tata companies that compete primarily within India versus companies that compete globally? CHANDRASEKARAN: No. In some businesses you go for growth rates, seeking

cash flow in an expanding market. In other businesses you look at the demand that already exists. We have metrics in either case. We just have to make sure that we have the discipline to follow them. S+B: At a time when many companies are focusing on single businesses, and divesting those that don’t fit, what does a conglomerate like Tata provide its member companies? CHANDRASEKARAN: Many things. First of all, there is the brand. The good-

will people have for the group, including our financial strength and the credit

“IN THE INDUSTRIALIZED WORLD, INDUSTRY 4.0 IS BECOMING AS ESSENTIAL AS LEAN STRATEGY:

thought leader

IF YOU CAN’T CLAIM TO HAVE MASTERED IT, YOU MAY BE OUT OF THE GAME.” Reinhard Geissbauer, Stefan Schrauf, and Steve Pillsbury Digital Champions

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rating of Tata Sons, derives directly from the heritage and credibility we have established over time. This reflects the power of our brand and values system. The second is the quality of management, and of our talent. This includes a certain integrity. Tata companies will always do business in a certain way. The rules are established. The third is the management tools that the companies share. We have a single performance model, which we call the business excellence model. We use it to drive operating performance, business performance, and excellence in everything we do. Fourth, there is the “One Tata” approach I spoke of. It is focused on synergy: on bringing our best capabilities to bear for all members of the group. Each of the companies operates individually, but we leverage their strengths together in developing more comprehensive industrial ecosystems, particularly in India. For example, we might build an automotive ecosystem. Tata Motors has the capabil-

This is where ‘yes, and’ becomes a philosophy, not just a tactic.’’

thought leader

‘‘We need to let go of our message and actually engage with what others are offering.

Elizabeth Doty Using Improv to Transform How You Lead

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PwC’s Global CEO Survey Providing unique insight into the thinking of corporate leaders around the world, PwC’s annual Global CEO Survey covers issues such as the prospects for economic growth, the challenges in building a workforce, the threats facing companies today, and the impact of AI. www.ceosurvey.pwc

ity to produce cars. Tata Power can build charging stations. Tata Communications can provide connectivity. We can all borrow technological expertise, marketing talent, and other capabilities from one another. Putting it all together gives us a holistic solution, particularly for major initiatives such as Smart Cities. [The Smart Cities Mission, launched in 2015 by India’s prime minister, Narendra Modi, is a multilateral initiative to prototype sustainable, citizen-friendly urban areas within India. One hundred cities have been selected to date, through a competition managed by India’s Ministry of Housing and Urban Affairs.] S+B: What is the potential that you see with smart cities? CHANDRASEKARAN: The smart city is an area where we have lots of capabilities,

AI and Other Challenges S+B: What are the big technological changes that could affect your business? For example, what are your thoughts about artificial intelligence? CHANDRASEKARAN: Major technological changes are going to happen every-

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where, and their impact differs from company to company. Before talking spe-

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but we definitely want to deploy them at scale. We don’t know what the future will hold, but we know that environmental sustainability is going to be an important factor in technological progress. In that context, business leaders should look not only at smart cities, but at digital delivery, digital governance, electric vehicles, and water conservation. These are all going to be big businesses in the future.

cifically about artificial intelligence, we need to recognize that business is all about data-centricity right now. This represents a change in the way most businesspeople think about operations. For the past 30 or 40 years, we have all been focused on process reengineering. Every management consultant wrote a book on process engineering. Now, as I tell people in our companies, process maturity is no longer your day job. If you’ve been in business for a while, you should already have world-class processes. If you don’t, then you had better work all night to come up to speed. Your day job now is data maturity. Start working on that. “If you don’t have world-

class processes, then you had better work all night to come up to speed.”

S+B: What do you mean by data maturity? CHANDRASEKARAN: In developing thought leader

data maturity, you have three layers to worry about. One is defining the core data. What is the type of data that drives your business? For example, power generation is a manufacturing-intensive industry. Machine performance data, plant performance data, and maintenance data are as important to that business as the customer and employee data. In consumer industries, data about the customer experience is more important. The second layer is to make sure that your data is available in real time, in accurate fashion. Otherwise, you cannot apply analytics and develop insights rapidly enough. Capturing 99 percent of your data in real time is not good enough.

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Making this layer work involves a transformation for nearly every company. The third layer is linking analytics with your other systems. The analytics don’t stop with gathering data; you have to have a platform with which to develop insights. Then, if you have the insights, what kind of inference systems — inference engines, machine learning, whatever you want to call it — do you need to offer a better solution? S+B: And this represents a big transition for most companies? CHANDRASEKARAN: For most companies around the world, yes. In my previous

role at TCS, I worked on this directly with many CEOs and CIOs at other companies. S+B: What are the other big challenges facing companies now? CHANDRASEKARAN: Cybersecurity is key. The potential vulnerability and ma-

nipulation of data by outsiders is a deeply important concern. The second challenge is one’s own inability to learn. The technology is changing so rapidly that people say, “What can digital do for me? How do we learn to use it?” But I think there are more important questions: “What happens if I don’t adopt digital technology effectively? How will my business survive? How might someone else disrupt it?” A Digital Learning Ethic

know the nitty-gritty, but the power of everything that’s being developed in technology has to be obvious from the top to the bottom of the organization. You can’t outsource that level of understanding. And it’s not just technological learning; it’s business model learning. Mostly you need to learn what you can do with this technology. What parts of the business can become data? How can it be digitized? If you digitize the business, what will your new business model look like? What possibilities does this change open up? At Tata, the possibilities are changing all the time.

