Tạp chí Chiến lược kinh doanh - quý II / 2013

Tạp chí Chiến lược kinh doanh - quý II / 2013

Published by Booz & Company

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Summer 2013 $12.95 Display until August 27, 2013

CAPTAINS

IN DISRUPTION

the incoming class of

chief executives

DISRUPTION

Emily Cavanagh

Program for Leadership Development 2012

EXPECTATIONS.

I CAN TELL YOU THAT THIS PROGRAM MET THEM ALL.”

The world’s top executives often need to step outside their organizations to acquire the skills, knowledge, and leadership to successfully address today’s critical business issues The Harvard Business School Executive Education comprehensive leadership programs are where they convene clp_info @ hbs.edu | www.exed.hbs.edu/pgm/clp/

Emily Cavanagh

Program for Leadership Development 2012

EXPECTATIONS.

I CAN TELL YOU THAT THIS PROGRAM MET THEM ALL.”

The world’s top executives often need to step outside their organizations to acquire the skills, knowledge, and leadership to successfully address today’s critical business issues The Harvard Business School Executive Education comprehensive leadership programs are where they convene clp_info @ hbs.edu | www.exed.hbs.edu/pgm/clp/

We chose the title “Captains in

Dis-ruption” for the lead feature story

of this issue—by Ken Favaro,

Per-Ola Karlsson, and Gary L Neilson

(page 40)—explicitly to contrast

with captains of disruption In other

words, we’re not talking about the

charismatic CEOs who come into

office roaring about the dangers of

tradition and complacency,

promot-ing upheaval as a turnaround

strat-egy, gratuitously marginalizing and

scapegoating the previous

leader-ship, and then burning out, leaving

their companies in a state of

back-lash and collapse (The latest

promi-nent example, as I write this, is Ron

Johnson at J.C Penney.)

The most effective CEOs today

are steady, collaborative chief

execu-tives—those who look for stability

in all the chaotic places They face

down disruptive events and trends

by planning and preparing for the

time after crisis, and by acting in

harmony with the people of their

enterprise

Several articles in this issue

sug-gest that the trends are in their favor

For example, “Portrait of the

Incom-ing Class” (page 52), which tracks

the proportions of planned to

un-planned CEO successions in 2012,

finds that boards of directors on average are less inclined to fire their CEOs reactively, and more inclined

to deliberately develop a pipeline of leadership acumen A similar point is made by the former CEO of Procter

& Gamble A.G Lafley and his time advisor, dean of the Rotman School of Management Roger Mar-tin, in “Leading with Intellectual

long-Integrity” (page 60) While at P&G,

they redesigned the strategic ning process to cultivate more co-herent and rigorous thinking among fast-track executives

plan-Jon Katzenbach and DeAnne Aguirre, who lead the Katzenbach Center (which coordinates Booz &

Company’s research on tional culture and change), argue that the CEO’s most important role

organiza-is as a leader of the company’s

cul-ture (page 22) On page 11, CEO

Tom Fanning of Southern

Compa-ny, an innovative power utility based near Atlanta, explains how he fos-ters collaboration across functional disciplines, and how this has led to many of the firm’s most profitable and intriguing energy initiatives

This issue also contains a worthy Thought Leader interview with David Kantor, the influential

note-author of Reading the Room (page 90); a list of five principles for “re-

imagining” your digital identity, from three leaders of the new team

known as Booz Digital (page 34 );

a compelling profile of ment, an idiosyncratic manufacturer

AeroViron-of drones and innovative battery

sys-tems (page 78); an intriguing

asser-tion that driverless vehicle ogy could transform the long-haul

technol-trucking industry (page 8); and a

look at the consumer-centric

busi-ness model for healthcare (page 68)

that is emerging as hospitals and healthcare companies address the disruption facing their industry

Whether you’re standing hind it, cheering it on, or facing off against it, disruption can be exhaust-ing If you’re a CEO—or a business leader of any type—you’ve already learned, at least somewhat, to take it

be-in stride After the past several years

of uncertainty, we’re all learning to

do so Or maybe we’ve just been ing in disruption for so long that it’s starting to look like equilibrium

liv-Art Kleiner

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

Turning the Tables on Success

Adam Grant

In today’s workplace, what goes around comes around

faster, sinking takers and propelling givers to the top.

The Next Autonomous Car Is a Truck

Peter Conway

The obstacles to adoption are significant, but driverless

technology now in development could transform

long-haul trucking.

Innovating for Energy’s Future

Edward H Baker and Tom Flaherty

The key to clean, reliable, and affordable energy,

says Southern Company CEO Tom Fanning, is a bold

and balanced approach to R&D

The Wise Leader

Prasad Kaipa and Navi Radjou

Practical wisdom in business comes from combining

the broad view with the narrow, and opportunity with

constraint.

s+b Trend Watch

Big Pharma’s Potential in Emerging Markets

India’s Leadership Challenge

Gaurav Moda, Anshu Nahar, and Jai Sinha

At many Indian companies, the development of top

management lagged behind the pursuit of technical

excellence

STRATEGY & LEADERSHIP

Culture and the Chief Executive

Jon Katzenbach and DeAnne Aguirre

CEOs are stepping up to a new role, as leaders of their

company’s thinking and behavior.

STRATEGY & LEADERSHIP

Building a Flywheel Business

Tim Laseter and Jeff Bennett

By linking customers and capabilities, companies can

generate the momentum for sustainable growth

MARKETING, MEDIA & SALES

Don’t Reengineer Reimagine

Jeff Schumacher, Simon MacGibbon, and Sean Collins

To realize the digital potential of your business, bring the

dynamics of a startup to scale

68

SPECIAL SECTION: THE BOOZ & COMPANY 2012

GLOBAL CHIEF EXECUTIVE STUDY

Captains in Disruption

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

Even when facing a crisis, some CEOs know

how to anticipate the worst, plan a response,

and navigate to advantage You can do the same

“It’s Time for a Change”

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

CEO turnover is trending high, but in a more

planned and stable manner.

Portrait of the Incoming Class

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

The newest CEOs have neither the diversity nor

the global backgrounds that you might expect.

STRATEGY & LEADERSHIP

Research Perspectives

on the New CEO

Matt Palmquist

Academic studies of the recruitment of chief

executives suggest that those from outside the

industry do relatively well, companies pay more

for generalists than for specialists, and “shadow

emperors” hamper performance.

STRATEGY & LEADERSHIP

Leading with

Intellectual Integrity

A.G Lafley and Roger Martin, with Jennifer Riel

One skill distinguishes the effective CEO: the

abil-ity to make disciplined and integrated choices.

HEALTHCARE

Putting an I in

Healthcare

Gil Irwin, Jack Topdjian, and Ashish Kaura

The days of the disengaged health consumer

are numbered Consumerization will transform

healthcare systems, involving individuals as never

before in the management of their own care.

The Patient Engagement Framework

INNOVATION

Flight of the Drone Maker

Lawrence M Fisher

How a small firm named AeroVironment is changing the course of airplanes, automobiles, and warfare.

Factors beyond Their Control

THE THOUGHT LEADER INTERVIEW

David Kantor

Art Kleiner

An eminent systems therapist says that learning to recognize the hidden patterns in conversation is the first step toward more effective executive leadership.

END PAGE: RECENT RESEARCH

The Power of “Independent”

102

76

84

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Change lives Change organizations Change the world.

The fall of takers and the rise

of givers hinges on a third group, whom I call “matchers.” Matchers hover in the middle of the give- and-take spectrum, motivated by a deep-seated desire for fairness and reciprocity They keep track of ex-changes and trade favors back and forth to keep their balance sheet

at zero, believing that what goes around ought to come around Be-cause of their fervent belief in an eye for an eye, matchers become the en-gine that sinks takers to the bottom and propels givers to the top

Takers violate matchers’ belief

in a just world When matchers ness takers exploiting others, they aim to even the score by imposing a tax For example, matchers spread negative reputational information to colleagues who might otherwise be vulnerable, preventing takers from getting away with self-serving ac-tions in the future On the flip side, most matchers can’t stand to see generous acts go unrewarded When they see a giver putting others first, matchers go out of their way to dole

wit-Turning the

Tables on

Success

In today’s workplace,

what goes around

comes around faster,

sinking takers and

propelling givers to

the top

by Adam Grant

guys finished last “Takers”

(those in organizations who put

their own interests first) were able

to climb to the top of hierarchies

and achieve success on the shoulders

of “givers” (those who prefer to

con-tribute more than they receive)

Throughout much of the 20th

cen-tury, many organizations were made

up of independent silos, where

tak-ers could exploit givtak-ers without

suf-fering substantial consequences

But the nature of work has

shifted dramatically Today, more

than half of U.S and European companies organize employees into teams The rise of matrix structures has required employees to coordi-nate with a wider range of managers and direct reports The advent of project-based work means that employees collaborate with an ex-panded network of colleagues And high-speed communication and transportation technologies connect people across the globe who would have been strangers in the past In these collaborative situations, takers stick out They avoid doing unpleas-ant tasks and responding to requests for help Givers, in contrast, are the teammates who volunteer for un-popular projects, share their knowl-edge and skills, and help out by ar-riving early or staying late

After studying workplace namics for the past decade, I’ve found that these changes have set the stage for takers to flounder and givers to flourish In a wide range of fields that span manufacturing, ser-vice, and knowledge work, recent research has shown that employees with the highest rates of promotion

dy-to supervisory and leadership roles exhibit the characteristics of giv-ers—helping colleagues solve prob-

Leading

Ideas

out a bonus, in the form of

compen-sation, recognition, or

recommenda-tions for promorecommenda-tions Of course,

these responses aren’t limited to

matchers Givers, too, are motivated

to punish takers and reward fellow

givers But I’ve found that in the

workplace, the majority of people

are matchers, which means that they

are the ones who end up dispensing

the most taker taxes and giver

bo-nuses In an interdependent,

inter-connected business environment,

what goes around comes around

faster than it used to

At Google, for example, an

en-gineer named Brian received eight

bonuses in the span of a single year,

including three in just one month

He volunteered his time to train

new hires and help members of

mul-tiple cross-functional teams learn

new technologies, and his peers and

managers responded like matchers,

granting him additional pay and

recognition Consistent with Brian’s

experience at Google, a wealth of

re-search shows that in teams, givers

earn more respect and rewards than

do takers and matchers As Stanford

University sociologist Robb Willer

notes, “Groups reward individual

sacrifice.”

Interdependent work also means

that employees will be evaluated and

promoted not only on the basis of

their individual results, but also in

terms of their contributions to

oth-ers This reduces the incentives for

takers to exploit givers, encouraging

them to focus instead on advancing

the group’s goals As a result, takers

engage in fewer manipulative acts—

which reduces the risks to givers—

yet they still contribute less than givers This allows givers to gain

a reputation for being more ous and group-oriented And a rich body of evidence has shown that these qualities are the basis for sound leadership

gener-In fact, when givers become leaders, their groups are better off

Research led by Rotterdam School

of Management professor Daan van Knippenberg has shown that em-ployees work harder and more effec-tively for leaders who put others’

interests first This, again, is a matching response: As van Knip-penberg and Claremont Graduate University professor Michael Hogg

found, “going the extra mile for the group, making personal sacrifices or taking personal risks on behalf of the group” motivates group mem-bers to give back to the leader and contribute to the group’s interests

And a thorough analysis led by

Nathan Podsakoff, a professor at the University of Arizona, of more than 3,600 business units across nu- merous industries showed that the more frequently employees give help and share knowledge, the higher their units’ profits, productivity, customer satisfaction, and employee retention rates

By contributing to groups, ers are also able to signal their skills

giv-In a study led by researcher Shimul Melwani of UNC’s Kenan-Flagler Business School, members of five dozen teams working on strategic analysis projects rated one another

on a range of characteristics and haviors At the end of the project, team members reported which of their colleagues had emerged as leaders The single strongest predic-tor of leadership was the amount of compassion that members expressed toward others in need Interestingly, compassionate people were not only viewed as caring; they were also judged as more knowledgeable and intelligent By expressing concern for others, they sent a message that they had the resources and capabili-ties to help others

be-Today, these signals are ever more visible: Givers are aided by the fact that the anonymity of pro-

The strongest predictor of leadership was the

amount of compassion that members expressed

toward others in need Compassionate people

were judged as more knowledgeable.

