Marina Gorbis's Blog, page 1351

Corporate Universities Should Reflect a Company’s Ideals

If the number of executives from other companies who have been benchmarking GE’s management-development centers is an indication, interest in creating corporate universities is on the rise. While these visitors are always intrigued by the commitment and sense of mission they observe, many tend to focus on traditional metrics like the number of classes, the number of participants per year, and the cost. But they sometimes fail to understand that a corporate university can and should be used to drive strategic and cultural change and to champion individual and collective growth. Here are some of GE’s principles for achieving those essential aims:

A leadership institute should reflect the company’s leadership ideals. Establishing a corporate university is a big deal. It is a statement you are making to employees about the company’s willingness to invest in talent. It is an expression of a company’s ideal for leadership excellence. So being clear about what the corporate university stands for is an essential starting point. At GE, we use our corporate university to “inspire, connect, and develop.” Employees of all levels, from all our businesses and regions, come together here. We have made our flagship site in Crotonville, New York, the epicenter of our culture — a go-to place to get a feel for what we are all about.

Deep leadership involvement is essential. Superficial measures like number of classes or participants or even costs are not a real indication of value. Deeper qualities, some of which can’t be measured, are critical to success.

One of the most important is how senior leaders engage participants in the learning process. Jeff Immelt, GE’s chairman and CEO, spends more than one-third of his time on leadership development — setting the tone for leaders at Crotonville and worldwide. For instance, we have a course for mid-level executives, called the Manager Development Course (MDC). We have offered well over 100 MDC sessions since Jeff took the helm in 2001, and he has participated in all but one.

Crotonville also provides a platform for driving cultural and leadership change across the company. Some of GE’s best-known initiatives — WorkOut; CAP; Six Sigma, Lean Six Sigma; Leadership, Innovation, and Growth; and, more recently, Simplification — took shape at Crotonville. This is where the leadership of the company tests new concepts, gets the voice of the employee, launches new interventions and initiatives.

The experience matters as much as the content. While great content is vital, providing the right kind of environment and learning experience is just as important. We curate a participant’s experience with the aim of making it an immersive learning journey — intellectually, emotionally, and even physically. When a person enters the campus, every second of his or her stay is focused on learning. We try and make it transformative. Everyone — from the facilities team to the hospitality staff to the faculty — endeavors to create an atmosphere of excitement, learning, and connection.

It is about meritocracy, not hierarchy. We want attendees to be open to learn from everything and everybody. Each individual who comes in is a student, a teacher, and a coach, in keeping with our leadership philosophy of “we all rise.” All the events are open to everyone. Even the residence building reflects an egalitarian view: The accommodations are the same irrespective of seniority. All learners are equal. The prime objective is to learn.

The physical space of a corporate university is always the easy part. Infusing all its applications with the company’s culture, or spirit, is what’s difficult. A corporate university can play an instrumental role in creating a company’s future.

What Peter Drucker Knew About 2020

When PwC released its annual survey of corporate chief executives for 2014, it was immediately obvious that change is on leaders’ brains: “As CEOs plan their strategies to take advantage of transformational shifts,” the consultancy reported, “they are also assessing their current capabilities – and finding that everything is fair game for reinvention.”

It’s no wonder why.

“Every few hundred years throughout Western history, a sharp transformation has occurred,” Peter Drucker observed in a 1992 essay for Harvard Business Review. “In a matter of decades, society altogether rearranges itself – its worldview, its basic values, its social and political structures, its arts, its key institutions. Fifty years later a new world exists. And the people born into that world cannot even imagine the world in which their grandparents lived and into which their own parents were born. Our age is such a period of transformation.”

For Drucker, the newest new world was marked, above all, by one dominant factor: “the shift to a knowledge society.”

Indeed, Drucker had been anticipating this monumental leap – to an age when people would generate value with their minds more than with their muscle – since at least 1959, when in Landmarks of Tomorrow he first described the rise of “knowledge work.” Three decades later, Drucker had become convinced that knowledge was a more crucial economic resource than land, labor, or financial assets, leading to what he called a “post-capitalist society.” And shortly thereafter (and not long before he died in 2005), Drucker declared that increasing the productivity of knowledge workers was “the most important contribution management needs to make in the 21st century.”

Sadly, judging from the way most of our institutions are run, we are still struggling to catch up with the reality Drucker foresaw. How should managers alter their approaches to fit the times? Here are six aspects of running an enterprise that should now be front-and-center:

Figure out what information is needed. “It is information,” Drucker wrote, “that enables knowledge workers to do their job.” This is especially true for executives. The trouble is, even in a hyper-connected world where endless amounts of data are literally at our fingertips, many rely on the producers of the data – the bean counters, the sales force, the IT department – to serve up the numbers they believe are most relevant. And these folks don’t necessarily have a clue. A 2014 McKinsey & Co. survey found, for example, that fewer than 20% of IT professionals say they are effective at targeting where they can add the most value inside their organizations. “An adequate information system,” Drucker wrote, must lead executives “to ask the right questions, not just feed them the information they expect. That presupposes first that executives know what information they need.”

Actively prune what is past its prime. Virtually every executive is eager to see his or her organization innovate. Through our work at the Drucker Institute, however, it is clear that most are reluctant to take the necessary first step toward creating the new: continually winding down those products, services, programs, and procedures that are no longer making a real contribution. “Every organization will have to learn to innovate” on a constant basis, Drucker wrote. “And then, of course, one comes back to abandonment, and the process starts all over. Unless this is done, the knowledge-based organization will very soon find itself obsolescent, losing performance capacity and with it the ability to attract and hold the skilled and knowledgeable people on whom its performance depends.”

