Marina Gorbis's Blog, page 1315

Why “Network More” Is Bad Advice for Women

When well-meaning people give advice to young women about how to get ahead, networking is almost always at the top of the list. Make connections; get outside your comfort zone; don’t just build relationships, focus on your business. Find a mentor — no, a sponsor! — and if your company doesn’t already have a women’s network, start one.

A new study suggests that perhaps this network-your-way-to-the-top advice is, for women, a tad overblown. A working paper by Lily Fang, an associate professor of finance at INSEAD, and Sterling Huang, a Ph.D. candidate at the school, focuses on 1,815 Wall Street analysts, their school ties, and their forecasts and recommendations between 1993 and 2009. Fang and Huang found that male and female analysts have an equal number of school-based connections — and in fact, in some cases the women were even slightly more connected to the firms they were covering – but that the men seem to get a lot more help from their contacts.  When it came to projecting the performance of the firms they were connected to, the male analysts’ forecasts were slightly more accurate, and their buy/sell recommendations were more likely to be followed.

As Fang wrote for INSEAD Knowledge:

We find that while connections improve forecast accuracy for analysts across the board, the effect among men is significantly higher. For example, while connections lead to a 2 percent improvement in accuracy rankings in general, among men, there is a further improvement of about 1.8 percent. The effect of connections is even greater in… how the market reacts to their buy and sell calls. Connections improve male analysts’ recommendation impact by about 1.2 percent, but not at all for female analysts.

The mens’ connections also made them more likely to be recognized by Institutional Investor, a major coup — analysts listed by the magazine tend to earn three times more than other analysts. The women’s connections had no such impact.

These discrepancies began as soon as the analysts were hired, suggesting that men and women are set on different trajectories at the very outset of their careers, by factors outside of their control. And Fang and Huang also found that, because of the greater impact of the men’s connections, male analysts were about 1% more accurate in their forecasts overall. (I’m drawing a causal inference here because the difference between connected and unconnected analysts was bigger than the difference between men and women generally. Previous studies have shown that once you factor in transaction costs — men trade more frequently — male and female investors have about equal returns.)

Fang and Huang found one set of connections that did prove helpful to female analysts: connections with executive women. A female analyst with a tie to a female executive at a firm she was covering saw her accuracy rise by 2.5%, as opposed to the 2% improvement they found for any and all connections. But this turns out to be a double-edged sword as well. Male analysts with a tie to a male executive saw their own accuracy rise by 4.7%, suggesting that men are much more willing to help other men. “The value of the ‘old boys club’ is hard to refute in our data,” Fang writes.

She and her co-author also found that 35% of the women in their sample had attended an Ivy League school as opposed to only 25% of the men. This could suggest that women need to have more advantages to even get into finance in the first place. (Even in 1993, at the very beginning of their sample, women were more likely to have an Ivy League degree. In 1993, 42% of female analysts had gone to an Ivy, compared with 32% of the men.)

While Fang and Huang’s study is limited to the investment industry, other researchers have found similar effects elsewhere. INSEAD professor Herminia Ibarra found similar effects in the advertising industry 23 years ago in a study conducted while she was at Harvard.

This is also not the first study to show that there are aspects of the standard (eg, male) playbook that don’t seem to work for women. As Sarah Dillard and Vanessa Lipschitz noted in their HBR article, “Research: How Female CEOs Actually Get to the Top” there’s a now-familiar pattern taught to ambitious young people:

Ambitious young women hoping to run a major business someday are often advised to take a particular career path: get an undergraduate degree from the most prestigious college you can, an MBA from a selective business school, then land a job at a top consulting firm or investment bank. From there, move between companies as you hopscotch your way into bigger roles and more responsibility.

However, their research found this story is basically a fiction. It did not apply to the 24 women who became Fortune 500 CEOs. Rather, those women were more likely to have spent long periods of time at a single company.

The median long stint for these women CEOs is 23 years spent at a single company in one stretch before becoming the CEO. To understand whether this was the norm, we pulled a random sample of their male Fortune 500 CEO counterparts. For the men in the sample, the median long stint is 15 years. This means that for women, the long climb is over 50% longer than for their male peers. Moreover, 71% of the female CEOs were promoted as long-term insiders versus only 48% of the male CEOs. This doesn’t leave a lot of time for hopscotch early in women’s careers.

And while having an MBA was hardly a prerequisite for either the men or the women, women were more likely than men to have one: 25% of the women and 16% of the men held an MBA from a top-ten business school. Just as in the Fang-Huang study, the women who got ahead were more credentialed than their male counterparts. This is consistent with other research that in order to succeed, women have to work harder to prove themselves.

Perhaps most famously, the body of research around gender and negotiation also suggests that what works for men does not work for women — and in fact may even backfire. Most people are by now familiar with the research that showed women are much less likely to ask for raises than are men. But many are still unfamiliar with the subsequent research that shows why: when women do ask for more, they’re penalized for it. Simply asking for more, like a man would, is simply not a good strategy for a woman seeking to increase her earning power.

Even women’s relative lack of confidence has been lambasted. Fake it ’til you make it, ladies! is the rallying cry. But again, an oft-overlooked body of research suggests that women have, in fact, a more accurate view of our abilities than men do, and that overconfidence is much more of a problem for men than underconfidence is for women.

To me, the upshot of all of this research is increasingly clear: we need to stop telling women to follow a male playbook. It doesn’t work for women. And I would argue that it doesn’t work that well for companies, either. Raises should go to the people who bring their firms the most value — not those who are simply better at, and less penalized for, asking for them. Promotions ought to be handed out according to who is the smartest and most capable, not according to who appears the most confident. And although there are benefits to social capital, as Fang and Huang’s study makes clear, rewarding the people with the chummiest network simply creates a self-fulfilling cycle.

Consider that in Fang and Huang’s study, they did not find that the men were more likely to be promoted than the women. No — only that men were more likely to be promoted on the basis of social capital, while women were more likely to be recognized for “documentable and measurable competence.” Promoting someone based on measurable competence! What a wild idea. We should try it sometime.

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You Have to Be Fast to Be Seen as a Great Leader

It’s obvious that business is moving faster and faster and that to keep up, leaders at all levels need to know how to pick up the pace.

That’s easy to say. But is it so? Is there a correlation between speed and perceived leadership effectiveness?

In a word, “yes.”

We recently analyzed 360 feedback evaluations on more than 50,000 leaders to assess the impact of speed on their colleagues’ impression of each executive’s overall leadership effectiveness. For this purpose, we created a “speed index” that measured speed in three simple ways: how well a leader can spot problems or trends early, can respond to problems quickly, and can swiftly make needed changes. (If you would like to evaluate your own pace and see how you compare, take our Pace Assessment by clicking here.)