For development, promotion, and retention, leaders and managers should focus less on individual skills and talents, and more on the extent

to which employees use their skills and talents to lift others up—rather than cutting them down The em-ployees with the greatest potential to excel and rise will be those whose success reverberates to benefit those around them

Along with investing in people who are already disposed toward op-erating like givers, it will be of para-mount importance to create prac-tices that nudge employees in the giver direction In many organiza-tions, owing to their tendencies to claim credit and promote them-selves, successful takers are more visible than successful givers To make sure that employees are aware that it’s possible to be a giver and achieve success, it may be necessary

to locate and recognize respected role models who embody an orienta-tion toward others That way, when what goes around comes around faster than it used to, it will be for the benefit of employees and their organizations +

Reprint No 00175

Adam Grant

grantad@wharton.upenn.edu

is Wharton’s youngest tenured professor

and the author of Give and Take: A

Revolutionary Approach to Success

(Viking, 2013).

The Next Autonomous Car Is a

Truck

The obstacles to adoption are significant, but driverless

technology now in development could transform long-haul trucking.

by Peter Conway

Inc spends hundreds of millions of dollars deliver-ing its merchandise across the Unit-

ed States The 6,000 trucks in the retailer’s fleet are a common sight on highways, as are those of the many other companies that rely on long-haul trucking to transport their goods from coast to coast But what

if that fleet could be cut by third—and be made up of trucks pulled by slimmed-down tractors less than half their current size, with

one-a computer one-at the helm?

It may be hard to imagine: trucks guided by GPS, radar, sen-sors, and software, hauling much of the nation’s cargo Yet autonomous vehicle technology has made head-lines for years, and experimental au-tonomous cars are already on the roads today Google’s driverless cars have logged more than 300,000 miles on California and Nevada highways since 2011 That same year, Chinese carmaker FAW un-veiled its own autonomous car,

fessional life is vanishing In the

past, when we encountered a job

ap-plicant, a potential business partner,

or a prospective service provider, we

had to rely on references selected by

that candidate When takers burned

bridges with one contact, they could

eliminate that person from their

reference list But now, online social

networks offer a much richer

data-base of references Odds are that

through a quick search of our

LinkedIn or Facebook networks, we

can find a common connection with

knowledge of that person’s

reputa-tion By reaching out to the mutual

contact to obtain an independent

reference on the candidate’s past

be-havior, decision makers can screen

out takers and favor givers Of the

billion Facebook users around the

world, 92 percent are within four

degrees of separation—and in most

countries, the majority of people are

just three degrees apart

Such tools have made it tough

for a taker to hide in the shadows

At Groupon, for example, Howard

Lee was heading the South China

office, and received a slew of

appli-cations for sales jobs He searched

his LinkedIn network for common

connections, and located quite a

number of them When he

discov-ered that certain candidates had a

history of self-serving behavior, he

quickly moved on, focusing his time

and energy on candidates with track

records as givers

Taken together, these trends are

Are you a taker, giver, or matcher?

Visit www.giveandtake.com for

a free assessment of your

self-awareness or to collect

anonymous 360-degree ratings

from anyone in your network.

decide the best path on which to proceed to its final destination

These new technologies won’t come cheap It is hard to put an ex-act cost figure together, given that much of the technology is still in the pre–mass production stage But the total cost of outfitting a truck with equipment and software could be

as much as US$200,000 And although savings will vary from firm

to firm, they could exceed $100,000 per truck annually Over several years, the gains would far outstrip the initial investment and the main-tenance costs A significant portion

of both the cost savings and the efficiency gains would come from eliminating drivers’ wages from the bottom line

Diesel fuel costs would fall,

which it demonstrated on public

roads Toyota and Audi exhibited

their versions of the technology at

the Consumer Electronics Show in

January 2013

The use of autonomous vehicle

technology in trucks, however, is

more of a glimmer There have been

some developments to date, for

ex-ample, computer-guided trucks that

transport ore around mine sites Yet,

in these and other closed-loop

trans-portation ecosystems, it is easy to

maintain control and address issues

as they arise The appearance of

driverless trucks on a congested

highway poses many more

challeng-es and will face technical, practical,

social, and political hurdles But

despite these significant obstacles,

this vision is worth exploring The

use of autonomous long-haul trucks

(ALHTs) could add up to a

multi-billion-dollar opportunity for

com-panies throughout the trucking

val-ue chain, and in turn, lower prices

for consumers Although the

trans-formation is still years away,

compa-nies should start preparing for an

automated future today

A Technology-Powered Vision

ALHTs will have all the

fundamen-tal mechanics of the trucks we see

today, but they will be guided by a

suite of sensors acting together to

paint a digital picture of the road for

a computer positioned where the

driver now sits These sensors will

provide the data to support an

oper-ating system that one might

com-pare to the most capable autopilots

too—as long as other factors, such

as oil prices, hold cause the technology reduces con-sumption by optimizing accelera-tion and braking The Center for Automotive Research estimates that driverless trucks would increase fuel efficiency by 15 to 20 percent Acci-dent-related expenses and insurance premiums also could decline, be-cause automated trucks would be programmed for maximum safety, eliminating the driver errors that cause most crashes

constant—be-Along with the savings would come significant productivity im-provements Currently, restrictions

on the number of consecutive hours

a driver can stay on the road limit asset utilization But the software controlling driverless trucks never gets drowsy, and that opens the door to round-the-clock operations Higher asset utilization rates would reduce the need for capital spending

on additional trucks Retailers, tributors, and manufacturers that ship goods by truck will see addi-tional benefits as competition among trucking companies converts the efficiencies of ALHTs into lower shipping rates Retailers, in turn, could pass those savings along to consumers The one-day delivery radius could also expand, enabling

dis-Although the savings created by autonomous

vehicle technology will vary, they could exceed

$100,000 per truck annually The gains would

far outstrip the initial investment.

The Road to Opportunity

There are several different scenarios for how the adoption of autonomous trucking could unfold One is that driverless trucks appear first in large industrial environments, where they can be contained (just like the com-puter-driven trucks already navigat-ing mine sites) As with machines in the early days of factory automation, these trucks would have limited range and capabilities But just as robots became indispensable to moving parts and goods around plants, autonomous trucks could ex-pand to more open areas and longer distances as the technology is re-fined and proven We may also see partial adoption For example, some

companies may opt for “remote- control trucking,” in which a driver pilots a truck hundreds of miles away through a complex environ-ment of local roads until the truck gets onto the highway At that point,

a more basic, less expensive mous system designed for the rela-tively simple environment of high-way driving would take over This could be a palatable option for legis-lators and the public

autono-Given the obstacles that loom, it

is likely that adoption will be an lution along these lines We won’t see highways dotted with driverless trucks in the near term But the eco-nomics suggest that over the long term, the industry will migrate

evo-to auevo-tonomous vehicles Trucking companies that deploy these tech-nologies most effectively will secure industry-leading positions, and the

capitalize on new opportunities to supply billions of dollars of auton-omous trucking equipment But they’ll also see orders plunge for cockpit gear such as steering wheels and other components that won’t be needed if software replaces drivers

More importantly, if existing trucks can be retrofitted as autonomous ve-hicles, the current national fleet could find itself 30 percent over ca-pacity, because of the efficiency gains that can be extracted from ex-isting vehicles

ALHTs will also face legal stacles: Legislation allowing driver-less vehicles to operate will be need-

ob-ed across the country California, Florida, and Nevada have already

enacted rules allowing testing of driverless vehicles But a patchwork

of varying state standards would ate a difficult environment, which suggests a need for uniform federal rules of the road To that effect, the National Highway Traffic Safety Administration is working on na-tional standards, due in 2013 for cars and 2014 for heavy vehicles In addition, autonomous vehicle tech-nology will have to overcome resis-tance from a public frightened by the specter of unmanned trucks hurtling down highways

cre-Finally, as we’ve seen with mation in other industries, such as manufacturing, the use of driverless trucks is likely to face opposition from unions and their political allies

auto-as they are faced with the tion of hundreds of thousands of truck driving jobs

elimina-businesses to offer overnight ground

shipping to more customers

Society at large will also reap

benefits If truck driving shifted to

off-peak periods, which is a viable

option in a driverless vehicle,

high-ways would be less congested They

would also become safer as the

acci-dents involving trucks were reduced

by eliminating human error

Costs and Compromises

Autonomous vehicle technology

of-fers advantages across the trucking

industry value chain However, the

pace and extent of eventual

adop-tion will depend to a large degree on

the ability of stakeholders—whether

they’re shippers such as Con-Way

and Allied or manufacturers such as

Freightliner and Mack—to resolve a

range of technical, practical,

politi-cal, and social concerns

On the technical front,

driver-less trucks could reach commercial

viability within a decade, as the

manufacturers of their supporting

technology components ramp up

production and prices, in turn, fall

as the industry moves down the

cost curve

These components are still

prohibitively expensive today; for

example, the 600-rpm spinning

light-imaging radar system that

crowns most current autonomous

vehicles costs upward of $70,000

And ALHT supporters must answer

such difficult questions as how to

refuel driverless trucks and protect

their cargo when trucks break down

Fuel retailers, repair companies,

highway patrol, and insurers, among

others, will all play a role in finding

the solution

It’s worth noting that for truck

manufacturers and incumbent

sup-pliers, the impact of autonomous

trucks will be mixed Many will

If existing trucks can be retrofitted as autonomous vehicles, the current national fleet could find itself 30 percent over capacity, because of the efficiency gains

The key to clean, reliable, and affordable energy, says Southern Company CEO Tom Fanning, is a bold and balanced approach to R&D

by Edward H Baker and Tom Flaherty

the largest utilities in the United States It is also one

of just a small number of electric power companies with a reputation for cutting-edge innovation and ro-bust, proprietary R&D Under chair-man and CEO Thomas A (Tom) Fanning, the company has been deeply committed to a wide range of R&D efforts designed to employ a diverse mix of fuel resources

Southern Company’s four ating companies—Georgia Power,

oper-OEMs and suppliers that provide

the equipment needed by those

lead-ing firms will claim more than their

fair share of the market The most

transformative addition to the value

chain will be the autonomous

vehi-cle operating system, a software

package likely to cost hundreds of

millions of dollars to develop

Google, now testing its system on

public roads, may emerge as the

sup-plier of a standard operating system

for the industry But car and truck

manufacturers are likely already

working to develop this critical

component as well

Executives at trucking

compa-nies, truck manufacturers, and

equipment suppliers should start

thinking through how they see this

technology emerging, what the

im-plications are for their current

busi-ness model, and what they should

do in response The best approaches

for each company will vary, but one

thing is clear: Inaction isn’t an

op-tion Given that heavy truck model

changes occur infrequently,

some-times not for a decade or longer,

ALHTs could be just one design

cy-cle away +

Reprint No 00176

Peter Conway

peter.conway@booz.com

is a principal with Booz & Company’s

engineered products and services practice,

and is based in Chicago.

Also contributing to this article were Booz

& Company associates Antoine Cadoux,

Sathya Narasimhan, and Seva Rodnyansky,

and consultant Uppili Rajagopalan.

Alabama Power, Gulf Power ating in northwest Florida), and Mississippi Power—all combine power generation, transmission, dis-tribution, and customer engage-ment Rather than stifling innova-tion, Fanning says, the company’s integrated business model enables it

(oper-to make these broad investments in energy innovation And in doing so,

it can better serve its customers and shareholders

S+B: What drives Southern pany’s R&D strategy?