Embrace employee autonomy. Drucker urged executives to push decision-making and accountability all the way down through the organization as early as 1954, when he introduced the concept of Management by Objectives. And yet there is ample evidence that most organizations remain paragons of command-and-control. In a knowledge economy, top-down direction is particularly detrimental because employees are bound to know more than their supervisors do about the specialized fields in which they operate. They may also know more about the customer—his needs and desires. “Knowledge workers have to manage themselves,” Drucker advised. “They have to have autonomy.”

Build true learning organizations. “If knowledge isn’t challenged to grow, it disappears fast,” Drucker cautioned. “It’s infinitely more perishable than any other resource we have ever had.” To keep it fresh, John Hagel, co-chairman of Deloitte’s Center for the Edge, says that firms need “new architectures” designed to increase the flow of information and learning inside and outside the organization’s walls. Traditionally, the organizing principle for businesses was to achieve efficiencies of scale. Now, Hagel says, “scalable learning” must be the aim. Pursuing it begins with redesigning work environments to foster new knowledge creation – that is, to move beyond sharing what’s already known to helping workers make genuine discoveries more quickly by tackling performance challenges together. Unfortunately, there’s an awfully long way to go. Asked how many corporations have implemented this vision, Hagel says: “The answer is zero.”

Provide a much stronger sense of purpose. Survey after survey reveals that the vast majority of employees are not engaged in what they do. One big reason is the failure to connect people’s jobs with a larger sense of purpose. Too often, the organization seems to be an end in itself; no meaningful link has been forged between the daily tasks of the enterprise and how they serve the customer and better society. “What motivates – and especially what motivates knowledge workers – is what motivates volunteers,” Drucker wrote. Among other things, “they need to know the organization’s mission and to believe in it.” A paycheck, even a fat one, is not enough. No longer can organizations expect to inspire “by satisfying knowledge workers’ greed,” Drucker counseled. “It will have to be done by satisfying their values.”

Be more mindful of those left behind. Drucker worried a lot about a group that he characterized as “knowledge-worker cousins”: service workers. “Knowledge workers and service workers are not ‘classes’ in the traditional sense,” Drucker wrote. “But there is a danger that … society will become a class society unless service workers attain both income and dignity.” He added: “Anyone can acquire the ‘means of production’, i.e., the knowledge required for the job, but not everyone can win.” Again, Drucker’s words prove prescient as the gains in the knowledge economy are hardly being shared equitably. “Our basic grievance with today’s billionaires is that relatively little of the value they’ve created trickles down to the rest of us,” the University of Toronto’s Roger Martin asserts. He warns that this situation is unsustainable, and that top executives need to rein in their compensation. Surely, Drucker would have agreed. “A healthy business,” he wrote, “cannot exist in a sick society.”

It’s easy to forget how profound the emergence of the knowledge age really is. Ours is “the first society in which ‘honest work’ does not mean a callused hand,” Drucker noted. “This is far more than a social change. It is a change in the human condition.” But for all that, what it takes to manage effectively now is no mystery. We’ve been headed down this path for more than half a century.

In his HBR piece, Drucker suggested that our great transformation would be completed by 2010 or 2020. It is high time that management started acting like the clock is running out.

 

This post is part of a series leading up to the annual Global Drucker Forum, taking place November 13-14 2014 in Vienna, Austria. Read the rest of the series here.

Make the Internet of Things More Human-Friendly

In early research, McKinsey emphasized that the distinctive character of the Internet of Things — which is predicted to be a $7.1 trillion market by 2020 — lay in its ability to operate with little or no “human intervention.” The initial vision involved embedding sensors and actuators in physical objects like UPS packages and factory machinery to sense the environment, transmit “huge volumes of data,” and facilitate new kinds of automation.

But I’d argue that notion is shifting, and that people will be a more deeply intrinsic part of the IoT. And as the Internet of Things (IoT) expands to include people, companies that create value will need to understand user experience, psychological, and even some philosophical concepts much more deeply than they do now. They must learn how people really interact with things and why those things matter.

To make the IoT more human-friendly, the “things” involved need to do three things:

Things need to talk to other Things we use. Today, companies usually envision singular product offerings for the Internet of Things, resulting in store shelves with things that do not connect very well to other things once the consumer gets them home. Consider Google’s Nest or Schlage’s digital locks or smartphone-controlled home lighting systems. Each product functions perfectly well on its own, but doesn’t connect to other things in ways we might expect. Though people naturally rearrange things in their heads to complete everyday tasks, IoT products lack that flexibility. “You can control each of them from your smartphone…but the Nest won’t act to adjust the climate in response to the locks being keyed open, for example, nor to lights being turned on,” according to one user.

When things work together as we assume they should, our brains “cope smoothly,” displaying  “interaction-dominant dynamics” (IDS), to use the terms from cognitive science. By comparison, the standalone product design characteristic of many of early IoT consumer offerings leads to “component-dominant dynamics,” where a user’s ability to solve everyday problems by imaginatively connecting a number of elements is prevented by design.

Things don’t need to be so conspicuous. From smart refrigerator manufacturers to start-ups, high-design has become a predominant area of focus for the Internet of Things. Prototypes at one entrepreneurial firm include “a stylish leather clutch that can light up with a soft pulsing grid of glowing LEDs to let a wearer know she’s got a text message.” Similarly, Google just enlisted Diane von Furstenberg to design fashionable Glass frames, while the Cupertino-designed Apple Watch will eventually be angling to compete with stylish wrist-worn fashions from Geneva.

Yet companies should also note that in most of our work and play, we want things to be usefully inconspicuous, according to experimental research. Working in the kitchen, I interact with the refrigerator, knife, can opener, frying pan and stove in such a way that I “see through” each individual thing to the task of making dinner. If the can opener becomes the object of my attention and scrutiny, it’s because it’s malfunctioning and thus disruptive of my smoothly coping IDS.

Despite all the interest in eye-catching designs, cognitive science suggests most opportunities for the Internet of Things will arise by creating useful offerings that intentionally avoid sapping users’ attention away from what they’re trying to accomplish.