We then looked to see how high scores on the speed index correlated to overall leadership effectiveness ratings by focusing on the exceptional leaders in the pool (those rated in the top 10% in leadership effectiveness by their colleagues).

What we found was that of these 5,711 top leaders, 2% were judged particularly fast but not exceptionally effective (that’s about 114 of them);  3% (some 170) were judged to be highly effective (that is, people trusted them to do the right thing) but not particularly fast. And fully 95% (that’s more than 5,400 of them) were judged both particularly effective and particularly quick. That is, being good is only marginally better than being quick, but the fact is both are necessary, and neither alone is sufficient, to be perceived as an exceptional leader today.

What makes a leader both fast and good? We analyzed our 360-degree feedback data from more than 700,000 colleagues to see what set fast-and-effective leaders apart from those who don’t move fast enough, or who race quickly and stumble.  Here are the top five factors, listed in descending order.

People who work with them trust their ability to use good judgment and make effective decisions. Without trust, colleagues resist moving fast (or at all). And there’s no mystery in how that trust is built: Experienced leaders earn trust through a track record of success built through strong positive relationships and demonstrated expertise. If you are new to a role and your colleagues don’t know you well enough to trust your judgment, you need to build that trust by explaining the analysis you did to make your decision. It’s also wise to share your decision with a person who is trusted by the rest and enlist his or her support.
They make their vision and strategy absolutely clear to their colleagues.  When people can see the context for action, they can more quickly understand and carry out their part in an enterprise.  It’s not hard to move fast when everyone is clear about where you’re going and, equally important, where you’re not going. Conversely, when people can’t see the way ahead, simply put, they don’t rush ahead. That’s why the comfortable speed with which an organization can move is defined by the clarity of the vision.
They demonstrate personal courage. Acting with speed often feels risky. The person looking to avoid added personal exposure will be inclined to move slowly. In general, people are more comfortable working at a steady pace. It takes a great deal of courage to move faster and ask others to move fast with you.
They assemble world-class expertise and knowledge. When leaders lack expertise they have to stop and do their homework. Lacking knowledge leaves you in uncharted waters where your inclination is to be slow and careful. Conversely, having or accessing world-class expertise allows you to work faster and make better decisions. In our experience, we’ve noticed, though, that personal pride sometimes hinders people from seeking the expertise that will speed up a process, and in a misguided application of self-reliance, they chose to solve the problem themselves.
They set stretch goals.  Easy goals allow people time to reach them in a leisurely way.  Stretch goals reinforce the need for speed. They encourage people to get on with their work rather than ponder.

It’s interesting how often our pace affects our attitude. Let’s face it —  slow is often boring. Think about people you have worked with who keep things going at a fast clip versus those who move ponderously as they ensure that everything is completed.  Certainly, speed is no substitute for judgment. And, yes, too much speed can leave people feeling rushed and frazzled. But if your company’s energy is lagging, maybe it’s time to consider upping the pace.

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How Singapore Became an Entrepreneurial Hub

“You are crazy.”

That was the predominant sentiment I heard a little more than five years ago when I told U.S.-based venture capitalists about my plans to move my family out to Singapore to oversee Innosight’s nascent investment and incubation arm. Since I had never done venture investing before, I was trying to get advice from as many people as I could. The conversations all went pretty much the same.

“Why Singapore? You’ll never find any interesting deals there.”

Sure, I would respond. At the time Singapore didn’t have a sizzling start-up scene. But the conditions seemed to be ripe for one to develop. Like Silicon Valley, Singapore has strong research institutions and limited enforcement of noncompete clauses, a condition that academics now suggest can be a major driver of innovation. Like Israel, Singapore is small, with limited natural resources, which means economic growth requires innovative macroeconomic approaches. Both Singapore and Israel have liberal immigration policies for skilled workers. Both also have mandatory military conscription for males (Israel also has mandatory conscription for females), and as Dan Senor and Saul Singer argue in Start-up Nation, the Israeli military has been a breeding ground of innovation.

“Yes, but Israelis and Americans are innovative by nature. Singaporeans are not,” critics would respond. “Name a Singapore start-up. I can’t think of a single one”

A fair point. If you had asked Singaporeans in 2010 to identify a successful local start-up, they might have paused for a few minutes before mentioning Creative Labs. That company was a pioneer in the audio component market, having entered the MP3 market before Apple. But it was founded in 1981 and hit its revenue peak about a decade ago before delisting from NASDAQ in 2007 and shrinking substantially.

With the cautionary notes in mind, I arrived in Singapore in March 2010. It was indeed challenging in those early days to find good investment propositions. We made a couple, but they were proverbial needles in a haystack of business plans and pitches we sat through that were amateur at best, and outright naïve at worst.

Fast forward to 2015, and you see an island transformed. There are dozens, if not hundreds, of interesting start-ups, many clustered in “Block 71,” a building close to INSEAD, the National University of Singapore, and government-sponsored innovation hubs carrying Star Trek–like names of Fusionoplis and Biopolis. The Economist dubbed Block 71, “the world’s most tightly packed entrepreneurial ecosystem.”

In my first year in Singapore we might hear news about a company landing venture funding every few months, and an exit (cashing out either through an IPO or by selling itself to a larger company) every year. Today, there’s an investment seemingly every week; venture-capital investment in the tech sector increased from less than $30 million in 2011 to more than $1 billion in 2013. And we counted 10 local exits in 2014. Some of those so-called liquidity events are small by global standards, like the $30 million that customer service chat provider Zopim fetched. But others have been larger, such as the $200 million price Japanese e-commerce company Rakuten put on Viki, a video-streaming provider.

The Singapore surge seems particularly surprising given the city-state’s staid reputation and stagnant start-up scene just a few years ago. As governments around the world try to spur entrepreneurialism to drive job creation and economic vibrancy, it’s worth stepping back to consider the three components that in my view have combined together to power the Singapore story.

A hospitable environment. Singapore is regularly ranked as one of the easiest countries in the world in which to do business. There are rules, for sure, but they are clearly laid out and easy to follow. New companies can be set up in hours, if not minutes. Intellectual property is respected, and the rule of law is transparent. Immigration is no less a hot topic in Singapore than other countries, but Singapore makes it easy to get highly educated workers into the country, and has a specific employment pass targeting would-be entrepreneurs. The clean, efficient city has some livability advantages over Shanghai, Manila, Jakarta, or Bangkok.