Com-FANNING: Energy innovation sents an enormous advantage for Southern Company Our efforts have simple goals: to preserve fuel flexibility and increase the value of energy to our customers We are es-sentially fuel agnostic We don’t know which fuels are or will be in vogue, and we don’t bet on them

repre-We need to invest in “all the arrows

in the quiver”—the full portfolio of energy resources About five years ago, approximately 70 percent of our energy came from coal and ap-proximately 11 percent from natural gas Now it’s about 45 percent natu-ral gas and about 36 percent coal

We don’t profit more off one fuel over another We just want to use the cheapest fuel available for the benefit of our customers Because Southern Company is so integrated,

we can follow this strategy The problem with separating generation from distribution and delivery is that it sends the wrong economic signals to the industry’s participants [by prioritizing profits over opti-mized costs], without serving the interests of customers And if the interests of your customers conflict with the interests of your sharehold-ers, you’ve got a major problem

Besides cost and effectiveness,

Tom Fanning

er generation planning teams This allows the innovation team to dis-cuss the company’s operational chal-lenges and to identify opportunities

S+B: What about the role of external partners?

FANNING: Typically, we work with other companies on one-off or two-off projects, to put big money into big ideas Examples of this include our scrubber technology work with Chiyoda, the development of our new coal gasification plant in Mis-

we’ve done with Mitsubishi The goal is to share the significant fixed costs of some of these projects

Like many other companies, we partner with and support research at

a number of universities, working directly with the schools on techno-logical issues At our carbon capture research center, for instance, we di-vert some of the post-combustion gas streams from an operating coal plant into a series of bays in the re-search shop Then we invite univer-sities with strong research proposals

to plug into the gas streams and ply their technology solutions to capturing the carbon in the streams

ap-We pick out the best ideas, and we get to use some of what they learn during their experiments

We also hold regular customer forums where we show people our new ideas and gather feedback Much of this work involves our IT

we also prioritize environmental and

regulatory R&D In fact, since the

1970s, we’ve had a proprietary R&D

group working on developing

real-world ways to manage

environmen-tal issues involving coal Our initial

R&D involved coal liquefaction—

taking coal and turning it into an oil

derivative, essentially

S+B: So much has changed since

the 1970s: the advent of renewables

and now the new sources of shale

oil and natural gas How does that

affect your innovation bets?

FANNING: One of our most

interest-ing efforts today involves the

gasifi-cation of coal—transforming

low-grade coal into synthetic gas that

can be used to generate electricity,

with resulting carbon emissions

comparable to [those of] a similarly

sized natural gas plant We’re

build-ing a clean coal plant in Kemper

County, Miss., that uses the

gasifi-cation technology we developed in a

joint venture with KBR Inc under

the sponsorship of the U.S

Depart-ment of Energy, and we recently

announced an alliance to market

this 21st-century coal technology to

power companies worldwide

In another project, a joint

ven-ture with the Japanese engineering

firm Chiyoda, we’ve developed

scrubbers for removing sulfur

diox-ide from the emissions from our

coal-fired plants And we created

our own technology for selective

catalytic reduction—a chemical

process used to remove nitrates from

coal-fired boiler emissions We have

already spent [US]$8 billion on

im-plementing these new technologies,

and plan to invest even more in the

coming years

Such efforts have given us

prow-ess and proficiency We’ve been able

to deploy these environmental

con-trol technologies 10 to 20 percent cheaper than the competition, de-pending on the plant and the tech-nology involved We can also re-move up to 98 percent of certain emissions, significantly more than the average

S+B: How centralized are ern’s innovation practices?

South-FANNING: They are very ized, but we try to maintain what might be called a “push–pull” sys-tem The “push” side is headed by Chris Hobson, the senior vice presi-dent of research and environmental affairs and our chief environmental officer Chris is involved with our portfolio of energy solutions for cus-tomers, whether that’s generation or transmission He convenes his own

central-meetings with people in the ing companies, which involves both compliance-related and market-re-lated issues

operat-Another entity on the push side

is our R&D group, headquartered

in Birmingham, Ala We also have a large facility in Wilsonville, Ala., that’s dedicated to our gasification and carbon capture technologies

We’re the only power company in the U.S conducting carbon capture research in this manner, on both a post-combustion and pre-combus-tion basis We leverage the full range

of our technology research, ment, and deployment projects all around the system Our scientists come to us saying, “Here’s some-thing I’ve got Where else in the company can we use it?”

assess-“When tornadoes went through Alabama in 2011,

we could tell immediately which neighborhoods were out of power, because we could see which smart meters were still working.”

leading ideasleading ideas

13

organization, which has become an

integral part of how we deliver

en-ergy to customers

S+B: How do smart grids and smart

metering factor into your delivery

scheme?

FANNING: Southern Company had

about 4.4 million operational smart

meters by the end of 2012, which is

the second-largest smart meter

de-ployment in the United States

Those smart meters are already

re-ducing the number of vehicles on

the road In fact, Southern

Compa-ny has avoided approximately 40

million miles of driving since the

program began It’s good for our

bottom line, for the environment,

and for customers

There have also been some

re-markable unplanned consequences

When devastating tornadoes went

through Alabama in April 2011, we

could tell immediately from our

electronic map which

neighbor-hoods were out of power, because we

could see which smart meters were

still working That enabled us to

de-ploy our restoration crews more

ef-fectively The use of smart meters

contributed significantly to the

company’s fast response and

success-ful restoration efforts

In the longer term, smart meters

may be the gateway to the so-called

smart home But we’re taking a

pru-dent, measured approach We’re not

going to act hastily, because of

cy-bersecurity concerns It is better to

move slowly and deliberately, and

get it right Given how important

our service is to our customers, we

will not expose their personal

infor-mation—and the Southeast electric

network—to threats This is an

im-portant issue, and we will not take

unnecessary chances simply in a

conven-is that it’s an intermittent resource

We’re developing the next tion of compressed air energy stor-age, or CAES This technology uses power generated by the wind that blows during the night to compress

genera-air and inject it into the ground The air is then extracted under exceed-ingly high pressures during peak pe-riods of the day, using turbines to generate electricity

CAES technology has been around for a while, but we are im-proving its efficiency by exploring more advanced cycles that will help reduce operating costs and make CAES an economically viable op-tion for bulk energy storage This advanced application of CAES came from the joint efforts of our carbon sequestration group and our renew-ables group When we put these two teams together, they said, “Let’s not

underground Let’s think about how

to use wind energy and compressed air underground.”

S+B: Do you kill many ideas?

FANNING: Oh, sure In fact, I would argue that your greatest indicator of success is how many ideas you kill It proves that you’re developing ideas and pushing the envelope And it proves that you have the discipline not to pursue just any idea—and sometimes that’s the hardest part of

all, especially once you’ve started down the road

Sometimes we’ll say, “That just isn’t going to work now, but let’s keep experimenting with it.” The original coal liquefaction idea even-tually morphed into gasification from the ground up Then we blended that with carbon capture technology, and now we’re on the way to bringing the concept to real-ity in Mississippi It took some time,

but ultimately it emerged into thing really valuable

some-Right now, we’re building a nuclear power plant and a 21st- century coal plant, converting other plants to gas, adding environmental equipment, and developing sources

of renewable energy That’s a total commitment of about $20 billion

A little bit of R&D goes a long way

if it can raise the efficiency of these assets or reduce the amount of capi-tal investment needed Even our failures have more than paid for themselves in terms of cheaper en-ergy, and that’s what matters most

“I would argue that your greatest indicator

of success is how many ideas you kill It proves that you’re pushing the envelope.”

to lead

“Business smart” leaders, like GE’s Jack Welch and Oracle’s Larry Ellison, are big-picture thinkers who recognize that opportunities are un-limited, at least for those ready to seize those opportunities They are competitive, dynamic, and proac-

The Wise

Leader

Practical wisdom in

business comes from

combining the broad

view with the narrow,

and opportunity with

constraint

by Prasad Kaipa and Navi Radjou

currency of organizational culture in the 21st-century

Whether it’s called cleverness,

prac-tical intelligence, or savvy, one can

tive They relish high-stakes games, and display an aggressive, winner-take-all mentality Bill Gates exem-plified this form of leadership when

he took Microsoft from a college dropout’s startup in 1976 to a com-pany with a market capitalization of more than US$616 billion by 1999 But these leaders’ expeditious and sometimes self-centered approach to decision making can also cause trouble Gates learned this in 1998, when the U.S Justice Department (followed by a number of European countries) filed an antitrust suit against Microsoft By most ac-counts, this was a rude awakening for Gates Under questioning at trial, he appeared combative and defensive Although Microsoft set-tled the lawsuit in 2001, these events contributed to the company’s loss

of dominance

“Functional smart” leaders are grounded in the concrete, tangible, and tactical, enabling them to achieve operational and execution effectiveness Like Genentech co-founder Herbert Boyer and HP founders William Hewlett and Da-vid Packard, functional-smart lead-ers tend to have deep expertise in narrow domains They understand that constraints are unavoidable, but also know that they can be managed

by those willing to design ate solutions Tim Cook, for exam-ple, who took over as CEO of Apple after Steve Jobs’s death, brought a new level of operational efficiency and bottom-line productivity to Apple, honed during his years as chief operating officer Functional-smart leadership may seem like a safer bet, but these leaders are prone

appropri-to repeating poor decisions or crastinating on tough decisions They are more likely to be caught in the weeds of habitual practice, ne-

pro-leading ideas

glecting things outside their

pur-view Cook, for example, in

over-looking the poor working conditions

at Apple’s Chinese subcontracted

factories, damaged Apple’s

reputa-tion and some of its profi tability

Today’s business leaders need to

balance narrow and broad views of

their business and of the world, and

to combine fl awless execution with

big-picture thinking This ability to

navigate swiftly and effectively

be-tween the two forms of smartness

based on the context, coupled with a

focus on a higher purpose and

en-lightened self-interest—the belief

that a rising tide can lift all boats—

is what we call “wise leadership.”

Practical wisdom gives executives

the tools they need to achieve both

professional and personal success:

the fl exibility to anticipate

disrup-tive change, the execution

capabili-ties to meet today’s demand, and the

opportunity to build their facility in

ethics and shared values

Most people, when they start

their careers, have potential for

both business-smart and

functional-smart leadership But over time, as

they move up the hierarchy, they

tend to favor one or the other They

take on what psychologists call a

perceptual fi lter They see what they

expect to see—they become

con-scious of only one set of possibilities

and accept only one type of

behav-ior The perceptual fi lters of business

smartness and functional smartness

are so prevalent and yet so subtle

that it’s hard to recognize the extent

to which they govern behavior They

shape executives’ world view;

al-though people may have an

intellec-tual or intuitive appreciation for

both types of smartness, they miss

chances to bring them together

To see the world more clearly,

leaders need to become aware of,

To Do

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Pharmaceutical markets in developed

countries may still be quite sizable, but

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Algeria Thailand

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Circle size=

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KEY

0

29 million 1.35 billion

down as Microsoft’s chief executive

He took on the role of chief software architect, which emphasized func-tional smartness In the same year,

he embraced a higher purpose by establishing, with his wife, the Bill

& Melinda Gates Foundation though some people initially ac-cused Gates of using his charitable activities to sugarcoat his image, his foundation is today respected and appreciated for its highly effective approaches to combating global challenges Gates, the successful but polarizing fi gure, has become more

Al-righteous and moral in the eyes of many people

Tim Cook was driven by Steve Jobs’s advancing illness to change his leadership style He moved from

a narrow form of smartness to a more opportunity-oriented perspec-tive, turning his attention to the big picture and becoming sensitive to the changing context in the world around him When the factory scan-dal broke, Cook went to China

to inspect working conditions fi hand, and he is now striving to improve conditions there and else-where He also started matching employee contributions to nonprof-its, encouraging commitment to the greater good Although he has not fully emulated Steve Jobs’s agenda or style—for example, he pays divi-dends, which Jobs avoided—Cook has adopted some important busi-ness-smart approaches He discusses strategy with investors, reaches out

rst-to developers, focuses on rst-top-line growth, and has defended Apple’s position as a leading innovator by winning a patent infringement case against rival Samsung

A balanced approach also ables leaders to lead their companies

en-to sustained growth, even through trying times Here we can look to Ford CEO Alan Mulally as a model

of wise leadership Long before ing to Ford, Alan Mulally was a gen-eral manager at Boeing in charge of developing the 777 passenger air-craft Even at that time, he deliber-ately cultivated a mix of business-smart and functional-smart actions Traditionally, Boeing teams operat-

com-ed in silos with little collaboration, leading to project delays and higher costs Mulally’s job was to coordi-nate multiple teams and integrate their efforts In every project review meeting, he began by reminding all

and then set aside, their perceptual

fi lters This type of refl ection doesn’t

always come by choice—it is

typi-cally forced upon people Bill Gates

didn’t wake up one morning and

say, “I want to become a wise

lead-er.” He must have been compelled,

by the lawsuit and other factors, to

reconsider his leadership style

Gates, who had been known for his

intensely competitive personality

and take-no-prisoners strategies,

made a major course correction

In early 2000, while awaiting the

antitrust court decision, he stepped

leading ideas

17

India’s Leadership Challenge

At many Indian companies, the development of top management has lagged behind the pursuit of technical excellence

by Gaurav Moda, Anshu Nahar, and Jai Sinha

In-dian companies have rienced impressive growth during the past two decades But today, many face a daunting side ef-fect: a nationwide crisis in leader-ship In some ways, Indian compa-nies are victims of their own success

expe-As one senior HR manager at a large private-sector conglomerate ex-plained, “People have been so fo-cused on growth that they have not invested in developing [the next gen-eration of executives] There is a strong circle of top leadership in our businesses, but no tag team.”