Things need to go beyond remote control. Today, IoT product designs generally emphasize process automation and ability to access a device from anywhere in the world. This “remote control” logic misses the fact that our most fundamental orientation toward things is one of physical connection and interaction rather than removal and distance.

As we go about our business in the physical world, the distance between mind, body, and things fades away. When I grab a hammer to install shelving, the distinction between “hand” and “tool” recedes into the unconscious, while completing the job becomes the main object of my thinking; in function and thought, the tool is the extended hand when it works properly. Even our words suggest this: the tool is “handy,” the completed bookshelves are “handiwork.” As cognitive scientists put it things like hammers became a part of the body’s “extended periphery” and are “functionally a component of the [subjects’] smoothly coping IDS.”

So, what might a “handy” IoT offering look like? An offering from New England Biolabs offers one example. The company’s biologist customers work by handling a variety of things, including petri dishes, microscopes, indicators, forceps, probes, slides, beakers, test tubes, and — importantly for the sake of this example — freezers stocked with enzyme samples.

Yet, in carefully studying the behaviors of its biologist clients as they interact with lab equipment, New England Biolabs recognized that running out of the right enzymes at the right time would often slow down experimental work and drastically reduce scientific productivity. Lacking the expected products, the freezer and its contents would suddenly become unhandy to scientists.

To solve the problem, New England Biolabs developed an IoT enzyme freezer to replace its conventional one. The IoT enzyme freezer tracks inventory levels of multitudes of enzyme SKUs, predicts demand based on patterns in biologist behavior, and ensures the right samples are always handy when researchers need them.

An IoT innovation that both recognizes the way users really think about things and removes barriers to a smoothly coping IDS, the new freezer makes experimentation more productive. “We get to the Eureka moment faster,” according to one user.

So remember: while much of today’s IoT rhetoric focuses on making things smarter, the distinctive value of the freezer derives from the way it makes people smarter.

Banning Affirmative Action Hurts Minority Enrollment in Elite Colleges

Bans on affirmative-action-based admissions in certain U.S. states are associated with a decline of 15% to 30% in the proportions of blacks and Hispanics enrolled in selective colleges and universities there, says Peter Hinrichs of the Federal Reserve Bank of Cleveland. Courts have upheld states’ authority to impose such bans, and Hinrich writes that nationwide, the tide appears to be turning against affirmative action. Average schools appear to be unaffected by affirmative-action bans.

How to Deal with a Mean Colleague

When a colleague is mean to you, it can be hard to know how to respond. Some people are tempted to let aggressive behavior slide in the hopes that the person will stop. Others find themselves fighting back. When you’re being treated poorly by a coworker how can you change the dynamic? And if the behavior persists or worsens, how do you know when you’re dealing with a true bully?

What the Experts Say

“When it comes to bad behavior at work, there’s a broad spectrum,” with outright bullies on one end and people who are simply rude on the other, says Michele Woodward, an executive coach and host of HBR’s recent webinar: “Bullies, Jerks, and Other Annoyances: Identify and Defuse the Difficult People at Work.” You may not know which end of the spectrum you’re dealing with until you actually address the behavior. If it’s a bully, it can be difficult ­— if not impossible — to get the person to change, says Gary Namie, the founder of the Workplace Bullying Institute and author of The Bully at Work. But in most cases, you can ­— and should ­— take action. “Know that you have a solution, you’re not powerless,” says Woodward. Here are some tactics to consider when dealing with an aggressive colleague.

Understand why

The first step is to understand what’s causing the behavior. Research from Nathanael Fast, an assistant professor at the University of Southern California’s Marshall School of Business, proves a commonly held idea: People act out when their ego is threatened. “We often see powerful people behave aggressively toward less powerful people when their competence is questioned,” he says. Namie agrees: “People who are skilled and well-liked are the most frequent targets precisely because they pose a threat.” So it may help to stroke the aggressor’s ego. Fast explains: “In our study, we saw that if the subordinate offered gratitude to the boss, it wiped out the effect,” he says. Even a small gesture, such as ending an email with “Thanks so much for your help” or complimenting the person on something you genuinely admire, can help.

Look at what you’re doing

These situations also require introspection. “It’s very easy to say, ‘Oh, that person is a jerk,’” Woodward says. But perhaps you work in a highly competitive culture or one that doesn’t prioritize politeness. Consider whether you might be misinterpreting the behavior or overreacting to it or whether you’ve unknowingly contributed to the problem. Have you in any way caused the person to feel threatened or to see you as disloyal? Self-evaluation can be tough so get a second opinion from someone you trust, who will tell you the truth, not just what you want to hear. Don’t put too much of the blame on yourself, however. “It’s important to balance not being threatening with not being a doormat, which just invites more aggression,” Fast says. Namie agrees: “Targets regularly assume it’s their fault,” when it’s not.

Stand up for yourself

Don’t be afraid to call out the bad behavior when it happens. “I believe very strongly in making immediate corrections,” says Woodward. “If someone calls you ‘Honey’ in a meeting, say right then: ‘I don’t like being called that. Please use my name,’” she says. If you’re uncomfortable with an immediate, public response, Woodward advises saying something as soon as you’re able. After the meeting, you could say, “I didn’t like being called ‘Honey.’ It demeans me.” Show that there is no reward for treating you that way. “The message should be: don’t’ mess with me, it won’t be worth your effort,” Namie says.

Enlist help

“Everybody should have alliances at work — peers and people above and below, who can be your advocates and champions,” says Woodward. Talk to those supporters and see what they can do to help, whether it’s simply confirming your perspective or speaking on your behalf.  Of course, you may need to escalate the situation to someone more senior or to HR. But before that, “you owe it to the relationship to try to solve it informally,” says Woodward.