Mindful of its international reputation among the creative class it’s trying to attract, the government has worked hard to address the old view that there isn’t much to do in “Singa-bore” with two casinos, a Universal Studios, Asia’s largest aquarium, a “botanic garden masquerading as a theme park” called Gardens by the Bay, a 55,000 seat multipurpose stadium, internationally acclaimed restaurants, and an efficient, modern airport that makes leaving the country a breeze.

Serious government skin in the game. Entrepreneurs have long been able to tap into a range of grants and related programs to help with early development activities. In 2008, under the National Framework for Innovation and Enterprise (NFIE), the government launched the Early Stage Venture Investment Fund program. The initiative, which drew inspiration from a joint program between Israel and the United States called the Binational Industrial Research and Development Foundation, allowed five venture capital companies to receive matching funds from the government. One year later, we partnered with the government to prototype a new program under the NFIE. Ultimately dubbed the Technology Incubation Scheme (in Singapore, a scheme is a good thing), the program helped bring a flood of diverse investors into the country by offering to put up 85% of the capital in a start-up when investors put in 15%.

This level of support was critical for us. We had long been interested in venture investing. But as first-time investors without a deep track record in a country thousands of miles away from our U.S. headquarters, it was unlikely we (or any similar outside investor group) would have been able to develop the financial backing required to build a robust portfolio without government support. It is not a free lunch, however. We and other investors in the ESVF and TIS programs have had to make real commitments, as the government doesn’t cover the salary of the team (and since it typically takes years for investments in start-ups to bear fruit that’s important) or other overhead, and of course the investors have to pony up the capital to activate the government matching programs. It is hard to create an ecosystem overnight, but consistent, concerted efforts by the government have given a serious boost to start-ups in Singapore.

Wide use of soft power to address hidden barriers to entrepreneurialism. There is a misbegotten notion that entrepreneurs take risks because they don’t have much to lose. In fact, research shows that the number one factor predicting whether someone will become an entrepreneur is whether the person has received an inheritance or a gift. Singapore’s phenomenal development over the past 50 years means many of its citizens are sufficiently well off to take the entrepreneurial plunge without truly risking everything.

But doing something as uncertain as starting a business when you could go to work for a big bank or, even better, the government, was countercultural for the best and brightest a decade ago. So over the past few years political leaders have relentlessly talked up the importance of entrepreneurialism (see, for example, this Facebook post from Prime Minister Lee Hsien Loong); state-sponsored universities have aggressively pushed innovation (the National University of Singapore has a program to send students overseas to get firsthand experience in other entrepreneurial hubs); and the state-owned television company MediaCorp (full disclosure, I sit on its board) has run television programs celebrating entrepreneurialism.

Anafore, a company that we invested in two years ago, shows how times have changed. The company’s software-as-a-service offering, called ReferralCandy, helps small businesses organize customer referral campaigns. The company’s co-founders, Dinesh Raju and Zach Cheng, are both Singaporean whose academic track record scored them prestigious government scholarships to study at a top overseas university, Carnegie Mellon. In a previous generation, both would have likely followed a lucrative career in the government or perhaps even stayed overseas. Today, their company lives in Block 71 and is growing substantially.

These three ingredients create a reinforcing cycle, as entrepreneurs who enjoy success find they want to do it again. For example, in 2010 Melvin Yuan co-founded YFind Technologies, a company with a clever technology that could precisely pinpoint people’s location inside a building by tracking their cellphones’ interactions with WiFi access points. That capability could be the backbone of very valuable business intelligence services such as retail “heat mapping,” showing sophisticated analysis of in-store traffic. We invested in the company in 2012 through our fund, with the government contributing 85%, and U.S.-based WiFi service provider Ruckus Wireless snatched it up in 2013. Yuan did well in the transaction, and was bitten by the entrepreneurial bug. He’s gone on to found another start-up that’s developing a disruptive way to match people seeking original art with the vast trove of untapped artistic talent all over the world.

Some successful Singaporean entrepreneurs are beginning to invest in the next generation of  start-ups. For example, Hian Goh, who in 2005 cofounded the Asian Food Channel,  in 2011 invested in Chope, a regional restaurant booking portal that our investment arm backed. And after Scripps Networks Interactive acquired the Asian Food Channel in 2013, Goh launched his own venture capital firm to invest in regional start-ups.

Global investors are increasingly taking notice. Dave McClure’s 500 Startups recently invested in a local real estate portal. Established global venture firms like Sequoia and DFJ are stepping up local activities (in mid-February the “D” in DFJ — Tim Draper — said he views Singapore as a great environment for start-ups). In 2014 the government announced a new batch of participants in the ESVF program, including old names like Walden International (which was part of the 2008 batch) and new ones like Monk’s Hill Ventures. Many of these investors view Singapore as a launching pad to regional emerging markets like Indonesia, the Philippines, and Vietnam. More broadly, of the 156 software companies founded since 2003 that are now worth more than $1 billion, close to a third are based in Asia.

There is beginning to be a critical mass of companies creating a self-sustaining innovation hub in Singapore. No local start-up has broken through as a major international player, but I’m quite convinced that will happen in the next five years. Maybe it will be RedMart, which could expand from its base of on-line grocery delivery in Singapore to address the complex challenge of food retailing in markets like Indonesia. Maybe it will be Anchanto (one of our companies), which is working on a “logistics as a service” platform that allows any small business to master the intricacies of e-commerce. Or perhaps it will be Clearbridge Biomedics, which has a disruptive way detect cancer via a “liquid biopsy”; Garena, whose popular gaming platform has attracted more than 100 million members (and driven its valuation above the magical $1 billion mark); Reebonz, whose on-line luxury portal is booming across Southeast Asia; or one of dozens of other interesting local start-ups.

No place is perfect. While there is substantial seed capital to get a business started (arguably too much), plenty of investors primed to write huge checks to drive expansion, and significantly more entrepreneurs in Singapore than there were only a few years ago, building a team to start a new company remains challenging. And the so-called “Valley of Death” where a company has to move from a promising smart to real viability remains very real.

But if the next five years feature anything close to the development of the past five, I expect a lot fewer questions about why Singapore makes sense for entrepreneurs.

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Gamification Can Help People Actually Use Analytics Tools

If you’re trying to use advanced analytics to improve your organization’s decisions, join the club. Most of the companies I talk to are embarked on just such a quest. But it’s a rocky one.

The technological challenge is hard enough. You have to identify the right data and develop useful tools, such as predictive algorithms. But then comes an even tougher task: getting people to actually use the new tools.