Recent survey data supports this claim In a 2010 study by Harvard Business Publishing, an overwhelming 88 percent of top Indian companies cited “gaps in [their] leadership practice” as their top challenge in coming years The 2012 ManpowerGroup Talent Shortage Survey, a global survey of employers, reported that 48 percent

of respondents based in India had difficulty finding qualified candi-dates for their senior managerial po-sitions And Booz & Company (the

teams that they had to factor in the

larger system, the whole plane, when

making narrow decisions; then he

moved to intensive, detailed review

of the technical and design issues

Mulally took the same decision

logic to Ford When he arrived in

2006, the company was losing

mar-ket share and brand equity Mulally

mortgaged all of Ford’s assets to

se-cure a $23.6 billion loan, which he

said was needed to invest in R&D

and serve as “a cushion to protect

from a recession or other unexpected

event.” This decision, made at a time

when the economy seemed healthy,

was widely criticized But Mulally

defended it on the grounds that “we

have to control our own destiny.”

Two years later, this business-smart

decision allowed Ford, unlike GM

and Chrysler, to avoid

government-funded restructuring

Around the same time, Mulally

also made a critical functional-smart

decision Walking through the

park-ing lot at Ford headquarters in

De-troit, he noticed the plethora of Ford

brands, with no common attributes

in shape or style He set about

prun-ing the Ford model portfolio This

allowed Ford to concentrate on

im-proving the engineering quality of a

smaller roster of models, to make life

easier for Ford distributors and

deal-ers, and to reuse components across

brands, reaping big savings on

sup-ply chain costs

Becoming a wise leader is not

always a smooth journey—people

can easily revert to their familiar

smart behaviors Practical wisdom

requires the unlearning of one’s past

success formulas Even today, Bill Gates becomes intense and defensive when addressing Microsoft’s lack of growth in the past decade And Tim Cook saw a significant decline in

Apple’s market valuation when he focused more on tangible products and services than on intangible con-nections to the marketplace and end-users Such struggles are to be expected But wise leaders are resil-ient, and they learn from failure

They are flexible, enabling them to maintain this crucial balance: The business-smart leader can give voice

to aspiration, the functional-smart leader can appreciate limits and exe-cute within them—and the wise leader can do both +

Navi Radjou

navi@naviradjou.com

is a Silicon Valley–based strategy

consultant and the coauthor of Jugaad

Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth (Jossey-

Bass, 2012).

This article is adapted from Kaipa and

Radjou’s book, From Smart to Wise: Acting

and Leading with Wisdom (Jossey-Bass,

2013).

Tim Cook was driven to change his leadership

style, from a narrow form of smartness to a more

opportunity-oriented perspective.

population has thus far fallen short

of its promise Nandan Nilekani

points out in his book Imagining dia: The Idea of a Renewed Nation

In-(Penguin, 2009) that India lacks the educational institutions it needs, from the earliest years to the post-college level Thus, even though thousands of Indian university grad-uates enter the workforce every year, they are often not “industry ready”

or equipped in the skills of global business This has contributed to a dearth of topnotch candidates and a growing talent war for those few with desirable skill sets

Young talent needs development and supervision And as Indian com-panies have expanded their reach both domestically and abroad, the lack of managers capable of provid-ing this guidance has become more acutely felt The founding executives who built these thriving businesses, and who made the far-reaching stra-tegic decisions in the past, are now approaching retirement According

to the chief executive of a large vate-sector fi nancial-services com-pany in India, the country’s econ-omy is growing at a faster pace than the rate at which the leadership pipe-line is maturing A decade of rapid expansion and exponential growth has left companies in deep need of talent that is in short supply

pri-This dynamic is all the more daunting because operating models

at many Indian companies have shifted Traditionally, Indian com-panies operated in a markedly top-down manner—the person with the corner offi ce made the fi nal deci-sions, and senior managers oversaw their specifi c silos That top-down model was effi cient, but it stifl ed creativity and discouraged autono-mous decision making Now it is giving way to a more participative

need, putting both potential growth opportunities and the continuity of existing business operations at risk

(see Exhibit).

Several underlying causes have contributed to this breakdown in India’s corporate leadership pipeline

Considered together, they explain how Indian companies have arrived

at their current precarious position

Understanding these factors can veal the opportunities that today’s senior executives can use to set things right It can also provide helpful insight to executives in other emerging economies, many of whose companies are also suffering from a senior executive talent shortage

re-Shifting Realities

About 65 percent of India’s 1.2 lion people are between 15 and 64 years old, and 30 percent of the pop-ulation is made up of those younger than 15 This widely recognized

bil-“demographic dividend” should have given Indian companies a sig-nifi cant advantage in the form of a sizable pool of qualifi ed applicants

But the country’s youth-dominated

publisher of strategy+business)

fore-cast in a recent in-depth analysis of

India’s top 500 companies that by

2017, 15 to 18 percent of leadership

positions in those companies will be

unfi lled—or will be fi lled by people

underprepared for the jobs This

im-plies that companies will be missing

almost one of every fi ve leaders they

2012

Projected Gap in Top Management

2022 5%

15%

10%

20%

2017

Exhibit: The Supply–Demand Gap

India's top 500 companies will experience a

significant leadership shortfall over the next

five years Although supply will eventually

catch up, a gap will remain unless companies

take action.

Source: Booz & Company analysis, using data from RBI,

the Indian government, Indiastat, and Prowess

leading ideas

19

approach, more resonant with the

younger generation and more

effec-tive for companies that are too big to

micromanage But this new

operat-ing model can be effective only if

skilled managers are available to fi ll

the ranks

Looking for Leaders

India’s young, underprepared

popu-lation, its rapid economic growth,

and its changing business models are

the most visible contributors to its

leadership defi cit But there is a

sub-tler yet equally powerful underlying

cause: Historically, Indian business

leaders have focused on developing

technology rather than people As

a senior manager at a large Indian conglomerate put it, “We have qual-ity technical experts, but can’t con-vert them into business leaders.”

Perhaps the most obvious ample occurs in the C-suite: Few companies have provided human resources a seat on the executive management committee As a result, the HR department often has a lim-ited role (or no role) in the strategic planning process, leading to a lack

ex-of focus on people matters As U.S

companies did in the early years of the Silicon Valley boom, Indian companies have prioritized achiev-

As a senior manager at a large Indian

conglomerate put it, “We have quality

technical experts, but can’t convert them

into business leaders.”

ing technical excellence, hiring gineers who’ve been trained to pur-sue innovation—but not to manage people and lead organizations Evi-dence of this dynamic can be found

en-in practices prevalent throughout Indian companies

Insuffi cient training for new cruits. Many Indian companies struggle with new-hire “onboard-ing” programs Often, the incoming class of MBA recruits is not suffi -ciently integrated into the broader workforce, and companies put too much hope too early on these new hires’ shoulders

re-Meanwhile, rotation programs meant to train the new recruits are often ill conceived and seen by line managers as an intrusion into daily work “Corporate has assigned two MBAs to my department for rota-tion—I don’t know what to do with them,” said a department head at

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one midsized Indian company “My

people are already overworked with

their routine work We do not have

the time to train these overpaid

young recruits.”

Limited variety of experience at

the top Without a strong leadership

pipeline in place, star functional

specialists are typically promoted to

top roles These individuals may

have a background focused within

one domain, and may not have had

the opportunity to develop a

broad-er pbroad-erspective or set of skills

This experience gap is not a

problem just for Indian companies;

it is endemic to corporate structures

everywhere Many global companies

compensate with targeted

on-the-job experiences and in-depth

train-ing, where they bring senior

execu-tives together to help develop one

another’s skills But Indian

compa-nies have invested little in this type

of executive development Thus,

when functional specialists are

pro-moted into general management

po-sitions, few are well prepared and

motivated to handle their new roles

A lack of succession planning

Rapidly growing industries, such as

those driven by the rise of digital

media, often rely on relatively young

and inexperienced managers to take

on senior positions By and large,

these individuals have not yet

devel-oped a leader’s perspective For

ex-ample, the telecom boom over the

past decade has led to a flurry of

flourishing mobile phone brands in

India But each of these firms has

had to draw upon the company’s

ex-isting pool of players to build its nior team The growth of that talent pool has not kept pace with those of the brands One regional sales head for a mobile handset company point-

se-ed out that “eight to 10 years ago, there were only three or four handset brands in the country Today, there are over 60 Relatively younger man-agers have had to step up to take on top roles in these companies.”

The ultimate result of this lack

of qualified successors? Senior ers are postponing retirement In-stead of developing and executing a clear succession plan, executives have been extending their tenure,

lead-lacking confidence that the next level of management is up to the task of leading

The Next Generation

Many Indian executives recognize the challenges, but are unsure what steps to take to overcome them First and foremost, they need to take a fresh, holistic look at their leadership development practices Their goal should be to develop a sustainable leadership pipeline throughout the organizational pyramid: a well-rounded leadership team to comple-ment the required skills at the top,

a team of successors right behind them, a strong bench of high-poten-tial individuals identified and devel-oped in the middle, and a cadre of young, industry-ready talent The pipeline should also include ad-vancement opportunities for techni-cal specialists

This is no small task, and will

require executives and managers to embrace the idea that training young recruits is an essential part of their routine, and will provide the incentives for them to contribute to the organization Companies will need to invest in replicating and implementing specific interventions that have been successful at global companies (and a small number of Indian companies), instead of ge-neric initiatives This means making talent management a key compo-nent of HR strategy, and making

HR a key participant in the firm’s decision-making processes

By taking these steps, nies can fill their immediate gaps while building the enterprise capa-bilities necessary to ensure that they thrive in the long run But only in companies whose leaders endorse this approach wholeheartedly, and where it can become ingrained in the company’s culture, will such changes take hold Talent is India’s greatest opportunity, but it is also one of its biggest challenges The same is true for more and more businesses in other developing re-gions around the world In each of them, it falls to today’s executives to ensure strong leadership for genera-tions to come +

Anshu Nahar

anshu.nahar@booz.com

is a senior associate with Booz &

Company’s organization, change, and ership practice, and is based in Mumbai.

lead-Jai Sinha

jai.sinha@booz.com

is the co-head and managing director of Booz & Company in India, and is based in Mumbai.

“Eight to 10 years ago, there were only three or

four handset brands in the country Today, there

are over 60 Relatively younger managers have

had to take on top roles in these companies.”