Demonstrate the cost to the business

If you do need to take formal action, start with your boss (assuming he isn’t the aggressor). But you may need to take the issue higher up the hierarchy. When you have someone’s ear, Namie recommends, focusing the conversation on how the person’s behavior is hurting the business. “Talk about how it’s affecting morale and performance,” says Fast. Personal pleas rarely work and too often degenerate into he said-she said type arguments. “Don’t tell a story of emotional wounds,” Namie advises. “Make an argument that the person is costing the organization money.”

Know the limitations

When none of the above works you have to consider: Is this uncivil, mean behavior or am I being bullied? If you are in an abusive situation (not just a tough one), Namie and Woodward agree that chances of change are low. “The only time I’ve seen a bully change is when they are publicly fired. The sanctions don’t work,” says Woodward. Instead, you need to take action to protect yourself. Of course, in an ideal world, senior leaders would immediately fire people who are toxic to a workplace. But both Namie and Woodward agree that rarely happens. “Even though the statistics are clear on the impact on morale, retention, performance, it’s very hard for organizations to take action,” Woodward says. If you’re in an abusive situation at work, the most tenable solution may be to leave — if that’s a possibility. The Workplace Bullying Institute has done online surveys that show more people stay in a bullying situation because of pride (40% of respondents) than because of economics (38%). If you’re worried about letting the bully win, Namie says, you’re better off worrying about your own wellbeing.

Principles to Remember

Do:

Know that most people act aggressively at work because they feel threatened
Ask yourself whether you’re being overly sensitive or misinterpreting the situation
Call out the inappropriate behavior in the moment

Don’t:

Take the blame — many bullies pick targets that are highly skilled and well-liked.
Escalate the situation until you’ve tried to solve it informally and with the help of your allies
Suffer unnecessarily — if the situation persists and you can leave, do it

Case study #1: Don’t stay and suffer

Eleven years ago Heather Reynolds* took a new position at a veterinary clinic owned by another veterinarian named Adam* with the intention of buying into the practice. At first, Adam was thrilled about Heather coming to work with him. “He was positive, supportive, and encouraging. He was over the moon about me joining,” she says. After several months, she bought half of the firm and became Adam’s business partner.

Things continued to go well until a year later when, after what seemed like a minor disagreement, Adam stopped speaking to Heather for six weeks. When she confronted him, he told her he was considering dropping her as a partner. Heather was shocked. She had taken out a loan to buy into the firm and felt stuck.

Eventually, they got back on track but Heather soon learned this was a pattern of behavior. Any time there was conflict, Adam reacted the same way. “If I disagreed, he would ice me out. If I confronted him, he iced me out longer,” she says. She eventually figured out that stroking his ego was more effective. “You could flatter him, tell him how great he was, how he did well in a case, and he’d be back on your side. I learned to do this sort of dance in order to survive.”

But Adam’s harsh behavior took its toll on Heather. Last year, things got so bad that he didn’t speak to her for three months. Heather sought the help of a professional coach, who helped her see that Adam was a narcissist and a bully, who was threatened by her skills. Late last year, she told him she was looking for someone to buy out her part of the business and he offered to do it. “It was the best thing I could’ve done,” she says. “I wished I left when he first showed me who he truly was.”

Case study #2: Call out the bad behavior

Christine Johnson* was excited about her new role as deputy editor at a San Francisco-based media company. The position had just been  created so she would be managing a team of  existing staff, and everyone  welcomed her except for one person, Terry*. “What I didn’t know and I learned later was that he wanted the role and was angry that he didn’t get it,” she says.

During her first weeks on the job, Terry was aggressive. “I was constantly fending off little attacks from him,” she says. He kept asking her how she wanted to supervise their work, what processes she wanted to put in place, how he should interact with her about his projects. Looking back, Heather realizes these were all questions designed to make her look unprepared and incompetent. “And I was too green to say I didn’t know yet,” she says.

Terry started sending Christine 50 emails with return receipt before 9:00am. When she hadn’t responded by 11:00am, he would start emailing to ask if she’d seen his emails. “He was constantly badgering me. I actually considered quitting. I didn’t feel like I had any allies and wasn’t sure this was the job I wanted,” she says. After five weeks of this abuse, Christine stood up to Terry in a staff meeting. “He kept asking me questions over and over and I just lost my cool,” she says. She snapped at Terry and said, “I’m sick of you asking me so many unnecessary questions. Can you please stop?” Terry backed down.

Christine was embarrassed by her behavior but later, when she was in her office, people began stopping by to thank her for standing up to Terry. “Once I had a small amount of reinforcement from my peers, I knew I could take him on,” she says. And once he saw that she wasn’t willing to take her abuse, he stood down. “It got better and we were cordial but it was an awful start,” she says.

Strategy Lessons From Jean Tirole

Why did Jean Tirole win this year’s economics Nobel?

Here’s one key reason: “Jean has a bit of magical quality of being able to take very complex situations where there are a lot of different moving parts and a lot of institutional details and structuring the essence of it in a relatively simple model,” says Harvard Business School professor Josh Lerner, who has co-authored several recent papers with Tirole. “Obviously models have to simplify reality, but one of the real skills is essentially being able — it’s an art, not a science — to say, ‘What are the key levers here? What are the aspects that distill the situation down to its very essence?’”

In other words, Tirole does what modern academic economists do, only better than almost anyone else. He is the eighth most-influential economist on the planet among his peers, according to the weighted RePEc citations ranking, and three of those above him on the list already have Nobels. Unlike Paul Krugman, another MIT PhD of Tirole’s generation with similar renown as a model builder who has gone on to a second career as a highly visible and controversial public intellectual, Tirole has mainly just kept on building those models — and at a seemingly youthful 61 will presumably just keep building them unless the prize curse gets to him.

The models Tirole builds are mathematical in nature, and start with individuals or firms that are assumed to be rational creatures out to maximize their utility, their profits, or something else along those lines. He then usually brings in the tools of game theory, in which his protagonists have to contend with other rational actors and the moves they might make.