Why is the people factor so important? It’s easy enough to automate routine decisions, such as identifying likely buyers for a product upgrade. But many decisions in today’s knowledge economy depend on expertise and experience. Think of bankers deciding on business loans, product developers determining tradeoffs between features and cost, or B2B sales reps figuring out which prospects to target. Analytics can help codify the logic of the best decision makers, but it can’t replace human judgment.

Moreover, the tools developed for contexts like these can be complex, often involving a steep learning curve. If decision makers aren’t willing to experiment with the tool and improve their outcomes over time, then your investment in the technology is wasted.

Right here, some say, is where a company could use gamification to encourage people to invest the time and learn how to use the new tools.

Gamification means using motivational techniques like those the videogame industry has put to such effective use. Anyone with teenagers in the house knows that they will spend long hours on their own, trying to get to the next level of their favorite game. Motivation experts like Dan Pink would say that the games are tapping into some basic human drives: for autonomy (you control your own pace), for mastery (you get better over time), and for a sense of purpose (you’re aiming at a well-defined goal). The social factor is important, too. Gamers love to match their skills against others and to compare notes on how they’re doing.

Can these motivational concepts and techniques encourage decision makers to use new analytical tools and collaborate with each other — both to improve the tools and to better their ability to make more informed decisions? We don’t yet have much evidence to answer that question. But early signs indicate that it might work.

A large property and casualty insurance company, for instance, invested several million dollars to create a new analytical tool for underwriting decisions. The tool allows underwriters to run a prospective insured’s properties (including office buildings, warehouses, and manufacturing plants in many different countries) through sophisticated risk models. The models help assess the potential for losses due to natural catastrophes such as earthquake or flood. They produce complex spreadsheets that list the properties, score the various risks, and flag instances where underwriters might want to seek additional information.

A year after introducing the tool, the company’s chief underwriting officer suspected that not everyone was using it. She wondered whether all the underwriters knew how to interpret the results and whether they bothered to seek additional information. Her solution was to engage them in a game. The company gave the tool’s output from five different example companies plus some additional information to four teams of underwriters. Team members worked together to assess the risk. They were told that more information on certain accounts was available, but they had to recognize when this was the case and specifically ask for it. Meanwhile, members of the team that had developed the tool listened in on participants’ deliberations.

In the end, the teams’ decisions were rated by their peers and by independent judges. Teams that not only interpreted the results correctly but also identified a need for additional information and incorporated it into their analyses earned extra points. To me, the whole exercise felt much like the teenagers’ collaborative learning of online games. It had similar elements of engagement, excitement, and the thrill of “mastery” as team members worked together to earn points in the game.

Of course, not every approach to gamification is likely to work. Employees may feel that the typical game’s points and badges trivialize their work — or, worse, that the company is somehow creating a Big Brother system that expects everyone to act like clones. One trick is to pilot a game with a small, diverse set of users and involve them in co-creating the game’s rules and rewards. These “power users” can help others as the game is rolled out to the rest of the team.

Done right, gamification seems to hold a lot of potential. But the proof will lie in experience. Can models and decision support tools be rolled out using a gamification format with rewards and explicit levels of “mastery”? I haven’t seen it yet, but I’d love to hear from others about successful (or not so successful) examples.

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How to Coach, According to 5 Great Sports Coaches

Business is not a sport. But great coaching is just as important to success in the office as on the field. Over the years, HBR has interviewed some of the world’s top athletic coaches. We mined our archives for a few of their best insights that apply to employees and players alike.

Under manager Joe Girardi, the New York Yankees baseball team won their 27th World Series championship title. Girardi has won more than 500 games as a manager. He told us how he coaches players on when to listen to their guts and abandon the plan: “If you think too much, you fail, because the game happens too quickly. The key is preparation… The data has to become instinctual. You can’t think about it in the middle of a pitch.”

And it’s the same whether you are managing rookies or stars. In either case, he says, “you have to lead by example. You ask your players to be prepared mentally and physically, so you have to be prepared. Beyond that, you’ve got to adapt to the type of players you have. If you’ve got a home-run-hitting team, you can’t make them all base stealers, and vice versa.”

Adapting to your players was also a theme for Bela Karolyi, the gymnastics coach whose gymnasts have earned, among other honors, nine Olympic gold medals. “You have to take them individually,” he told us, “Find out what part of their mind is clicking, what part of their character is responding to you, and what’s the one thing you have to avoid. Nadia Comaneci was like steel. I never had to say, ‘Don’t be chicken,’ because she was never chicken. She was like a racehorse waiting to run. Now, Kerri Strug — she was the most timid little girl of my life, so she needed gradual reinforcement of self-confidence. In a competition I had to take away the stress, the paralyzing thoughts. So it was: ‘I haven’t seen this leotard. It looks good on you. Where did you buy it?’ Then, in a casual way: ‘OK, by the way, it’s your turn. You’re ready? OK, go ahead.’ Each time, you have a totally different approach.”

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And Karolyi also tailored his approach to the situation. “Criticism and encouragement have to be alternated and used at the right time and in the right situation. If there is ignorance or laziness or lack of interest, then make the critical remarks. If criticism isn’t working, you have a much more concrete discussion about the reason we’re competing.”

Sir Alex Ferguson, the legendary coach of the Manchester United football — or as we call it in America, soccer — team, sat down with Harvard Business School professor Anita Elberse to reveal his coaching secrets. And he, too, had some considered thoughts on criticism: “Few people get better with criticism; most respond to encouragement instead. So I tried to give encouragement when I could. For a player — for any human being — there is nothing better than hearing ‘Well done.’ Those are the two best words ever invented. You don’t need to use superlatives.”

But if someone has failed to meet expectations, don’t wait to correct them. “I would do it right after the game. I wouldn’t wait until Monday. I’d do it, and it was finished. I was on to the next match.”

For Ferguson, one of the keys was closely observing his players. “What you can pick up by watching is incredibly valuable… Seeing a change in a player’s habits or a sudden dip in his enthusiasm allowed me to go further with him: Is it family problems? Is he struggling financially? Is he tired? What kind of mood is he in? Sometimes I could even tell that a player was injured when he thought he was fine. I don’t think many people fully understand the value of observing. I came to see observation as a critical part of my management skills. The ability to see things is key — or, more specifically, the ability to see things you don’t expect to see.”

Ferguson doesn’t buy the idea that coaching stars takes special finesse. After all, the reason they’re stars is that they already work terrifically hard. “Superstars with egos are not the problem some people may think. They need to be winners, because that massages their egos, so they will do what it takes to win.”

In 2000, Bill Parcells, a football (American football, this time) coach famous for turning around underperforming teams, wrote about his approach, which is slightly blunter than Ferguson’s.