“S mart organizations are beginning to recognize that the secret

to engagement is to provide employees ample autonomy, the

opportunity to make progress, and a sense of purpose Dennis Bakke

brings these principles to life in a modern business fable with ample

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chief executives see their most

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be-ing the leader of the company’s

culture According to Ginni

Rom-etty, CEO of IBM, “Culture is your

company’s number one asset.” Her

counterpart at Microsoft, Steve

Ballmer, has said, “Everything I do

is a reinforcement or not of what

we want to have happen culturally.”

In another typical remark from the

C-suite, Starbucks Corporation

CEO Howard Schultz has written

that “so much of what Starbucks

achieved was because of [its

em-ployees] and the culture they

fos-tered.” Researchers such as former

Harvard Business School professors

John Kotter and James Heskett have also found consistent correlation be-tween robust, engaged cultures and high-performance business results

(as described in their book, rate Culture and Performance [Free

Corpo-Press, 1992]) But most business leaders don’t need that evidence;

they’ve seen plenty of correlation in their own workplace every day

Recognizing the importance of culture in business is not the same thing as being an effective cultural chief executive The CEO is the most visible leader in a company

His or her direct engagement in all facets of the company’s culture can make an enormous difference, not just in how people feel about the company, but in how they perform

Schultz described the CEO’s role

this way in his book Onward: How

Starbucks Fought for Its Life without Losing Its Soul (Rodale Books, 2012):

“Like crafting the perfect cup of coffee, creating an engaging, re-spectful, trusting workplace culture

is not the result of any one thing It’s

a combination of intent, process, and heart, a trio that must constantly

on productivity and emotional mitment, undermining long-term success Most companies are so large and complex that the culture acts in both ways at once Indeed, the cul-ture of a large company is typically made up of several interwoven sub-cultures, all affecting and respond-ing to one another

com-If you are the chief executive of

a company that is sailing with the wind and leading in its competitive race, that’s a sign that your culture

is in sync with your strategy This makes your company much more likely to deliver consistent and attrac-tive profitability and growth results You can tell you have such a culture because people are confident and energized They can justifiably take pride in the results of their work As CEO, your role is to keep the ship

on course and ahead of the tion This requires generating regu-lar behavioral reminders about the values, aspirations, and engagements that underlie your company’s success and reinforce its strategy

competi-However, if your company is

STRATEGY & LEADERSHIP

Culture and the

Chief Executive

CEOs are stepping up to a new role,

as leaders of their company’s thinking

heading into stormy waters, facing

the kinds of disruptive competition

or unexpected market changes that

affect every industry sooner or later,

then a program of normal

reinforc-ing leadership won’t cut it A

cul-ture that no longer aligns with your

strategic and performance priorities

needs a lot more attention—from

you and other senior leaders

Many CEOs understand in

principle that cultures are

multi-dimensional, slow to change, and

troublesome to control—and thus

that influencing them requires care

and thoughtful engagement This is

particularly true for global

compa-nies led by people of diverse

back-grounds When confronted with a

cultural challenge in real life,

how-ever, chief executives tend to forget

this principle Instead, they revert

to conventional managerial tactics,

but with more rigor They turn up

the volume on the inspirational

mes-sages They raise the bar and set

stretch goals with new statements

of the vision, mission, values, and

purpose of the company They bear

down on costs and castigate people

for complacency They may also see

culture change as primarily a

func-tional responsibility, to be delegated

to experts, either inside or outside

the company More often than not,

these approaches leave the deeply

embedded cultural behaviors largely

unchanged Only an enlightened

CEO can break through that kind

of cultural inertia

A better starting point is a

real-istic recognition of the culture’s

cur-rent status No company’s collective

practices and beliefs are all good or

all bad They have evolved over time

for understandable reasons—often

to deal with the challenges or

mal-functions of the past Moreover,

they are firmly entrenched in

mind-sets and habits Therefore, it is sential to be rigorously selective and disciplined in dealing with cultural issues There are several things you can do from your highly visible po-sition at the top of the hierarchy to spark and foster the cultural realign-ments you want to see:

by focusing on your company’s rations—its unfulfilled potential—

aspi-rather than on any impending crisis

that exemplify the best of your pany and culture, and that you want everyone to adopt Set an example

com-by visibly adopting a couple of these behaviors yourself

company to include both rational and emotional cues

by maintaining vigilance on the few critical elements that you have estab-lished as important

In all this activity, avoid gating your culture-oriented actions

dele-Do as much as you can yourself

The Power of Positive Urgency

Time and again, we hear tives cite the importance of having

execu-a “burning plexecu-atform”—execu-a producing crisis, whether externally

stress-driven or self-induced—to incite a high-performance culture We once observed a CEO incur several hun-dred million dollars of unnecessary debt for the sole purpose of creating

a sense of urgency for his culture change effort For many years, we too subscribed to the conventional wisdom that burning platforms were the only way to obtain cultural im-pact But no longer

Certainly we understand the logic that underlies this point of view: Companies full of complacent people will rouse themselves only

in response to crisis But experience and common sense argue differ-ently Consider what people on real burning platforms do They escape They barely have time to act, much less change their mind-sets and hab-its with a view toward long-term success In the business equivalent, which usually involves a rapid drain

of cash and profitability, your tions will be similarly limited—in this case, to layoffs, plant closures, responses to the press and investors, and other forms of damage control Like BP’s recovery efforts after the Deepwater Horizon spill, Toyota’s after the Fukushima disaster, or any plant shutdown made in response to

op-a sudden loss of business, these trop-au-matic activities are typically seen as

trau-a one-time event, not trau-as trau-a wtrau-ay of building for the future

There is a much better way

Consider what people on real burning platforms do They escape

They barely have time to act, much less change their habits.

but repetitive and demonstrably significant They signal where the company is going now For example, early in the General Motors Com-pany (GM) bankruptcy recovery effort of 2009, interim CEO Fritz Henderson and a handful of his se-

nior executives launched a series of informal conversations with front-line leaders, skipping all the levels

of the hierarchy in between These examples triggered dozens of imita-tions, including conversations with customers, among GM employees across North America Similarly, during a turnaround at the Mobil Corporation in the mid-1990s, then CEO Lucio Noto and five of his se-nior leaders personally conducted career appraisals of people at various levels whom they saw as “managerial bench strength.” This inspired simi-lar assessment efforts throughout the company Southwest Airlines, for its part, has continually singled out the same three behaviors: hiring people who connect emotionally with cus-tomers and colleagues, volunteering when help is needed at any level, and frugality to the extreme

Unfortunately, there is no

mag-ic formula for finding the right few behaviors that will make a difference

in your culture There are, however, some factors to consider

First, it is essential to emulate

at least some of these emerging key behaviors yourself—to be a living model of the culture you aspire to

lead People pay rapt attention to what the CEO does, not just what the CEO says You can’t rely on communications, no matter how inspiring You, and ideally a few other senior leaders, have to step out

by behaving in new ways that both

capitalize on elements in the current culture and demonstrate a key shift

in cultural alignment

No two senior leaders are alike; what works for one doesn’t neces-sarily work for another So do not seek to revamp your leadership phi-losophy, style, or personality to fit anyone else’s idea of what a leader should be Instead, as former Camp-bell Soup Company CEO Douglas Conant put it, “It’s hard for leaders

to realize that it’s not about ing up ‘the way I think I’m supposed

show-to show up.’ It’s about showing up

in a way that is ‘authentically

me’ and can be helpful” (see “The

Thought Leader Interview: Douglas Conant,” by Art Kleiner, s+b, Au- tumn 2012, with video interview by Jon Katzenbach [online only]).

When Conant first arrived as CEO at Campbell’s, the company was beleaguered by poor quality and newly fierce competitors; he was hired to turn the company around

He knew he was not a master of cial conviviality “Every time I take a Myers-Briggs test,” said Conant, “it shows I’m an introvert.” He knew it would not be easy for him to inter-act comfortably with a diversity of

so-Rather, build an emotional sense of

urgency, focusing on the values that

the company cares about

collec-tively: its way of serving customers,

its desire for growth and success, its

positive impact on social and

com-munity issues, and the attraction

and welcome that people felt when

they first arrived

Every sustainable company

cul-ture is based, in part, on this

intrin-sic attraction to the

work—includ-ing the way it challenges people At

some point, your employees chose

to be part of the enterprise For the

most part, they liked (or loved) their

profession, they felt they could

ex-cel, and they wanted to gain the

per-sonal benefits of accomplishment

As CEO, you need to capitalize on

those feelings, give them voice, and

encourage people to spread them

vi-rally throughout the company This

may mean discarding some

busi-nesses that don’t fit your strategy,

your capabilities, or your culture

But it will also mean helping people

expand (or recapture) the pride they

have felt, all along, in their collective

strength

The Right Behaviors

To help people capitalize on the best

aspects of your culture, you have to

focus attention on the critical few

behaviors that you believe matter

most These are a few positive

sourc-es of energy, pride, and interactions

that, when nurtured and spread to

scale, will improve company

perfor-mance significantly As simple as it

sounds, this approach will not only

accelerate the behavior change that

matters most, but also evolve and

align your culture more effectively

than forcing a major and potentially

disruptive culture change effort on a

broadly diverse global organization

These actions are ideally small

VIDEO FEATURE

Want to Change Your Culture? Run!

Douglas Conant speaks with Booz & Company senior partner Jon Katzenbach about

connecting with people more effectively by putting on a pair of running shoes.

early adopters of these behaviors, and working with them directly to sharpen their influence and deploy

it more effectively, you will gain far more leverage as a cultural leader

For example, when Lucio Noto created those new, informal “skip level” staff development opportuni-ties at Mobil, the rumor mill took notice People all through the com-pany began to do the same These career appraisals became common practice at multiple levels across the globe Similarly, when Michael Sabia was CEO of Bell Canada, he started attending small-group working ses-sions of “master motivators” at the front line, and other executives fol-lowed suit They wanted to see for themselves what he was learning

Rational and Emotional Impact

More than 100 years ago, Mary Parker Follett wrote about integra-tion in leadership and organiza-tional situations She contrasted integration with domination (“a victory of one side over the other”) and compromise (“each side gives

up [some of what it wants] in order

to have peace”) Integration comes about when “there is no curtailing of desire”—both sides in a dispute get all (or nearly all) of what they really wish for We have yet to hear a better definition for the kind of integration that a CEO needs if he or she is to have impact on the culture

When putting together a ness strategy or a case for action, it’s important to integrate the rational arguments from top leaders with compelling emotional appeals at more personal levels One without the other is unlikely to sustain cul-tural alignment In other words, in addition to a rational business case for change and other formal mech-anisms, it’s important to develop

busi-emotional impact through such forces as peer approval, the support

of colleagues, and the admiration of friends and families

For most business leaders, a rationally compelling argument is usually much easier to develop than

an emotionally compelling one Executives are used to quantitative analysis and logical reasoning They understand how to send arguments through well-established formal channels and programs, and they know how to delegate assignments within that system But emotional energy gets its strength from one’s own intuitive insight and the social support of colleagues This energy flows through informal networks and cross-organizational interac-tions outside formal channels The CEO’s role is to ensure integration

of the formal and informal sions, so that the emotional energy generated for change is reinforced by

dimen-a consistent formdimen-al dimen-accountdimen-ability for performance and a willingness

to pay attention to the metrics that indicate results

Douglas Conant calls this ing “tough-minded on standards but tender-hearted with people.” Early on in his turnaround chal-lenge at Campbell’s, he realized that he would have to replace more than 300 of the top 350 people in the company because they lacked the necessary skills In discussions and informal conversations, he held firm to this decision, but also openly acknowledged that those who were being replaced were the friends, colleagues, and teammates of those who were staying Those leaving were treated with respect and given

be-as much help be-as the company could afford “Even through that horrible period,” he later recalled, “our em-ployee engagement scores went up.”

people throughout the organization,

but he had to find a way to do it

At the time, the Campbell’s

“people strategy” emphasized

em-ployee health, using an American

Heart Association program that

encouraged people to walk 10,000

steps every day So Conant began

donning a track suit and pedometer

and running around the

headquar-ters building complex in Camden,

N.J., every day Because of his

con-stantly changing schedule, he ran

at different times every day, and he

made a point of running through

different parts of the complex

Peo-ple never knew when they would see

him jogging nearby, but they always

knew the reason—he wasn’t

check-ing up on them, he was just gettcheck-ing

his 10,000 steps in This practice

gave an introvert a highly visible,

easy way to interact informally with

people he would otherwise see only

at formal meetings, and Conant’s

running soon slowed to a walk “It

got to the point where I was so

com-fortable that people weren’t afraid of

approaching me,” he said He

even-tually dubbed this practice

“man-agement by wandering around.”