In the “Scientific Background” essay on Tirole’s work provided by the Nobel committee, the focus is on Tirole’s work on industry structure, which has had a big impact on antitrust and other regulation, especially in Europe. The basic story is that early antitrust and regulatory ideas that didn’t have much basis in economic theory were brushed aside in the 1970s and 1980s by the University of Chicago-based “law and economics” movement, which basically taught that competition conquers all, even in pretty concentrated industries. Then a new generation of economists, with Tirole at the lead, showed that a rigorous, orthodox economic approach, if you threw in a little game theory and information asymmetry, actually delivered much more complicated results. Sometimes business regulation improved social welfare, sometimes it didn’t, usually the key was exactly how the regulation was structured.

The implications of this for, say, broadband Internet regulation have been discussed at length elsewhere, so I’ll leave it there. But Tirole’s 1980s work on industrial organization also found its way into thinking about business strategy. The academic study of strategy took a big leap forward in the 1970s when Michael Porter of HBS looked at earlier economic research on industry structure and noticed that market power — which economists wanted to minimize — was the same thing as sustained profitability, which corporate executives wanted to maximize. Porter then used the tools of microeconomics to craft advice for executives on how to get and hold on to that power.

In the early 1980s, the game theory approach to studying industries promised to be the next big wave in strategy. A series of papers (sample title: “The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look”) by Tirole and game theorist Drew Fudenberg, who is now at Harvard, seemed to promise firm answers to timeless business questions like, “Should we enter this industry?” “Should we lower our prices?” “Should we increase production?”

“When I was just starting at HBS [as a professor] in 1983, Fudenberg and Tirole were kind of the reigning duo of young theorists,” says Pankaj Ghemawat, who now teaches at NYU’s Stern School and the IESE Business School in Barcelona. “Every single working paper of theirs was eagerly awaited.” For Ghemawat, what followed was a bit of disappointment. Game-theoretic models of industry did indeed often offer wonderfully explicit advice. But it turned out that slight changes in the initial conditions in a model might deliver wildly different advice. And so since the 1980s, he says, “the interest has shifted more to empirical work out of concerns that you can rationalize just about any kind of behavior with a game theoretic model.”

Still, that work has continued to be informed by Tirole. His 1988 book The Theory of Industrial Organization became the standard graduate textbook on the topic. “Many of us who have wound up teaching strategy and doing research in strategy grew up learning game theory from Tirole’s textbook,” says Jan Rivkin, the chair of the strategy unit at HBS. “Game theoretic thinking certainly influenced the strategy field, and Tirole was as influential as anyone in that shift.”

As an example, Rivkin cites the notion of commitment, which Ghemawat wrote a book on. “Game theory models, including some of Tirole’s models, show that a firm can sometimes advance its interests in odd ways,” Rivkin says. “For example, a firm can change its own payoffs and make it attractive to respond aggressively to a rival’s move. If the rival understands those payoffs, the rival might forego the move. Many of us teach such ideas — that one firm’s commitments can change another firm’s actions — in our classes today.”

More recently, Tirole put himself back on the strategy professors’ radar with a 2002 paper, co-authored with Jean-Charles Rochet, now of the University of Zürich, that examined the dynamics of competition in “two-sided markets” that “are characterized by the presence of two distinct sides whose ultimate benefit stems from interacting through a common platform.” This describes lots of modern digital enterprises — think Google and Airbnb — as well as most traditional media companies, and has been discussed a lot already in this week’s coverage. But the significance of the paper seems less in that offers any definitive answers to how to think about the phenomenon than that it kicked off what is a now a rich (if still not exactly conclusive) literature on what are now also called multi-sided platforms. “I don’t know how profound you can say the influence will be,” says Joshua Gans, a professor of strategic management at the University of Toronto’s Rotman School of Business, “but it was at a time where he was a pioneer racing to the fore in terms of thinking about strategy in those sorts of markets.”

Gans thinks Tirole’s most remarkable accomplishment might be his graduate-level textbooks. The Theory of Industrial Organization was just the first. Together with Fudenberg, Tirole wrote Game Theory in 1991. In 1993 it was A Theory of Incentives in Procurement and Regulation with Jean-Jacques Laffont, the late founder of the Industrial Economy Institute at the University of Toulouse, where Tirole has taught for almost two decades. Then, in 2006, came The Theory of Corporate Finance — not a field Tirole had really been known for. “That appeared out of nowhere,” says Gans. “Corporate finance? Since when? Sheesh, when did he do it?”

Gans wrote right after the Nobel announcement that he has “a whole shelf … and not a decorative shelf” of such books by Tirole and has relied on them throughout his career. “There’s very few people who can really absorb more than one of these. They think Jean Tirole is the IO guy or the corporate finance guy or the game theory guy.”

The aim here clearly hasn’t been making money — for that you need to write introductory textbooks for undergraduates. It’s to teach and to influence Tirole’s fellow economists, both in the academy and in government, mainly in the direction of carefully formalizing their analyses and arguments in mathematical terms. This is of course the direction economics has been headed in for more than half a century — Tirole certainly didn’t start it, and he’s been more careful and less ideological about it than many of his peers. But there is ideological content to the very methods that economists use, which Tirole acknowledges with dry humor near the beginning of his corporate finance textbook.

“Many politicians, managers, consultants, and academics object to the economists’ narrow view of corporate governance as being preoccupied solely with investor returns,” he writes. Then, after promising to revisit that debate a few pages later, he adds, “we should indicate right away that the content of this book reflects the agenda of the narrow and orthodox view.”

In recent years Tirole has taken some steps beyond the narrow and the orthodox, although always with his mathematical-economic toolbox in hand. A 2003 paper with Princeton economist Roland Bénabou starts out by agreeing with psychologists’ and sociologists’ long-standing critique that the use of economic incentives (paying your kid to do homework, for example) often backfires. But Bénabou and Tirole then go on to try to explain that backfiring in purely economic terms. Those are the tools Tirole knows how to wield so brilliantly, after all.