“You have to be honest with people — brutally honest,” he wrote. “You have to tell them the truth about their performance, you have to tell it to them face-to-face, and you have to tell it to them over and over again. Sometimes the truth will be painful, and sometimes saying it will lead to an uncomfortable confrontation. So be it. The only way to change people is to tell them in the clearest possible terms what they’re doing wrong. And if they don’t want to listen, they don’t belong on the team.”

And don’t be afraid to turn up the heat. “If you want to get the most out of people, you have to apply pressure — that’s the only thing that any of us really responds to.”

Yes, he concedes, this can create conflict. But for him, that’s not a problem. “I’ve actually come to relish confrontation, not because it makes me feel powerful but because it provides an opportunity to get things straight with people… In the end, I’ve found, people like the direct approach.”

“I’ve had many players come back to me ten years later and thank me for putting the pressure on them. They say what they remember most about me is one line: ‘I think you’re better than you think you are.’ In fact, they say they use the same line with their kids when they’re not doing so well in school or are having other problems. My father used that expression with me, and there’s a lot of truth to it — people can do more than they think they can.”

Still, having turned three underperforming teams around, Parcells doesn’t believe in just shouting his players into winning. Instead, “set small goals and hit them.”

“When you set small, visible goals, and people achieve them, they start to get it into their heads that they can succeed. They break the habit of losing and begin to get into the habit of winning. It’s extremely satisfying to see that kind of shift take place.”

Finally, we also sat down with Bill Walsh, the businesslike coach of three Super Bowl-winning 1980s San Francisco 49ers football team, in 1993. Long before the era of sophisticated player analytics and probabilistic outcome modeling, Walsh was known as a cerebral and strategic coach in an era when many coaches were content to out-macho each other.

“You are actually striving for two things at the same time: an organization where people understand the importance of their jobs and are committed to living within the confines of those jobs and to taking direction,” he told us, “ And an organization where people feel creative and adaptive and are willing to change their minds without feeling threatened. It is a tough combination to achieve. But it’s also the ultimate in management.”

His two most famous quarterbacks, Joe Montana and Steve Young, came from opposite ends of this spectrum. And like both Karolyi and Girardi, he adapted his style to what the players needed.

“Early on, we had to encourage Joe to trust his spontaneous instincts. We were careful not to criticize him when he used his creative abilities and things did not work out. Instead, we nurtured him to use his instincts. We had to allow him to be wrong on occasion and to live with it. In the case of quarterback Steve Young, it was almost the opposite. We had to work with him to be disciplined enough to live within the strict framework of what we were doing. Steve is a great spontaneous athlete and a terrific runner. But we found that we had to reduce the number of times he would use his instincts and increase his willingness to stay within the confines of the team concept.”

And unlike Parcells, Walsh expressed caution about being too direct. “It sounds just great to say that you are going to be honest and direct. But insensitive, hammer-like shots that are delivered in the name of honesty and openness usually do the greatest damage to people. The damage ends up reverberating throughout the entire organization. Over time, people will lose the bonding factor they need for success. And over time, that directness will isolate you from the people with whom you work.”

And Walsh agrees with Ferguson that the stars aren’t where you need to focus your energy. “Superstars will usually take care of themselves,” said Walsh. “Anybody can coach them.”

“The difference between winning and losing is the bottom 25% of your people,” explained Walsh. “Most coaches can deliver the top 75%. But the last 25% only blossoms in the details, in the orchestration of skills, in the way you prepare.”

The interviews are well worth reading in full, but a few key lessons stand out:

Be prepared and expect the same of your team.
Adjust your style to each of your employees’ needs. What works for one person could be detrimental to another. Figure out the best approach for each by watching your employees in action.
Choose encouragement over criticism; but when you must criticize, give feedback as soon after the event as possible. Be honest but compassionate, then move on.
Have high expectations. Believe in your team.
Don’t ignore or sideline underperformers — your team is only as good as your weakest member. Instead, help them improve.
Make progress tangible. Set clear goals and milestones, and celebrate when you hit them.



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Why the Print Catalog Is Back in Style

J. C. Penney’s recent announcement that it is resurrecting its print catalog reflects a trend of retailers returning to the print medium as an important sales and marketing tool.

While Bloomingdale’s and Saks Fifth Avenue have been mailing catalogs for years, now specialty retailers are picking up the tactic.  Some, like Anthropologie, are launching new catalogs, while J.Crew and Restoration Hardware have significantly upgraded their catalogs in the past couple of years.  Even digital retailers such as Bonobos, the menswear retailer, and Birchbox, the beauty subscription service, have started mailing catalogs.  According to the Direct Marketing Association (DMA), catalog mailings grew in 2013 to 11.9 billion.

The last time companies showed so much interest in catalogs was in 2007, when catalog mailings peaked.  In that year alone, a DMA study showed 59% of multichannel marketers had increased their catalog circulation from the year before.  J.C. Penney’s catalog distribution had swelled to 70 different mailings, in addition to its annual 1,000+ page “Big Book.”

But then the Great Recession hit, and retailers looking to trim their expenditures cut catalog budgets.  With the concurrent rise in online sales and marketing, print media seemed like a waste.  Although some holdouts remained (notably, Patagonia and Brookstone), catalog circulation continued to decline for the next several years.  According to the DMA, in 2012 mailings dropped to its lowest level since it began collecting annual data in 2001.

The recent resurgence in the popularity of catalogs raises questions about their value and long-term viability.  Is the latest rebirth of the catalog merely a reflection of the Great Recession’s conclusion? Will they once again fall out of fashion at the first sign of softness in the market?

Given the new dynamics of multichannel marketing and commerce, as well as the new targeting and measurement capabilities of catalog marketing, I think catalogs are here to stay this time.

Multi-channel shopping and buying is on the rise, and retailers know that customers who use more than one of their channels are usually the most valuable.  In fact, Nordstrom reports that customers who have a multi-channel relationship with the brand spend four times as much as those who do not.  Bonobos shares similar results, with Craig Elbert, vice president of marketing, reporting that 20% of the website’s first-time customers are placing their orders after having received a catalog and are spending one and a half times as much as new shoppers who didn’t receive a catalog first.

Catalogs are also uniquely designed to help marketing departments fulfill their objectives.  Marketers are increasingly challenged to produce a specific return on investment for their efforts.  The effect of a broadcast spot or social media campaign on sales may be hard to pin down, but catalogs — with their definitive mail dates and customer and source codes — are easier to track.   Targeting with catalogs is also much easier now, thanks to huge industry databases containing all sorts of information on millions of households. And thanks to online purchasing, many retailers have amassed their own customer databases that can be synced up with them.  This combination gets the right catalogs into the right hands.