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S+B: How can business leaders ensure their organizations are more capable of learning? CHANDRASEKARAN: I think it has to start from the top. You don’t need to

S+B: If everyone recognizes the trends, why aren’t the strategic implications more obvious? CHANDRASEKARAN: The issue is that we are seeing a maximum disruption in

S+B: With all these technological changes, and the commitment that the Tata companies have to good corporate citizenship, what protections do you think need to be in place?

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technology over a very short time. Each new set of technologies gradually adds power to other technologies, and when they reach a tipping point, we are not prepared. We have been talking about artificial intelligence since the 1980s. Nothing happened; it didn’t affect business. Suddenly, cloud computing has made possible the real-time collection of infinite amounts of data. This opens up the possibilities for AI. Robots were also made in the ’80s. But why are we talking about them now in new ways? Because today, the robot is also connected to the cloud. Suddenly, the memory, analytic capability, and data set available to the robot is infinite. The Internet of Things interacts with both of these. Let me put a chip or a sensor anywhere in a system, and I can collect even more data, in huge volumes, on a real-time basis. As that comes in, my ability to do analytics expands. We are now moving into the world of anticipative computing. We’re not only gathering data in real time, but also anticipating the data to come. You can tell what’s likely to happen in the next 30 seconds. And if you can predict it in that time, that’s all the time you need to prevent it or make use of it. Each technology is additive to what has come before. It’s happening very fast.

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CHANDRASEKARAN: There is no foolproof defense system. Build a very strong de-

fense system; somebody’s going to break it. That’s a constant concern. We also have to worry about what is ethical, and about data protection and the loss of privacy. And we also have to focus on jobs and the future of work. But to some extent, the effect of automation and artificial intelligence on the workforce is misunderstood. We don’t have AI systems that will replace humans. They will increase productivity, and change repetitive tasks, but they don’t have the judgment capability of human beings. S+B: What happens if a mechanistic system leads to problems that are not foreseen? CHANDRASEKARAN: I think standards will evolve for responsible artificial in-

telligence. Different groups will be worried about different outcomes. As we make more progress, we need collective thinking to shepherd this technological growth in a positive direction, because there is always a negative purpose for which technology can be used. Confidence and Community

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good: 3.7 percent. And it is expected to grow to 3.9 percent for this year and next. Although growth in the United States and China will probably level off, I think India, the primary market for many of our businesses, will continue its rapid growth. I think it will be an excellent growth market for at least the next 20 years. There are many reasons. First, India has a growing consumer population, which I think will rise even faster than it has in the last 15 years. In the past two decades, as China and India have opened up to the world, our economies have surged: China’s GDP went from $1.2 trillion to over $11 trillion between 2000 and 2016 — more than ninefold. India went from a $500 billion economy to a $2.3 trillion economy in that time, comparable to Japan’s growth between 1980

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S+B: Most of the chief executives in PwC’s 21st CEO Survey are optimistic about global economic growth. They believe conditions are improving, despite the political headwinds of the past few years. CHANDRASEKARAN: I would tend to agree. Global growth last year was very

and 2000. The growth in China started with exports, and then expanded to the domestic market. India is now where China was around 2005; we have had export growth, but now we will also have domestic growth as our consumer market expands. The second factor is that we have both rising consumer spending and rising government spending. Third, look at the changes made over the past few years in financial and economic infrastructure. Regulatory reform, the Aadhaar [India’s new identity system for individuals], and simplified payment systems are driving the economy to become more inclusive. Many informal sectors will get more formalized, bringing more and more people into the formal economy and workforce, and this trend will accelerate. As India’s problems are addressed with technology, there will be more digital platforms. With more digital platforms there are more business models, and that means new businesses. We should thus maintain our current rate of growth, at least, for a long period to come. And that will grow our per capita income, which is currently less than $2,000, but is estimated to rise to $15,000 or $20,000 over the next decade. Even if there is only 7.5 percent growth for four or five years, per capita income will dramatically increase. I feel very good about India’s prospects. S+B: Do you see this growth taking place differently in different industries? CHANDRASEKARAN: There’s no overarching way to define it. Steel, for exam-