Gender Balance Is Hard, but It’s Not Complicated

Large, established organizations are finally starting to accept that gender imbalances are a business problem. Yes, Microsoft’s CEO Satya Nadella recently lit up the blogosphere with his unfortunate suggestion that women should not ask for pay raises. (He quickly apologised.) But gaffes like his are increasingly out of step with the mainstream. This summer, Google publicized the gender balance of its workforce, and vowed to improve. This led other large tech companies to do the same. Leaders at Harvard Business School have admitted the school has not been hospitable to women, and publicized their efforts to improve in a front-page New York Times story. These and other changes are evidence of a steady and growing recognition that today’s gender imbalance are a business and leadership issue.

We are literally – and collectively — changing our minds. Slowly but surely, the shift from the 20th century view that “gender imbalance is a women’s problem” to the more 21st century “gender imbalance is a leadership challenge” is beginning to take root.

It is now important to design the right response. To maximise this moment, leaders need to proceed strategically:

First, lead the charge. The number one driver of better gender balance in large corporations is leadership. If leaders don’t get it, buy it, and sell it, no one else can make it happen. Leaders must be the change they want to see (not just call for change). This requires a thorough understanding of the issues and how to address them.

The best CEOs publicly commit to high-performance meritocracies that recognise and serve a more gender balanced economy and customer base. Acknowledge publicly that you are not yet there (many of your managers probably assume that you are). A bit of mea culpa is not out of place here – vulnerability is increasingly becoming a leadership competence. After 20 years of companies focusing most of their well-meaning but ineffective efforts on fixing women (think assertiveness training and women’s networking events) it is helpful to acknowledge that you’ll be making a shift in approach. And not just by throwing training at mid-level managers. Many managers are bored or skeptical about gender initiatives, so leaders need to prove that they themselves are convinced. Commit to creating a balanced business. Sell this vision. Enthusiastically. Repeatedly. Repeatedly.

Cisco’s John Chambers is a good example. After meeting with Sheryl Sandberg, he admitted that he hadn’t quite “gotten it,” and communicated this admission widely to his employees. “While I have always considered myself sensitive to and effective on gender issues in the workplace, my eyes were opened in new ways and I feel a renewed sense of urgency to make the progress we haven’t made in the last decade… while I believe I am relatively enlightened, I have not consistently walked the talk … What we have been doing hasn’t worked, and it is time to adjust.”

Unilever’s Paul Polman has simply communicated that the company will never achieve its growth and sustainability targets without getting the gender balance right. “Unless we recognise the critical role that women play and unless we involve women more directly in developing solutions, then we are destined never to fulfil our potential.”

Google was the first Silicon Valley tech company to come clean on the reality of its gender situation, admitting that it was wrong to avoid transparency. “We’ve always been reluctant to publish numbers about the diversity of our workforce at Google. We now realize we were wrong, and that it’s time to be candid about the issues. Put simply, Google is not where we want to be when it comes to diversity, and it’s hard to address these kinds of challenges if you’re not prepared to discuss them openly, and with the facts.”

Whatever the exact language, the CEO and the core of the company has to take responsibility. The problem is that many CEOs delegate the issue to a Head of Diversity, most of whom don’t even report directly into them. It takes courage and years of proactive, public pushing from the top to make gender balance happen. You get what you envision.

Second, explain why it matters. Many people think the business case for gender balance is now so obvious that it doesn’t require repetition. In my experience, this is the crux of the challenge. Most managers simply don’t understand the complexity of the issue, and even those who do are not usually ready to preach it to others. Each company needs its own, fact-based explanation of how this relates to the bottom line. Leaders need to make the link to their own businesses, in a convinced and convincing way. You need to make the case and explain why gender balance is an urgent global business imperative – just as explaining “why” is important for any key business initiative. Then get all your leaders to repeat the same, aligned message with their teams.

When Marijn Dekkers became CEO of Bayer — and the first non-German CEO of a DAX 30 company — he knew he’d have to explain why an extremely successful, 150-year-old company might want to change. And he did, over and over, in a variety of media, making it very clear that diversity was a priority.

“One of our most important current innovations,” he wrote, “may not be technological. It may be our skill in managing new talent and market realities. The better we can understand and connect with customers (and potential customers) the stronger we will be… Evolving the balance of nationalities and genders in BAYER’s management is not a management fad. Nor is it the result of German government quotas. It’s simply good business. We want to look like, sound like and anticipate our customers’ needs.”

Beware of purely ethical arguments around diversity and fairness. While this works for many managers, many others will argue that the lack of gender balance is simply due to women’s choices, and has nothing to do with fairness. In our experience (although ethicists struggle with this) a business-driven reason for balance is essential to garner more broadly-based support. This is especially true in countries that are still culturally attached to highly differentiated gender roles.

Finally, build skills. Working across genders, like working across cultures, is a management skill. It requires education, awareness, and the ability to differentiate between real differences and unconscious biases. Help managers understand the current situation in their organizations. What’s the current gender balance among customers? Among employees? At different levels and across different functions?

Most companies also need to spend time educating managers to understand the different behaviors, preferences and concerns of men and women – as customers and as employees. They need to see both the impact of those differences – and how to leverage them to create value. Make a distinction between actual differences and stereotypes. Managers need to understand why both genders get judged negatively for behaving outside of traditional gender roles – and why both genders unconsciously associate leadership with masculine traits. We need to stop fixing the women, but we should also avoid starting to fix the men.

When done constructively, men and women enjoy building skills that immediately unlock opportunities with customers, employees, and stakeholders. Inviting people to courses on “bias” or “stereotyping” is not the best way to prime them for working well together — so seek to be eye-opening and positive, putting your focus on generating opportunities that blind spots may once have concealed.