What’s more, new production and printing capabilities in print media have taken the cost and complexity out of versioning — the industry term for tailoring different versions of a catalog to different customer segments.  Outdoor and apparel retailer L.L.Bean says it is experimenting with the page count of the catalogs it sends to regular website shoppers.  Steve Fuller, chief marketing officer, explains that instead of sending every customer his brand’s largest book, he looks for frequent website visitors and asks, “Can I only send her 50 pages, or 20, as a reminder of, ‘Oh, I’ve got to go to the website’?”

Retailers have also discovered that catalogs can be used for high quality content marketing. High-touch print pieces filled with stories, fashion show images, profiles of celebrity endorsers and designers, and room layouts have proven to be excellent ways to convey a brand ethos and express a brand personality.  For instance, Williams Sonoma has started including recipes in its catalogs, next to the products consumers need to cook them. And Restoration Hardware has elevated brand-building through catalogs to an art form.  Its 2014 annual catalog was actually comprised of up to 13 “sourcebooks” with more than 3,300 pages of luxurious photography, profiles of designers and craftsmen, inspirational stories — and yes, products for sale.  The extravagant catalog is part of the company’s effort of “becoming a brand worthy of loving,” as chairman and CEO Gary Friedman explains.  ”We believe what we are doing is moving beyond an intellectual connection to an emotional one. We are beginning to express those things we deeply believe in a way you can see it.”

The need to engage customers at this higher level is unlikely to go away even if the economy takes another turn downward.  In fact, as more products become more similar and as the Internet continues to provide increasing access to more products, print catalogs and their content will grow as means to differentiate brands and sustain existing customer relationships.  Great brands integrate catalogs with email marketing, social media, and other tactics into a distinctive, memorable, and valuable brand experience for their customers.

Catalogs may seem old school, but their increased capabilities and the brand-building potential suggest they’ll remain a staple in retailers’ toolboxes – and consumers’ mailboxes.

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Can Walmart Get Us to Buy Sustainable Products?

We all want to buy the best products we can find and afford. But what does “best” actually mean? The ones that offer the best bang for the buck, last the longest, or give us the most pride of ownership? How about a product that minimizes its environmental impacts or tries to make the world a better place? Identifying the companies that make these more “sustainable” products has been nearly impossible… until now.

On Tuesday, the world’s largest retailer took a major and important step toward helping all of us shop smarter. Walmart’s ecommerce site is now labeling 3,000 products, made by more than 100 companies, with a badge that reads “Made by a Sustainability Leader.” For the first time, a major retailer is giving prominent shelf space — albeit virtual — to companies operating in a better way.

The story of how this badge came to be, and the information backing it up, requires some background. In 2009, Walmart was one of several companies that provided seed funding to start The Sustainability Consortium (TSC), jointly run by the University of Arkansas and Arizona State University. TSC has evolved into a collaboration of more than 100 of the world’s largest retailers, consumer product companies, and NGO and academic partners. The corporate members include Coca-Cola, PepsiCo, P&G, J&J, Kellogg’s, L’Oreal, and Unilever.

TSC has been plugging along, doing the hard work of figuring out what makes certain products more sustainable than others. The organization now has guidelines and data on over 100 product categories from bread, books, and computers to clothing, TVs, and toys.

In essence, TSC is a data amalgamator, gathering the best peer-reviewed science on the lifecycle impacts and “material” environmental and social issues for a given product category. The group identifies the “hot spots” in the value chain that create the most risk and footprint. So for example, in the case of computers, key issues might be how much energy it consumes during use, or the inclusion of metals in the design that come from controversial “conflict minerals” in the supply chain. For other product categories, the largest issues may be things like overall carbon footprint, water use, resource depletion, or worker health and safety.

TSC boils the analysis down to about 10 to 15 questions that manufacturers and consumer products companies can answer, which generates a score for each company. The scores are unique for each category, so a company like Kimberly-Clark could have a different score in diapers (Huggies) than in “household papers” (Scott). Using this data, Walmart is awarding the badge to companies in each category that either rank highest or score above 80 (out of 100).

Of course, with any effort of this scale, there are some caveats and issues to work out.

First, the data and science on the most material issues for a product are evolving. But we have solid information on many products’ hot spots now. Second, the answers from the suppliers are self-reported, not independently verified. But the highest-ranking sustainability officer at the company has to sign off on the answers. And as one Walmart exec pointed out, “Yes, it’s self-reported, but it’s reporting to Walmart.” Meaning, you’d risk alienating your largest sales channel if you fake it.

And third, being best-in-class is not the same as being sustainable. Rob Kaplan, Director of Sustainability at Walmart, gave an example of this important difference using electronics. Computers sold on walmart.com may still have conflict minerals in them, but the TSC questions help identify the brands that are handling the issue the best.

So what does this all mean to the companies that have staked a great deal on their environmental and social efforts? As Unilever’s VP of Sustainable Living, Jonathan Atwood, told me, “the launch of the Walmart Sustainability Leaders Store is a significant moment for the industry and shoppers.  It’s a major signal that embedding sustainability into your business can drive growth and help people make more sustainable choices without making trade-offs between quality, accessibility, and affordability.” [Full disclosure: I sit on Unilever’s sustainability advisory board in the U.S.]

On Atwood’s point about trade-offs, what I think the badge is doing is helping redefine quality to include environmental and social performance. And it’s giving companies the opportunity to better identify which kinds of sustainability offerings really sell. For years, big brands have learned painfully that only a small percentage of people will pay more for “green.” But, years of surveys (see also here and here) indicate that a large portion of us will seek out more environmental and socially-aware products, especially if all else is equal; that is, at the same price and quality, we will take the more sustainable option.

So think about what Walmart can do now. Given that the world of ecommerce is a playground for big data, Walmart will build base of knowledge about how people really shop on sustainability criteria. Will they pay more at times, and for what? Or at the same price, will the products with the badges fly off the virtual shelves?

But here’s the remarkable thing: Walmart plans to share its findings, at least with its big suppliers, and perhaps with all interested parties (I’d love to get my hands on it). And if it works, this kind of data- and science-driven labeling could be seen in physical stores soon. Walmart’s Kaplan points out that the last two specialty stores the company tried, “made in the USA” and “women owned” both started online and moved into the real world.

Let’s not overstate what any of this means for the planet or even for Walmart, a company that has its own significant sustainability challenges around social issues like labor and wages, and is at the center of a consumption-driven model of business that has enormous environmental impacts. That said, helping all of us as consumers understand which companies are managing their environmental and social impacts best is a good thing. We can, and should, talk about consumption over all, but as we will still need stuff like detergent and clothes, we should find the most sustainable options we can – and we should encourage companies, through the power of our dollars, to do much more.