We like this example because it

shows the importance of enjoying

this experience Most of us will not

do something for long if it makes

us uncomfortable It also illustrates

the emotional impact that simple

changes in CEO behavior can have

on others

You do not need very many

senior leaders to start a few critical

behaviors rolling through the

com-pany Get several well-known

execu-tives to step away from the norms of

the past with you People

through-out the workforce will rapidly take

notice and do the same, creating an

atmosphere of approval and

sup-port In short, by seeking out other

Eternal but Focused Vigilance

Your role as a cultural leader starts

on Day One of your appointment as

CEO It will not end until the last

day you hold that office Indeed,

your persistence in emphasizing the

right cultural behavior will continue

to be influential after you have left

Because cultures evolve in

in-formal ways that are hard to track,

they can easily degrade before many

people are even aware something

bad is happening Chief executives

in peak-performing companies

al-most never let this happen; they

work hard to keep an eye on the

critical few behaviors over time

You can either keep promoting the

same few behaviors, as Southwest

Airlines did, or, after the first few

have taken hold, pick a few more to

model and support

In many great organizations, a

kind of cultural vigilance baton is

passed from each CEO to his or her

successor At Southwest Airlines, for

example, it passed seamlessly from

cofounder Herb Kelleher to

incom-ing CEO James Parker and

presi-dent Colleen Barrett in 2001, and

then to incoming CEO Gary C

Kelly in 2004 Each new chief

ex-ecutive is deliberately charged with

keeping the company’s fundamental

cultural identity intact (while

help-ing the company evolve to meet new

competitive and market dynamics)

This rich cultural identity is

part of the competitive advantage

of leading organizations such as the Mayo Clinic, Apple, Procter &

Gamble, and IBM When it slips, because people grow complacent or lose touch, the CEO is expected to step in and reignite the enthusiasm and vigor that were part of the cul-ture originally—as Conant did at Campbell’s and as Meg Whitman appears to be doing at Hewlett-Packard

Things Only the CEO Can Do

Most chief executives are master egators Some believe, as one chief executive we know puts it, that suc-cessful delegation is the single most

del-important skill that a developing leader needs “It is the only way a rising leader can handle increasing responsibilities, and the best way to develop subordinates.”

For the most part, we agree—

except when it comes to the CEO’s cultural impact The activities de-scribed in this article should not be assigned to others Leaders who del-egate too much will lose their oppor-tunity to become role models and energizers for the culture they want

to shape For example, you should

be personally involved in selecting the new behaviors needed by the company Your choice should reflect the company’s strategic and operat-ing priorities, in a way that others throughout the company can com-fortably align with However, get-ting down to a few critical priorities

VIDEO FEATURE

Can Great Leaders be Tender and Tough?

Douglas Conant describes why it’s crucial

for executives to be tough-minded on

standards and tender-hearted on people.

will almost always be a judgment call you need to make, because no choice will be easy to defend

Only you can interact with ers on your own behalf Only you can speak regularly for yourself with people throughout the company, in-formally and outside normal chan-nels When incoming CEO Jack Rowe launched a turnaround jour-ney at Aetna Inc in 2000, he kept in direct personal contact with nearly

oth-100 leaders in multiple levels and functions These informal networks not only brought him up to speed

on the way people thought about their work and the practices they followed, but became viral spreaders

of the culture he wanted to evolve Because you, as CEO, have the final word on most strategic and op-erational decisions, the most critical aspects of cultural impact—selectiv-ity, simplicity, and targeted persis-tence—are in your domain More-over, your role as cultural leader

is, more likely than not, the single thing you will be most remembered for That’s why so many CEOs refer

to culture as their highest priority; it

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by Tim Laseter and Jeff Bennett

look like bottle rockets

They start with an pressive flash but end with an explo-

im-sion Most often, this is caused by

business leaders’ tendency to chase

after the biggest customer segments

or the ones with the highest

mar-gins—typically the same segments

that everyone else chases Other

leaders get lost in their enthusiasm

for a new product or in their desire

to pursue the next market fad They

fail to consider whether they are

at-tempting to solve a customer

prob-lem, and how much the solution is

worth Such strategies may result

in fireworks, but they don’t create a

business of increasing momentum

that provides both the stability and

the energy reserve to drive able growth—in other words, one with a solid flywheel

sustain-Companies that pursue a flywheel-business model focus on building the kind of long-term ca-pabilities that allow them to prevail against rivals and capture new oppor-tunities for growth This gives them the profits they need to invest more

in capabilities, and the insights to do

so wisely Along the way, they target the customers or customer segments that will help them develop these ca-pabilities It is similar to the flywheel concept from high school physics, typically demonstrated by a heavy disc that is difficult to start up, but that spins easily with limited effort once it reaches full speed Over time,

a simple innovative idea becomes

a well-oiled machine, which

trans-lates into a predictable and profitable business

Two case studies—Johnson Controls Inc.’s Automotive Experi-ence group and Pulte Homes—show how company leaders embraced the flywheel concept to unlock strategic growth opportunities

Collaborate with Suppliers

Revenues at Johnson Controls Inc (JCI) in 2012 were US$42 billion, nearly half of which came from the largest of its three global business units, the Automotive Experience group But this group is relatively new For most of its 110-plus-year history, JCI developed control sys-tems for the regulation of tem-perature in buildings, gradually ex-panding in the 1960s to centralized systems integrating control of tem-perature, fire alarms, lighting, and security In the late 1970s and early

’80s, it expanded even further from its core building controls business.The Automotive Experience group began in the early 1980s as the Automotive Seating group At that time, the automotive indus-try was embracing outsourcing to eliminate the burden of United Auto Workers (UAW) wages From 1982

to 1984, leading seat frame and foam manufacturer Hoover Univer-sal Inc had built six seat assembly facilities to serve nearby customer vehicle assembly plants JCI rec-ognized the outsourcing trend and acquired the Automotive Seating group from Hoover, along with the Ferro Manufacturing Corporation,

a seat mechanisms manufacturer, and continued to add plants capable

of providing full seat systems to the Detroit Three

Realizing that wage arbitrage offered no competitive advantage—any competitor could also hire

STRATEGY & LEADERSHIP

Building a Flywheel

Business

By linking customers and capabilities,

companies can generate the momentum

for sustainable growth.

non-UAW laborers—JCI sought to

build a sustainable flywheel

busi-ness Although the term lean had

not yet consumed the psyche of the

automotive industry, former Hoover

plant manager John Daly, the newly

appointed vice chairman of JCI,

rec-ognized its potential He challenged

his managers to embrace Japanese

manufacturing methods and

target-ed the Toyota Motor Corporation as

a customer that could help the

com-pany achieve its goal

In October 1985, Daly informed

his Georgetown, Ky., plant workers

that a team from Toyota would be

visiting in three weeks Although

the plant was viewed as JCI’s best in

terms of internal housekeeping—an

important consideration in

Japa-nese manufacturing—it followed

U.S manufacturing performance

standards, which did not match

Ja-pan’s Die changes took four to eight

hours, so an average production run

lasted 20 days to amortize the setup

cost Inventory levels exceeded a

month of supply, and equipment ran

only 40 percent of the time Despite

making nascent efforts at statistical

process control, the company

re-mained focused on volume, leading

to substantial rework

In anticipation of the Toyota

visit, the Georgetown plant manager

sought to temporarily cut inventory

by nearly 70 percent, to a mere

10-day supply He rented nearby

ware-house space and hauled away any

inventory he thought he could

func-tion without until after the plant

tour Later, he visited a seat supplier

in Japan and learned that even 10

days was excessive by Toyota

stan-dards: The supplier held so little

in-ventory that it did not even require

forklifts to move materials around

Perhaps Toyota saw a diamond

in the rough, or maybe JCI just got

lucky—but shortly after the JCI plant visit, Toyota announced that

it would build an assembly plant in Georgetown Over the coming year, Toyota visited JCI regularly, and the Georgetown plant attempted to showcase new improvements every time Plant leaders started by creat-ing a welding cell staffed by cross-trained workers Next they attacked die change times, reducing them to half an hour on their own and even-tually to a mere 17 minutes with the

help of a Toyota kaizen expert By

the time Toyota production began ramping up in 1988, the dedicated Toyota seat assembly area within the Georgetown plant operated with a mere 7.5 days of inventory, and by

1989 at full scale it held less than a day’s worth

Over the next four years, Georgetown was the only Toyota supplier among the corporation’s entire U.S supply base to receive an award every year and was selected

as one of four “showcase suppliers”

to demonstrate the potential of the Toyota production system to other U.S companies Equally impor-tant, the lessons of Georgetown had spread across other JCI Automo-tive Seating group plants—includ-ing the additional dozen seat plants serving vehicle manufacturers in the United States At this moment, JCI had completed the first turn of the flywheel; it had developed the ca-pabilities to be a world-class seating manufacturer in the emerging “just-in-time” environment

The company then sought

to become a full partner in design through delivery Chrysler appeared

to be the logical customer to fuel this second rotation of the flywheel Although it had acquired the Amer-ican Motors Corporation—and the indomitable Jeep brand—in 1987, Chrysler remained subscale in com-parison to its U.S competitors, and was looking to outsource engineer-ing as well as manufacturing In

1989, JCI jumped at the chance

to take responsibility for the entire seat system in Chrysler’s new Neon model The innovative compact car designed under Lee Iacocca’s guid-ing hand proved to be a huge com-mercial success for Chrysler—and for JCI, which now had the momen-tum to build its design capability

JCI’s next step was to establish deeper relationships with the De-troit Three and other automotive manufacturers by creating dedicated

“customer business teams.” These new cross-functional groups sought

to expand their scope of ties for their respective automotive customers For example, by 1992, JCI had more than 500 product en-gineers—having started with only a handful at the time of their acqui-sitions in the 1980s While the in-dividual teams focused on serving the specific needs of their respec-tive OEMs, a common R&D group sought to leverage the company’s growing expertise across vehicle pro-grams by designing materials and components that could be incorpo-

responsibili-The Neon was a huge success for Chrysler—and for JCI, which could now build its design capability.

rated into many different designs.