This does not need to take years; it does not take a global cultural change initiative for any manager to balance their own team. What it does take is changes to business systems (career management, leadership criteria, product and service design and delivery).

Many companies want to simply jump in with skill building – often framed as bias training — without having leadership take a strong stance, and without explaining why this matters to the overall health of the business. But unconscious bias isn’t always the problem. Entrenched business systems often are. And unless leaders decide on the change they want – and explain why it matters—those systems won’t budge.

The risk of investing in training before steps 1 and 2 are in place is that people feel they have done a huge amount (and invested time and money) and it just doesn’t work. That creates a whole new layer of gender fatigue for the future.

Leadership, language, and skill are extraordinarily important in developing effective (and accountable) agents of change. Most managers are very willing to change if you equip and empower them in the right way. And of course, if you then celebrate and promote the ones that are walking the talk — there is no clearer incentive to change than promoting the people who have built balanced teams and unlocked new business opportunities.

Again, this does not require a huge culture shift. It requires the momentum that comes from a strategic push towards a clear vision, backed by strong leadership and skilled managers.

How to (Gradually) Become a Different Company

A number of recent headline-grabbing announcements of divestments and split-ups by companies such as HP (spinning off its PC and printer businesses), GE (the sale of its appliances business to Electrolux), Bayer (the flotation of its MaterialScience chemicals business), and Royal Philips (its separation into two autonomous companies, Lighting and HealthTech) are putting the spotlight again on the phenomenon of “core shifting”: how a company, through a sustained process of acquiring and divesting assets, changes the mix of its business portfolio and thus purposefully shifts the core of its activities.

PPG (originally “Pittsburgh Plate Glass”) is a splendid example of such a transformation. The US-based company used to be a diversified industrial group, with activities in all types of glass, chemicals, paints, optical materials, and biomedical systems. Through a raft of acquisitions and divestments since the early 1990s, it has transformed into a focused world-leading coatings manufacturer with $15 billion in sales. Since 1995, when glass and coatings each accounted for about 40% of sales, the split has evolved to 93% coatings and 7% glass today.

What makes such a transformation successful? From our analysis of a number of core shifts and conversations with the CEOs who have undertaken them, we have drawn five keys to success:

1. Allow time and persevere. Pulling off a core shift takes many years, if not a decade, as PPG and other companies have shown. For example, it took Umicore, a global materials technology group, five years (2002–2007) to lay the basis for its transformation from a commodity supplier of base metals into a premium provider of emission control catalysts, rechargeable battery materials and other value-added solutions. It initially lost about half of its revenues by divesting its copper and zinc smelting business, but by 2010 it had quadrupled its revenues to €2 billion through a combination of acquisitions and organic growth.

A core shift takes time for several reasons. First, such transformations consume resources, both financial and human. A company needs the financial firepower to make the required acquisitions on top of the capital investments in its ongoing business. Even more important, it takes management time to align all teams, including those of the acquired businesses, to the transformation initiative. Second, finding value-creating acquisition and divestment opportunities requires patience. Third, some stakeholder groups may want to see confirmation of the positive impact of a given move before consenting to continue on the chosen path.

2. Be clear about the destination, yet flexible about the path. To keep all stakeholders aligned over the course of the transformation, the company’s executive team should be clear and unrelenting about the vision of its future and the rationale thereof. Consider Eaton, which used to be a manufacturer of vehicle components such as axles and transmissions. During the past two decades it has transformed into a provider of electrical, hydraulic, and mechanical power management solutions. Throughout this period it has been communicating regularly about its leitmotif of becoming a diversified company with more consistent earnings. Accordingly, it has systematically published figures about the evolution of its business portfolio in terms of sales by segment (e.g., vehicles decreasing from 40% of total in 2000 to 17% in 2013), by destination (e.g., the U.S. from 80% in 2000 to 50% in 2013), and by exposure to the economic cycle.

While the overall desired direction of the transformation should be clear, the actual path to get there is unpredictable. The executive team should not commit to specific moves, as factors outside of their control might require a change of plan. For example, the company may have identified the perfect acquisition target, but be outbid by a rival. Or the economic cycle may suddenly turn and thus make it impossible to divest an activity as planned at a fair price. What is important is to create options and exercise them as the right opportunities arise.

3. Go for the occasional mega-acquisition. Acquisitions are part and parcel of a transformation. While the number may vary from one year to the next, companies such as PPG and Eaton have been acquiring on average one company every quarter for the last two decades. Having said that, what really gives traction to a core shift is the occasional mega-acquisition that is emblematic of the vision and that catapults the company forward. For example, Umicore’s 2003 acquisition of PMG increased its revenues by 50%. Eaton’s acquisitions of Westinghouse’s distribution & control business (1994), Aeroquip-Vickers (1999), and Cooper (2012), increased revenues by roughly one-third with each addition.

Of course, it takes time to digest such acquisitions and restore the company’s financial firepower, which often results in a transformation pattern in which a period of consolidation follows a period of acceleration.

4. Communicate consistently and transparently. Clearly communicating about the vision and its rationale is crucial to keeping everyone committed, whether they’re employees or external analysts. Particularly important are the managers and staff of businesses that have been earmarked for divestment. Clear, open, and up-front communication about the company’s intention and the rationale thereof is essential to keep them motivated and prevent value destruction. Their business should not be labeled a “cash cow” or a “problem,” and their staff must not feel second-class. The message is that the divestment should be beneficial to the business concerned, as its future owner normally will see greater opportunities to create value than its current owner does. The best way to demonstrate the veracity of that message is to continue to do business as if the divestment decision had not been taken, i.e., continue to recruit, invest, and even acquire smaller entities that strengthen the value of the business to prospective buyers.

5. Safeguard the short-term performance of the ongoing business. While M&A transactions absorb much of senior management’s attention and attract great interest from financial analysts and the business press, the company’s operational performance will ultimately make or break the transformation. If short-term performance slips, pressure will mount and stakeholders will question, rightly or wrongly, the pertinence and/or viability of the long-term transformation.