In the end, the success or failure of this initiative will depend on us. After years of guessing, and surveys that show positive eco-intent, we’ll see if we are really willing to put our collective money where our mouths are.

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When Customers Will (Willingly) Pay More for Less

Last week, AT&T launched its GigaPower internet service in and around Kansas City with a curious type of tiered pricing: $70 a month if you let the company track your web browsing — and $99 if you don’t. In effect, AT&T is taking its baseline product – internet service with tracking – and, for an additional $29 a month, removing something.

This is an interesting twist on a standard product marketing strategy known as “versioning.” With versioning, a marketer takes a base product – say a DVD player – and offers the plain vanilla unit for one price, one with bells and whistles for a higher amount, and a stripped down version at a discount. What marketers don’t normally do is strip a product down and raise the price. You can imagine that this could backfire badly if consumers feel they’re being taken for a ride. But done thoughtfully, charging a premium for a product that lacks certain components can deliver value to companies and customers alike. Simply identify an aspect of your base offering that some segment of customers will willingly (“willingly” is key) pay to avoid, and remove it. Let’s call it a “product-minus” strategy.

Decaffeinated coffee is a case in point. The base offering has caffeine — and it’s a key feature for many coffee drinkers. Although it’s not expensive to decaffeinate coffee beans, it does add to the product’s cost. Subtract the caffeine and raise the price enough to preserve your margin but not so much that you piss off customers. Starbucks, for example, sells Pike Place roast whole bean for $11.95 a pound but charges a dollar more for the same product, minus the caffeine.

It’s not hard to think of cases where companies already have a product-minus offering but don’t charge more for it. Fragrance-free versions of “regular” products come to mind. Mennen Speed Stick antiperspirants and deodorants, for example, come in a profusion of scents – Regular, Musk, Irish Spring, Ocean Surf, Icy Blast and more – but the difficult-to-find unscented version is available at the same price as the “regular” and other scented versions.

Likewise, Amtrak, provides a “Quiet Car” on many of its corridor trains. The quiet car offers a library-like haven from the loud conversations, cell-phone calls, and other distractions found on the train’s regular cars. It’s a base offering (standard cars) minus an aspect of that offering – noise. Although Amtrak provides a product-minus service that a subset of passengers clearly values, quiet car seats are priced the same as seats on the other cars.

Removing components of a base offering and upping the price is a model similar to “reverse positioning” described by Harvard Business School’s Youngme Moon. But unlike that model, the product-minus approach  does not introduce new features – it simply subtracts existing ones and leaves it at that. Mennen and Amtrak could probably charge a higher price for their product-minus offerings. The key is to make the value exchange explicit. Consumers will launch a scorched-earth social media attack on any company they think is exploiting them, or they’ll simply defect (remember Netflix’s Qwikster debacle?). A product-minus strategy has to clear a high bar for value because it can so easily look (and actually be) exploitative. Tim Wu, writing in the New Yorker, describes the airlines’ strategy of making the base offering so degraded that customers will pay a fee to escape it. “In order for fees to work,” he writes “there needs be something worth paying to avoid.” The soul-crushing fight for overhead space (now a standard aspect of the base offering) can be removed — for a price. Just check your luggage. But airline customers don’t feel that they’re getting value in this deal. They feel they’re being bilked.

On the flip side, customers will willingly pay for a product-minus offering that they feel is fair and delivers real value. A really good cup of decaf coffee will be worth a few cents more to some customers – particularly if the supplier emphasizes the care and costs that go into the process. Making scarce scent-free Speed Stick easier to find, and highlighting the absence of potentially irritating additives, could justify a premium. And a quiet car whose norms are vigorously enforced by the train crew is surely worth a few bucks. Allow customers to reserve quiet-car seats and the value would climb further.

How AT&T customers respond to its pricey tracking opt-out policy is an experiment in progress. Since the company rolled out a similar plan in Austin a year ago most people choose the cheaper service says a company spokesperson, giving up privacy in order to save money. If consumers feel that’s a fair deal, it could work. But if they come to feel that AT&T shouldn’t be spying on them in the first place, and resent paying extra for their privacy, the company stands to lose more than a little revenue.

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Navigating the Transition from Friend to Boss

Guy walks into a bar.

Bartender notices how sad he looks and asks, “You OK?”

“I just lost my best friend,” says the guy.

“How’d it happen?”

“I became his boss.”

We all need friends at work. Looking for advice on a project? Want to celebrate a major client win or milestone? Need to vent about how demanding, controlling, unreasonable, ignorant, awful, and stupid the boss is? That’s what friends are for.

And there are proven benefits to such relationships. Research from Gallup has shown that people who have best friends at work are more engaged, and that their organizations show higher profitability and customer loyalty than those in which close friendships between colleagues are less common. Psychologist Abraham Maslow argued 60 years ago that a sense of belonging is one of the most basic human needs, right after food, water and safety. I think it’s safe to say that we need friends in our professional lives just as much as we do in our personal ones.

But if you’ve recently been promoted into your first managerial role, you understand that having close friends at work can also be complicated. Before, you and your friends complained about the boss behind his or her back. Now, you’re the boss, and they’re complaining about you behind your back. They might expect preferential treatment, and other employees will worry about favoritism. When Davidson College professor Scott Tonidandel, his former student Paige Logan, and I examined the leadership challenges of nearly 300 first-time managers, we found that the transition from BFF to boss — what we labeled “adjustment to people management/displaying authority” — was the biggest hurdle, cited by almost 60% of respondents. As one first-time manager said:

“It’s hard for me to adjust to managing people who used to be my coworkers. Sometimes I feel that people don’t take tasks and projects as seriously as they should because they think they can use their friendly relationship with me to their advantage. I’m having a hard time drawing this line because we used to work at the same level.”

Interestingly, these concerns seem to fall away as leaders move up in the ranks. When, in my own research, I asked middle managers from around the world about their most common work worries, navigating the friend-to-boss transition didn’t even make it into the top 10. Center for Creative Leadership (CCL) research shows that C-level executives are also focused elsewhere – on pressures related to boundary spanning, leading across multiple groups, organizational performance and talent management.  In short, they have bigger problems to tackle. First-time managers, by contrast, have fewer responsibilities and are unaccustomed to leadership roles so they feel the psychological effects of shifting workplace dynamics much more acutely.