In 1994, JCI opened a new

research and development center

capable of doing its own prototype

testing, expanding its design

capa-bilities even further Independent

of the OEMs, the company also

be-gan examining car customer views

regarding seating Through

sophis-ticated conjoint analysis, JCI

devel-oped deep consumer insight into

preferences among features, such

as motorized versus manual

adjust-ments and seat heaters Rather than

simply accepting design guidance

from the customer’s vehicle program

manager, the customer business

teams came armed with data to help

them make the inevitable design

trade-offs that influenced the entire

car The second revolution of the

flywheel was complete

The third rotation began with

JCI’s acquisition of Prince

Automo-tive (which made auto interiors) in

1996 Now the company could

le-verage its growing capabilities across

a larger proportion of the vehicle It

provided instrument display

clus-ters, dashboards, sound-cushioning

headliners, and trim, in addition to

the safety and comfort-critical seat

system Having gained control of all

the key aesthetics of a car’s interior,

JCI opened a new technology center

in 1998 complete with an “idea

fac-tory” and “comfort lab.” It

expand-ed its conjoint analysis to consider

trade-offs among extra cupholders

and dashboard features JCI could

now help a program manager make

the right decisions throughout the

car interior

JCI continued to increase the

momentum of its flywheel by

ex-panding its product and geographic

scope In 1998, it added to its

port-folio an automotive interior part

producer, the Becker Group, with

70 percent of its revenues in Europe, and the Italy-based Commerfin SpA, a maker of door systems Tak-ing another page out of the Japanese playbook, in 1999 JCI launched a

keiretsu-like partnership with

Gene-tex, Jabil, and Microchip ogy to develop integrated electron-ics for car interiors And in 2000,

Technol-it expanded into Japan by ing Nissan’s stake in Japanese seat

acquir-manufacturer Ikeda Bussan By

2005, JCI had renamed the business unit the Automotive Experience group It was now a global flywheel business with annual revenues of nearly $19 billion

Create Scale in New Markets

In 1950, unable to afford an tect, a startup contractor named Bill

archi-Pulte used a plan from the Detroit Times’ Home of the Week section to

build his first house—which he sold for $10,000 By today’s standards, that may sound cheap, but the me-dian home price in Michigan that year was only $7,500 Over the next decade, his company, which is today called PulteGroup Inc (of which Pulte Homes is a subsidiary), oper-ated like every other builder in the country It built individual, custom-designed homes for a particular price niche in a local market—in Pulte’s case, the high-end home market of the Detroit suburbs

But Pulte recognized an portunity to create a flywheel busi-ness of national scale by offering his high-quality craftsmanship at more

op-affordable prices through modular design and prebuilt components

In 1959, Pulte shared his vision for the future in the plans for Concord Green in Bloomfield Township, Mich., the company’s first subdivi-sion project He priced the homes

at $29,000—well more than double the $12,000 median price in Michi-gan at a time when median family income ran less than $6,000—and

tapped the aspirational dreams of a growing upper middle class

Pulte created a superior tive to the then dominant models

alterna-of suburbia From experience, he understood that the custom model incurred additional costs for the buyer and uncertainty for the seller beyond the true value of the fin-ished product He also saw the flaws

of the mass-produced subdivision model pioneered by Abraham Levitt and his sons, William and Alfred Launched in 1947 to target soldiers returning from World War II, the Levitts’ original planned commu-nity in New York consisted of 2,000 rental homes employing a common, single-floor house plan The homes could be built at the astonishing rate

of 30 per day By 1949, they had expanded the quality of the homes and introduced a new “ranch-style” design for sale at $7,990, well below the statewide median of $10,152 It was offered in five models defined

by only slight differences in window placement and exterior colors By

1951, what had become known as Levittown encompassed more than

Pulte created a flywheel business

by offering high quality at affordable prices through modular design.

material suppliers, not just local tributors He continued to innovate during the 1970s, turning his focus

dis-to the baby boomer market For ample, Pulte’s in-house architectural team introduced the “quadromin-ium,” a single structure made up of four two-bedroom units with sepa-rate entrances and garages priced

ex-at a mere $20,000 per unit (only slightly above the median home price in 1970), targeting first-time buyers with kids These new capa-bilities provided the momentum for the third rotation of the flywheel, as Pulte built additional national scale across a wider range of price points and markets

Bill Pulte also recognized a potential disadvantage his business model had in comparison with that

of entrenched local builders, who could ensure quality through per-sonal relationships with subcontrac-tors for electrical work, plumbing, and the like To offset this disadvan-tage, in 1980 the company created

“Pulte University” near its quarters in Bloomfield Hills, Mich., and began training construction workers from around the country

head-Over time, the university was panded to include high-performing managers as well By the end of the 1980s, Pulte was selling homes in 17 markets in 11 states at prices ranging from $50,000 to $600,000

ex-Continuing to bear in mind the now middle-aged baby boomers,

in the 1990s Pulte developed munities in Arizona, California, Florida, Michigan, New Jersey, and Virginia, targeting “active adults”

com-age 55 and older (A merger in 2001 with Del Webb Corporation, a builder of retirement communities, solidified this market.) The compa-

ny entered the Fortune 500 in 1999 and won recognition from J.D Pow-

er & Associates for its high customer satisfaction, praise it continued to garner for five straight years Along

the way, Businessweek named it one

of the 50 top-performing companies

and Money magazine declared it a

30-year “super stock.”

Today Pulte operates in more than 65 markets in 29 states and the District of Columbia, generating

$4.8 billion in annual revenue—

roughly a third of its peak revenues

in 2005 before the housing crash Despite being hit hard by the col-lapse of the bubble, Pulte survived, while other builders did not, by con-tinuing to look for new markets and honing its design tools In 2009, the company acquired Centex Corpora-tion, a leader in the entry-level home market And in 2011, Pulte drew on consumer research to introduce its trademarked “Life-Tested” designs, which offer innovative features to meet the needs of modern families That same year, Pulte ranked as the country’s largest home builder (in terms of revenue), and one poised

to grow during the housing market recovery

The Perpetual Motion Machine

Both JCI and Pulte created able, multibillion-dollar businesses that have proven resilient despite the misfortunes of the automotive and construction industries They built their flywheels in different ways, but still provide common lessons for other companies

sustain-First, both recognized the nation inherent in the status quo, and sought to create a step change

stag-in customer value by questionstag-ing conventional wisdom or practices JCI sought to become more than

a simple contract manufacturer veraging nonunion wage rates, and Pulte sought to break the trade-off

le-17,000 homes—organized in huge

subdivisions full of nearly identical

“boxes.”

At Concord Green, Pulte sought

to achieve the scale economies of the

low-end, mass-production approach

while providing the variety

demand-ed by the more discerning

upper-middle-income customer His

mod-ular designs eliminated the need

for expensive architects but, unlike

the Levitts’ homes, provided

gener-ous variation in design throughout

the subdivision The company also

built design tools to allow

homebuy-ers to customize where it mattered

most, in the interior Customers

could choose from a wide range of

paint colors, flooring, countertops,

and lighting and plumbing fixtures

The unique capabilities Pulte

devel-oped for the Concord Green project

powered the first rotation of Pulte’s

flywheel, enabling the company to

reach an underserved market

After receiving an

overwhelm-ing response to the concept, Pulte

expanded to other markets:

Wash-ington, DC, in 1960, Chicago in

1961, and Atlanta in 1968 In this

second turn of the flywheel, he broke

the paradigm of construction as a

lo-cal business Under the old model,

relevant scale occurred at the local

level, through builders’ ability to get

better pricing and scheduling

pref-erences with local subcontractors

and suppliers The new paradigm

of modular designs and selective

customization applied across

mar-kets, making national scale in home

building meaningful

Pulte’s national expansion

en-abled him to invest in improving his

company’s capabilities in developing

design tools and customer

under-standing—building more houses

with more options while

increas-ing scale by usincreas-ing national buildincreas-ing

between customization and cost that

constrained other homebuilders

Second, both companies

identi-fied key capabilities that would

en-able them to compete successfully,

and targeted a customer or customer

segment that could help them

fur-ther develop those capabilities

Im-portantly, they targeted neither the

largest customer segment nor the

customer that could pay the most

per unit Rather, they sought out an

underserved market that would help

them learn and refine their

alterna-tive business model In some cases,

they added capabilities and market

access through M&A: Both

compa-nies realized that a well-functioning

flywheel is not only an engine for

or-ganic growth, but can also provide

the strategic logic for acquisitions

Third, JCI and Pulte both had

a “big-picture vision” for their

com-pany’s growth, and simultaneously

understood the need to work with a

customer to learn the myriad small

details that no amount of planning

or conceptual thinking could

un-cover Toyota helped teach JCI how

to implement lean manufacturing,

and Concord Green provided the

opportunity for Pulte to interact

with hundreds of customers to build

the design tools needed to change

the customization–cost paradigm

Finally, for both companies, the

entire picture might not have been

clear from the beginning But each

had a line of sight to the next

fly-wheel revolution—that sense that

this could be bigger than a

single-customer initiative They leveraged

their growth to fund further

invest-ment ahead of the competition JCI

used its scale to invest in consumer

research and expand its interior

port-folio, whereas Pulte used its

consum-er knowledge to capture purchasing

scale and enhance its design tools

Each nurtured specific competitive advantages to add momentum to its flywheel

These four characteristics—

step change in value, clear target segment, scale in new capabilities, and line of sight to the next revo-lution—are also found in other fa-miliar flywheel businesses Consider Walmart, which spent its early years targeting towns that then domi-nant Kmart had concluded were too small The company recognized the possibility of a step change in value in towns where the existing alternatives were high-priced local stores with limited merchandise or a suburban mall a dozen miles away

By growing for more than a decade under the radar screen, Walmart achieved the scale to develop the IT systems and logistics network for which the company is now famous

Did Sam Walton foresee Walmart’s becoming the largest company in the world (by revenue)? Probably not, but he certainly did sense that his “everyday low price” model and the efficient supply chain behind it offered innovations to better serve millions of people in the type of middle American towns that he un-derstood so well

There is great power in ing customers and capabilities this way to create a flywheel effect But

link-it is important to remember that flywheels can be deceptive, lead-ing to false confidence and hubris

We’re reminded of an article in a rural newspaper of our youth featur-ing the supposed inventor of a per-petual motion machine Made of an intricate collection of hand cranks, gears, and chains connected within

a menagerie of dozens of old oil drums, the device clearly powered

a massive flywheel that would tinue to spin the cranks for a long

con-time once the operator had used the gearing to gradually build it up to top speed Inevitably, the machine stopped as gravity and friction took their inescapable toll But the inven-tor was undeterred, closing the in-terview with conviction: “I think I just need a couple more barrels.”

Flywheel business models do not achieve perpetual motion, but instead require continued tending

to maintain the momentum Times change, and flywheels are by defini-tion hard to adapt and difficult to control—leaving a business vulner-able to the entry of a disruptive tech-nology In times like these, it can

be tempting to revert to old habits, pursuing bottle rockets Our advice: Don’t even try to course correct Even companies with well-oiled ma-chines should continually look for the next flywheel business, always seeking step-function changes by linking a new set of capabilities and customers The original flywheel inevitably winds down, but compa-nies that have planned ahead will have a new one up and running to take its place +

Reprint No 00180

Tim Laseter

lasetert@darden.virginia.edu

is a professor of practice at the University

of Virginia’s Darden School and other leading business schools He is the author

or coauthor of four books, including

The Portable MBA (Wiley, 2010) Formerly

a partner with Booz & Company, he has more than 25 years of business strategy experience.

Jeff Bennett

jeffb@amphoraconsulting.com

is the founder and managing partner of Amphora Consulting Formerly a partner with Booz & Company, he is an expert

at helping companies think cally about growth opportunities He has facilitated discussions on strategy and or- ganization at university executive education programs and at more than three dozen leading corporations.

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by Jeff Schumacher, Simon

MacGibbon, and Sean Collins

be-come digital? nies in all industries are building online businesses, enabling

Compa-new customer experiences,

experi-menting with “big data,” and

seek-ing advantage in a digitally enabled

business environment They have

tried reengineering their practices;

they have set up new technological

platforms for customer engagement

and back-office efficiency But these

efforts have not yet had the impact

that they should Instead of

reen-gineering, they need reimagining

They need to conceive of their

busi-ness freshly, in line with the

capabil-ities that digital and business

tech-nologies can give them, connecting

to customers in ways that have not

been possible before

Reimagining your business means creating many of the condi-tions of a startup—the sense of free-dom, flexibility, and creativity—but

at the scale and with the discipline

of a large enterprise You bring gether cross-functional teams who can ideate, bring to life, and execute

to-a truly digitto-al user experience You take a customer-centric approach to everything your company does—in-cluding innovation, user experience (UX) design, marketing, promo-tions, sales, operations, and custom-

er service You convey a distinctive brand identity and emotional con-nection that’s present in storefronts, websites, smartphones, connected devices such as high-tech fitness wristbands—and forms of interac-tion still being conceived You use big data and analytics in all their

forms to deploy insights from tomers in real time, designing and marketing products and services that respond instantly after sens-ing and analyzing what people do online (and off) Reimagining your business also means continually measuring and testing the impact

cus-of these products and services, and learning from the results

In the digital world, time really

is money Companies no longer have the luxury of carefully developing requirements for new products and services or for bureaucratic stage-gate approval processes Nor can your digital presence be bolted onto your company’s current way of oper-ating Instead, it must be a natural reinforcement of your company’s brand, its positioning in the market, its core value proposition, and the capabilities you already have The digital presence must also be a viable contributor to the business, with sig-nificant revenues and profits accru-ing almost from Day One

Admittedly, the first steps in this transition aren’t easy Becom-ing digital requires a new way of thinking Moreover, the exact set

of capabilities needed to get there will vary from company to com-pany Nike Inc.’s direct engagement

of consumers, linked closely to the development of new apparel and fitness-related devices, involves a completely different approach from Aetna Inc.’s rethinking of its patient and customer experiences But there are five basic principles of digitiza-tion that any company can follow to help reimagine its business and drive growth: Empathize with end-users, expand the brand and the value proposition, design for three years out (but build for today), build new structures and teams, and use digital technology to energize your culture

MARKETING, MEDIA & SALES

Don’t Reengineer

Reimagine

To realize the digital potential of your business,

bring the dynamics of a startup to scale.