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ple, will not be a growth industry everywhere, but it will be an excellent industry in India. As a nation, we use about 100 million tons per year now, and we might eventually double that number. There will be more demand as our infrastructure gets built. Our automotive industry will also grow significantly. When China’s middle class emerged and demand for automobiles grew, the cost of an individual automobile dropped. The Chinese auto industry grew from making about 700,000 cars per year to 24 million. There is a takeoff point when per capita income rises, and India will experience it as well. But there are pluses and minuses to the auto industry, because we need a new generation of affordable, environmentally sustainable vehicles. Consumer businesses will be high-growth industries in India for the same

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reason: People have more disposable income. A few hundred million consumers are looking for new products and services, and they are all connecting online, so their aspirations have grown. Everybody has an eye for the top-of-the-line products. We’ve got to make sure that we can provide that for them at the right price. Electric power is also positioned to grow extremely well in India. The country’s current power consumption per capita is extremely low, compared with [that of] either China or the United States. But consumer demand and energy consumption growth are intertwined. For example, when more people can afford air conditioners, more energy is consumed. There are thus huge opportunities for growth, and at the same time, we need new, more sustainable energy solutions. I don’t know whether India’s power mix will involve large private plants, large government plants, coke, coal waste, renewables, or microgrids. But I do know technology will play a very important role. Another fundamental challenge in this country is healthcare. Too many people have no access to healthcare. We need to figure out how to convert an urgent need for healthcare coverage into a solution, including a business model that allows healthcare providers to operate in a commercially viable way. If there is no current solution for this, there will be innovation to create one.

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er said, that the purpose of the business is the community. J.N. Tata’s famous quote is repeated by everybody. In every place we operate, we believe we exist for the good of the community, which in turn believes in us. I think that this purpose is an integral part of any business. In fact, the development of society cannot happen without business, and business cannot prosper without the development of society. If any business tries to operate without a social purpose, it doesn’t last long. Social development and business go hand in hand, and that’s not going to change. +

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S+B: For 150 years, the Tata companies have been living with a question that many companies are just starting to think about seriously: “What is the role of my business in society?” What would you say to a CEO who is trying to figure this out for his or her own company? CHANDRASEKARAN: Our company has a deeply ingrained belief, as our found-

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Can more flexible workforces solve society’s problems? YASUYUKI NAMBU, PASONA GROUP

How can middle-market companies in emerging economies thrive? EDUARDO SIROTSKY MELZER, GRUPO RBS

WHAT DO INNOVATIVE CHIEF EXECUTIVES THINK ABOUT THE FUTURE? Visit strategy-business.com/mindoftheceo to find out.

©2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

What Happens When the Salary-Secrecy Taboo Is Broken? Employees who know what their bosses earn work harder, but the opposite is true if their colleague’s paycheck is bigger. BY MATT PALMQUIST

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Illustration by Elwood Smith

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lthough it’s long been seen as forbidden to discuss paychecks around the water cooler, an increasing number of startups and tech firms are embracing salary transparency, hoping to establish a sense of fairness and competition. This also fits in with generational trends: A 2017 survey found that 30 percent of U.S. workers between 18 and 36 discussed their salary with coworkers, which is a proportion four times as great as among people 53 to 71. A new study looks at employees who discover that their salaries lag behind those of others at their firm and finds that the information has a significant effect on employees’ motivation, performance, and retention. The effect was positive when they found out about a better-paid supervisor’s compensation (vertically in the company structure), but was negative when they learned their coworkers’ wages (horizontally). The authors studied a sample of 2,060 employees at a large commercial bank. Working with the firm, the authors accessed records on hours worked, emails sent and received, and sales made — all indicators of an employee’s performance level. They also tracked career outcomes such as transfers within the firm, departures, promotions, and raises. In addition, the researchers surveyed employees on a range of topics related to their compensation, attitude toward the job, and workplace performance. Many were also shown compensation data for the average employee at their level, as well as for supervisors on several different levels above them. Their

performance-related data was tracked for three months before and six months after this disclosure. Employees who discovered they made less than their average peer experienced negative effects in every effort and performance measure. Learning the average supervisor salary, however, motivated them to work harder. How to explain the difference? As has been speculated in psychological research, employees might be concerned about pay discrepancies only as they relate to their peers — in this case, their immediate coworkers. Because they have similar jobs, employees who realize they make less than their colleagues might perceive salary differences as fundamentally unfair and become demoralized. But it’s easier for employees to justify pay inequality vis-à-vis their managers, the authors posit, because supervisors are expected to add more value to the firm and deal with more responsibility and stress. There’s also an aspirational aspect: Knowing what they will be earning if they climb the company ladder themselves is a powerful motivator. The results suggest companies should consider structuring their incentive packages vertically instead of horizontally: “Firms may want to motivate employees with the prospect of a higher salary upon promotion rather than through performance pay,” the authors write. + Source: “How Much Does Your Boss Make? The Effects of Salary Compari-

sons,” by Zoë Cullen (Harvard Business School) and Ricardo Perez-Truglia (University of California, Los Angeles), Social Science Research Network, Aug. 2018 end page

More Recent Research at: strategy-business.com/recent_research

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