The experience of Chiquita Brands International provides a case in point. Some 10 years ago, the company embarked on a transformation that was meant to reduce the exposure to the volatility and asset intensity of the legacy banana business by shedding ships and farms on one hand, and by acquiring and developing branded healthy snacks on the other hand. However, a significant decrease in profitability and free cash flow over time led the company to change course in 2012 and return to the former core of branded commodity produce, under the leadership of a new CEO.

As is always the case with tips, use them wisely, as fits best. They may not all be applicable in the same way and to the same extent at every company. But when it comes to shifting your business’s core, it usually pays to be tenacious, visionary, bold, transparent, and results-oriented.

Whatever It Is, You’ll Get Over It

Despite wars, famine, economic collapse, and personal tragedies, a majority of human beings feel happy a majority of the time, extensive studies have demonstrated over the past two decades. In fact, people seem to have “happiness set-points” to which they return after even the most extreme perturbations, says a team of researchers led by Ed Diener of the Gallup Organization. The reason for our baseline happiness may have to with evolutionary advantage: A good mood leads to greater creativity, sociality, and, ultimately, reproductive success, the researchers say.

The Dark Side of Efficient Markets

It is generally accepted that efficiency represents the optimal, aspirational state for any market. Efficient markets, which feature many buyers and sellers and perfect information flowing between them, determine the “right price” and hence allocate society’s resources optimally.

Those are indeed positive features. But every good thing is like a face caressed by the sun. The rays that light and warm the face automatically cast a dark shadow behind it. The shadow of an efficient market is increased price volatility — quite the opposite of what we expect from efficient markets.

Think about how markets evolve. We’ll take the market for corn as an example. Farmers used to grow corn, take it to the local market, and sell it to families who use it to bake and cook. Primitive markets like this have two classic features. First, buyers and sellers have to be near to each other so it is a narrow and shallow market, restricted to relatively few people. Second, the value in the exchange is determined by immediate use. The buyer plans to consume the corn relatively promptly, not hold it as an investment or resell it.

As markets such as these evolve and the density of buyers and sellers increases, another actor inevitably arrives: the market maker who facilitates trading between sellers and buyers. They are useful. They help sellers find buyers and vice versa. With their participation, the market in question becomes more efficient. Suppliers can better find the buyers who want their good or service most and buyers can find all the suppliers of the item that they want. These are all good things.

But there is an unintended consequence. Actors in the system typically start to speculate. A market grows for those who imagine what consumers might find the good to be worth in the future. In due course, that corn gets traded not in the local market but on the Chicago Board of Trade (CBOT). In the very earliest days, real users of commodities were important players at the CBOT. They made contracts with sellers using the CBOT and actually took delivery of the corn they bought.

But that all changed over time. In the modern era, only a minuscule proportion of CBOT trades are intended for delivery. The vast majority are trades made on expectations of future value, not current use. Buyers don’t want to take delivery on the corn, soybeans, or pork bellies. They are simply trading based on their beliefs about the future value to hypothetical future users of the product in question.

In the natural evolution of markets, as markets become more efficient, they turn from being use-driven to expectations-driven — like equities, real estate, or derivatives based on both.

For this reason, the unintended consequence of efficiency is price volatility. In a use-driven market, the value of a good or service rarely changes dramatically in a short period of time. The value of a peck of corn to a family who needs to eat won’t change much from week to week — because the use is immediate and human habits don’t change quickly. Indeed, if the weather in the growing season starts to deteriorate, then prices will migrate higher over the growing season as buyers and sellers both see that supply will be tight following the poor growing season.

To be sure, dramatic events can cause use to swing very quickly. When a hurricane approaches the Florida coast, the price of plywood can spike because everybody suddenly knows they need to board up their windows. After the hurricane, prices drop back to normal. But this is the exception, not the rule, in use-dominated markets.

Efficient, expectations-driven markets shift quickly for two reasons. First, expectations, unlike uses, have no bounds. They are the product of human imagination, which is ruled alternatively by fear and euphoria. There is simply no limit to how far and how fast expectations can shift. Every bubble and crash reinforces this. Dot-com companies weren’t worth anything close to what their expectations suggested in 1999-2000, nor probably as little as their adjusted expectations implied after the bust. The same held for packages of securitized mortgages in the summer of 2008 and for Dow Jones 30 stocks in March 2009.

Second, expectations extend deep into the imagined future. Rising rents for a piece of real estate may be expected to rise forever. Profit growth of a company may be expected to continue ad infinitum, or losses until bankruptcy. Thus when expectations change, the change is implicitly projected far into the future and discounted back to the present, resulting in a much amplified change in value. One bad quarter can trigger a run on your stock and one good quarter can prompt a feeding frenzy.

So efficiency doesn’t inherently produce smoothness and stability in prices; it produces spikiness, the dark side of efficiency and expectations.

That dark side has not gone unnoticed. It has spurred the growth of an entire industry that exists only to exploit volatility: the hedge fund business. Thanks to the fact that their compensation is dominated by their carried-interest (the 20% in the famous 2&20 formula), their returns are driven by volatility — the more the better. And if more is better, why simply wait for volatility to happen? Why not band together to purposely exacerbate and profit from volatility?

Meanwhile, there are all sorts of good folks operating in use-driven markets, producing goods and services that we use on a daily basis. Most are organized as public companies with stock prices that are jerked around by the volatility aficionados. So while they are working on something that we all want — more and better products and services — they have to deal with the a huge group of influential wielders of capital who exist only to exploit whatever level of volatility they can create.

This is the dark side of efficient markets: systematically high volatility and an entire industry that exists to exploit and exacerbate it.

 

This post is part of a series leading up to the annual Global Drucker Forum, taking place November 13-14 2014 in Vienna, Austria. Read the rest of the series here.