What can they do to overcome this challenge? Here’s what I tell the executives I train at the CCL:

Be clear. Yes, you can still be friends with your subordinates. But everyone needs to realize that your work relationship has changed. Set clear expectations and boundaries. For example, talk with your friends about the new responsibilities you face. Explain that you are accountable for the development and performance of your friends and that of their coworkers. To be an effective leader for the entire group, the amount of time you spend with them and the tenor of your interaction will probably have to change.

Be fair. When it comes to bonuses, raises, promotions, support, and resources, leave your personal biases aside. If your friends deserve them, and it’s documented, great. If not, and your friends are still rewarded, then gossip, politics, and distrust will follow.

Be aware. When you have your “supervisor hat” or “leadership t-shirt” on, all eyes are on you. So pay close attention to the signals you’re sending. How much time, energy, and resources are you giving your friend compared to others? Ask your own boss or a trusted mentor to observe and provide feedback.

Be prepared. My psychology professor at Emory University, Steve Nowicki, taught me that relationships have a four-stage life cycle: choice—beginning—deepening—ending. When you go from friend to boss, the friendship as you’ve known it has ended. You and your friend must choose whether it will begin again in this new phase. If he, she, or you can’t adjust, move on. But don’t burn bridges. You never know who may be leading you one day.

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How to Know If a Spin-Off Will Succeed

There is little consensus as to whether firms that find themselves spun off from other companies – either as new, standalone companies, or under the stewardship of new parent companies – perform better or worse than they did before. An oft-cited 1992 study found that, on average, the performance of divested units after the spin-off does not improve—and is just as likely to decline—compared with the three years before divestment. But a study from 1999 found that long-run performance of both the former parent company and the divested unit is strongly positive, provided that the spin-off increases the company’s focus. A 2010 meta-analysis detailed many of the different issues that make divestiture so hard to evaluate consistently.

In addition to sheer luck, three categories of factors could explain differences in the performance of divested businesses. The first category is exogenous factors over which the business has little control: the growth of the markets into which it sells; the competitive intensity and thus the average profitability of the industry in which it operates; or the fragmentation of its industry and thus the scope for a growth-by-acquisition approach.

The second category is legacy factors from whose impact the business can only escape slowly. For example, a divested business may inherit assets and capabilities that have been starved of investment by its former parent. Conversely, the business may be an “unpolished diamond” that was neglected by its former management for too long and whose value is just waiting to be unlocked.

The third category is of the most interest because it concerns factors that the divested business’s (new) management and new owners do control: the quality of the business strategy and operational decisions after divestment, as well as the capital made available for follow-on investments.

Based on our 30 years as advisers, on the sell side and the buy side, in close to one hundred divestitures, we find that prospective new owners should ask themselves four questions.

1. Is the business ready to stand on its own feet? After earmarking a business for divestiture, the parent should carefully carve it out to reduce its parental dependence. A detailed roadmap should outline how it will become autonomous in terms of revenues and/or access to central services. A lack thereof may make some staff believe that parent support is still guaranteed, or it might provide some parent staff with justification for continued interference. These preparatory steps are of particular importance for carve-outs that are not full-fledged business units with profit & loss responsibility, such as R&D centers or production units whose only customer is their parent.

The diverging fortunes of two recent spin-offs in the energy industry illustrate how financial markets value autonomy from the parent. Since its spin-off in July 2014, the capitalization of Seventy Seven Energy, the former oilfield services business of Chesapeake Energy, has melted by more than 75%, at least partially reflecting continued dependence on its former parent for about 90% of its revenues. In contrast, the capitalization of NOW, the former commerce unit of National Oilwell Varco, has been much less affected by the recent oil price collapse, which reflects the investor community’s confidence in the spin-off’s ability to prosper on its own.

2. Does the business have a complete, balanced, and cohesive management team? Successful spin-offs tend to have a management team that comprises both insiders and outsiders. The insiders bring a detailed understanding of the company’s assets, capabilities, customers, competitors, and stakeholders. The outsiders provide new blood in support functions such as finance, legal, or administration. It is critical to ensure cultural compatibility between the insiders and the new hires, and to bind them together into a cohesive group with fully aligned objectives. The importance of this factor is corroborated by an academic study suggesting that for a divestiture to be successful, all managers involved must perceive it as a beneficial opportunity instead of an abandonment.

3. Are the management team and owners prepared to abandon business as usual? The management team and owners should realize that the spin-off event is just the beginning of a journey that will be radically different from the past. Only in rare circumstances is “business as usual” a viable value-creating option. Decisive actions are required to tackle the factors that prompted the spin-off in the first place, which in many cases are underperformance and/or a lack of strategic fit leading to chronic underinvestment in the development of the business.

For example, after its spin-off from International Paper, Arizona Chemical drastically changed its market approach from a drive for volume to margin optimization. In parallel, it reduced its fixed costs by restructuring its industrial footprint and overhead structure; increasing sales, marketing, and R&D expenditures in targeted areas; and dramatically reducing working capital.

4. Does the business have an adequate financial structure? The divested business should have the financial resources needed to bridge the transition period to full independence from its former parent, and to implement a strategy that is different from “business as usual.” Obviously the required resources and optimal financial structure depend on the starting quality of its assets (e.g., has its former parent deprived it even from basic maintenance investments?) and the competitive intensity of its industry.

Looking forward, the new owners and the management team should be prepared to embark on a serial investment path. Many of the most impressive divestment growth stories relate to businesses that changed owners in rapid succession: Taminco, a former specialty chemicals subsidiary of pharmaceutical company UCB, changed owner five times in a 10-year period; CABB, a former fine chemicals subsidiary of Clariant, had four successive private equity owners between 2005 and 2014; and Unifrax, a former thermal insulation materials business of BP, changed hands four times between 1996 and 2011.

We are not saying that rapid ownership change is a requirement for business success—quite to the contrary, it is often a corollary. According to the academic literature, so-called secondary buy-outs (SBOs) in many instances are driven by the confluence of two pressures: the seller’s to monetize his investment and the buyer’s to invest committed capital that otherwise he would have to return. Whatever the motives, though, SBOs do enable successive waves of add-on acquisitions to the initial divested business. For example, IMCD, now a global leader in specialty chemicals distribution, made some forty acquisitions and quintupled its revenues since its carve-out from IM twenty years ago, while having been owned by three different private equity investors prior to its IPO in 2014. The challenge for each successive owner is to keep the company’s management team motivated to follow the tempo.

As the above examples also show, Warren Buffett’s famous 1980 saying is not necessarily true in all situations: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” When it comes to divestitures, bad economics usually get discounted in the transaction price. And while luck plays a much bigger role in explaining business success than managers like to believe, as Daniel Kahneman points out, the examples here clearly demonstrate that you can always give luck a helping hand.

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