Empathize with End-Users

To unlock the value enabled by

digital technology, companies need

to focus first on delivering great

ex-periences to customers Don’t just

build connections between

custom-ers and your company Enable them

to engage with one another In the

process, habitually capture insights

about what customers think of your

products and services, what matters

to them, and what consistently

irri-tates and enthralls them Then feed

these insights back into your

inno-vation practices as well as customer

service, marketing, advertising, and

promotions

To see and understand your

customers’ problems, you must be

able to fully empathize with the

end-users of your company’s

sys-tems Develop an ongoing sense

of what your company’s products,

services, and brand look like from

their point of view The word

em-pathy derives from the Greek words

for in and feeling Digital

technolo-gies give companies a way to

empa-thize, or to adopt others’ feelings as

their own They can provide a much

closer connection between you and

your customers than the marketing

methods of the past did When

con-sumers have problems that need to

be solved, or aspirations that your

company might satisfy, you are now

equipped to meet that challenge

proactively

Esurance Inc., an online

insur-No one likes to buy insurance The

design of Esurance’s business and

the technology that enables it are

aimed at mitigating its pain points.

ance company backed by the Allstate Corporation, has taken the idea of customer empathy to heart It uses digital technology to enhance the car insurance experience from quote

to claim, reducing the customer’s stress while saving time and money

No one likes to buy insurance It’s expensive and often seems unneces-sary, and the process of obtaining

it can be thoroughly confusing

Worse still, the moment of truth when it becomes valuable—when customers actually have to make a claim—may be fraught with pain, uncertainty, and the frustration of not knowing how long the repair process will take The design of Es-urance’s business and the technol-ogy that enables it are aimed at miti-gating these pain points

Esurance accomplishes this by increasing transparency and remov-ing confusion and ambiguity The experience begins with getting a quote online in minutes; the com-pany displays its best offer as well

as quotes from leading competitors

Esurance also makes its claims cess user-friendly, with mobile apps that simplify the process and keep customers updated in real time If

pro-an insurpro-ance holder is in a car cident, he or she can file a claim from the scene with a smartphone, capturing the necessary details and uploading photographs of the colli-sion The app also provides recom-mendations for vehicle repair shops

ac-Once the car is in the shop, the app sends customers daily photos of the repair process

Thanks to its end-to-end focus

on the customer experience through digital technology, Esurance is en-joying rapid growth, large gains in customer satisfaction, and improved financial results It is also providing

a learning lab for Allstate, which will apply the insights from Esurance’s experiments as it develops strategy for its core business

Expand the Brand

The second basic principle of tization involves expansion of the brand Companies that are expert at branding don’t simply incorporate

digi-a logo digi-and visudigi-al identity into their physical products They consciously run their business with their brand

in mind They know that every tail, from the design of their head-quarters to their products’ place-ment on a store shelf, helps define the way customers see them That’s equally true of digital capabilities The brand must guide not just the message, but also the ambiance, fea-tures, and emotional impact of your online and mobile touch points

de-So put the meaning and value

of your brand at the center of your digital design In doing this, look across your entire value chain—

from R&D to product design to manufacturing to marketing and sales—for digitally augmented op-portunities to relate the brand and its value proposition to every level

of operations Don’t think narrowly about traditional ways to market and sell products You no longer merely advertise You immerse people in the experiences you create

Consider Nike, long considered among the world’s greatest brands Several years ago, the sportswear

company created a special unit,

Digital Sport, using the company’s

brand and innovation talent to

re-imagine what it could do for its

cus-tomers Out of this came a strong

investment in Nike-branded media,

including sports-oriented videos,

websites, and “zines.” Another key

component was the Nike+ group

of products and services—a digital

ecosystem of apps, sensors, and

re-lated devices that track athletic

per-formance The Fuelband, for

exam-ple, is a wristband that gathers data

from motion detection, enabling

people to maintain records of their

“NikeFuel points,” tracking the

benefits they gain from workouts,

sports, and other physical activity

Millions of consumers have signed

up with Nike+, giving the company

a huge new source of data to mine,

reinforcing its core footwear and

ap-parel businesses, and creating a

sub-stantial new revenue stream through

a variety of new digital products

Design for Three Years Out

The third principle of digitization

involves taking the long view, even

as you build for today You can no

longer succeed with a digital

strat-egy based only on today’s

technol-ogy and competitive environment

Nor is it enough to merely ideate

about future developments

Com-panies must take actions now that

prepare them for the disruptive

op-portunities and evolving platforms

of the next few years What ogies might be available then? How will customers be using digital in their lives? Where will your industry

technol-be, for example, in terms of sive use of data, digital fabrication (parts and devices made on the fly), cloud-based interoperability, or new forms of supply chain coordination?

respon-Do you have the capabilities now to

make use of those technologies in creating new customer experiences?

And what new capabilities will you need once those technologies be-come reality?

3M Company is already swering these questions The com-pany—which makes a wide range

an-of innovative products and als, including tapes and adhesives, electronic devices, medical sup-plies, films and fabrics, cleaning and car-care products, and industrial components—is developing a road map of its future by building the world-class capabilities it will need over the next several years The ef-fort began with a focus on combin-ing content, search optimization, and social media to capture data on consumers’ feelings about 3M prod-ucts The company then developed the analytics needed to make use of that data 3M maintains a Facebook

materi-“do-it-yourself” page, for instance, where woodworking aficionados post photos of the cribs they build for their grandchildren or the hand-made tables they sell on the Web

Contributors are motivated, in some cases, by the chance to promote their own work, accompanied by comments like, “We are staying safe with [3M’s] goggles, gloves, masks, and using lots of sandpaper.”

Based on these kinds of ences with its early adopters, 3M is building out its e-commerce capa-bilities for the future The sales and marketing departments are creat-ing additional content Customer service is using analytics and data

experi-to identify cusexperi-tomer problems and solve them rapidly—for example, telling people how to recycle their Post-It notes (put them out with the office paper pickup; the recycling process removes the glue) And in general, the company is boosting in-novation by ramping up collabora-tion—including collaboration with outsiders

New Structures and Teams

The fourth principle recognizes that becoming digital isn’t just a matter

of rearranging the lines and boxes

on your org chart It involves tering a startup’s way of working through new structures and teams, and changing your incentives, rules, and decision rights accordingly Just

fos-as important fos-as these formal nisms are their informal counter-parts—the personal networks, com-munities of interest, information flows, and behavioral norms—that link the people in your company who can imagine and build new digital capabilities

mecha-In a truly digital enterprise, you will often find that new cross-func-tional, multidisciplinary teams need

to be formed and assigned solely to conceive and build successful digital customer experiences These teams bring together specialists in strategy, R&D, UX design, industrial design,

Millions of consumers have signed

up with Nike+, giving the company

a huge new source of data to mine,

reinforcing its core businesses.

marketing and branding, sales, and

IT to work collaboratively The

di-versity of talent and perspective is

vital when it’s time for the team to

move its digital DNA back to the

main body of the company,

chang-ing the culture from the inside out

Health insurer Aetna recently

created a new business unit called

Healthagen It has operations based

in San Francisco, far from the

company’s headquarters in

Hart-ford, Conn Essentially a startup,

this new group was charged with a

mission: to tackle the

fundamen-tal issues of value and transparency

in healthcare The unit isn’t simply

trying to address customers’ pain

points Instead, its goal is to

empow-er consumempow-ers, improve the quality

of care, and reduce overall costs

Aetna has identified digital

capa-bilities and user experience as game

changers It is investing more than

U$1 billion to acquire and build a

comprehensive collection of health

management and health IT

solu-tions Under one roof, Healthagen

has assembled a multidisciplinary

team of strategists, consumer insight

specialists, digital product

manag-ers, user experience and user

inter-face designers, and IT architects It

is adopting distinctive innovation

methodologies that rapidly bring

new ideas to life and test them with

users and stakeholders

This new group is prototyping

an application for parents of

new-born infants that can help families

bring their babies home as soon as

possible All too often, new parents

don’t feel ready and armed with the

right support to take their infant

home This app lets them leave the

hospital sooner, because it provides

educational content, support, and

live video chat with nurses when

needed

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Energize the Culture

Tackling the culture is the final

digitization principle The toughest

part of becoming digital is creating

the cultural norms and ways of

do-ing thdo-ings that enable sustainable

change, especially at very large

com-panies These changes are likely to

be extreme Thinking and behaving

with an orientation toward

custom-ers represents a major leap from the

product- and channel-centric

ap-proach on which most corporate

cultures have been built

The sporting-goods retailer

Sports Authority took on this task in

2010 by redesigning the branded

ex-perience from the consumer’s point

of view and building the necessary

digital “omni-channel” capabilities

The new behavior that went along

with these capabilities then sparked

a culture change Rather than

sim-ply letting its e-commerce efforts

stand alone, the company focused

on maximizing the entire business

through digital

capabilities—re-imagining its advertising, shopping,

and delivery experiences It was

criti-cal to use digital capabilities to drive

store traffic, not just online

rev-enues Sports Authority teamed up

with Google to create virtual online

inventories for customers of the

mer-chandise in each store; it optimized

store websites to gain better search

response; and it experimented with

digital partners such as Shopkick (a

mobile app that provides rewards

and offers when customers walk into retail stores) and Foursquare (a location-based social networking app that helps people engage with nearby retailers) The company also deployed additional omni-channel capabilities in many stores, includ-ing ship-from-store systems (which turn stores into local distribution centers for pickup and delivery)

One key to changing Sports Authority’s culture was allowing customers to buy on any channel they preferred—whether digital or in-store—and then compensating store managers for all e-commerce

sales in the zip codes of their trade area At the same time, the retail chain raised its revenue targets, and required units to report on the direct and indirect sales impact of every channel in weekly business reviews

The new approach proved that

a vibrant digital presence could vitalize all aspects of a company’s business, including its non-digital channels It produced a shared sense

re-of purpose among store-based and online staff, a willingness to experi-ment in order to boost sales across all channels, and a “fail fast” culture that is eager to learn from risks and experiments

The ultimate goal of ing your business is to transform it into a more customer-centric enter-prise This is an exhilarating process for most companies, once it begins

reimagin-in earnest It brreimagin-ings together

busi-ness and functional leaders, ployees and customers, global and local managers, and the seemingly disparate practices of analytics and creative ideation Companies that move from reengineering to reimag-ining will be in a far better position

em-to benefit from the new world of digitization +

Simon MacGibbon

simon.macgibbon@boozdigital.com

is a senior director with Booz Digital in San Francisco He helps companies design and realize transformational customer experi- ences through digital capabilities and data analytics

Sean Collins

sean.collins@boozdigital.com

is a senior director with Booz Digital in Los Angeles He helps CXOs define and execute digital growth strategies

Also contributing to this article was Booz & Company partner and Booz Digital senior director Matthew Egol

Booz Digital is a full-service team of strategists, designers, and technologists focused on the relationship among ideas, digital platforms, and transformational businesses.

One key to changing the culture at

Sports Authority was compensating

store managers for all e-commerce

sales in the zip codes of their area.