Marina Gorbis's Blog, page 1408

The Innovation Strategy Big Companies Should Pursue

The inability of established firms to come up with breakthrough innovations is a truism today. It wasn’t always so. Joseph Schumpeter, the 20th century economist known for heralding the role of innovation in the evolution of society, argued that established firms were best positioned to innovate because of the resources available to them. Edith Penrose, one of the most prominent management thinkers of the 20th century, agreed.

It was the modern combination of internet and venture capital that changed people’s minds, by opening up a new source of breakthrough innovation: high-growth startup companies. With their appetites for high risks and returns, and no legacy systems or brands to encumber them, agile young businesses produced so many breakthrough products and services that they came out ahead, even given a high rate of failure and even though it often took many experiments to arrive at a winning business model. Innovation scholars who studied these new wellsprings of innovation soon came to appreciate the power of the entrepreneurial ecosystem, rich with resources and creative stimulus.

As the idea took hold that innovation comes from the “startup nation,” many established companies ceded the ground, deciding to focus on execution and efficiency instead. It wasn’t long, however, till they realized that these two strengths without innovation were not enough to win.

In reality, established companies never lost the advantages that served them well in past innovations: the much larger set of resources under their control and the extensive networks, often spanning the globe, they could tap. They might be at a disadvantage in hatching breakthrough solutions at the product and service level, but they beat startups in more complex breakthroughs – those that called for creations or transformations of whole markets and industries. Take, for example, the challenge of bringing about any major innovation in healthcare. Yes, we see startups launching ingenious products and services, but established players are taking the lead in shaping the new healthcare market into which these new solutions can be integrated. The same is true in the energy and transportation sectors, and in the realm of “smart cities.” (In some rare cases, such as social networks or internet content marketing, startups launch products and services capable in and of themselves of creating new industries. But in general, the newness of the business behind them imposes important growth constraints.)

Is it possible that large established companies could excel in both parts of the innovation challenge – not only driving the industry change to take advantage of new solutions, but also serving as hotbeds to create them? It is, but it will require creating different environments within enterprises, more conducive to breakthrough, bottom-up innovation.

You’re no doubt familiar with the distinction between breakthrough and incremental innovation. Terms such as the ambidextrous organization have been coined to highlight the difficulty of managing both simultaneously. What makes this especially challenging is that incremental innovation calls for managing knowledge on many fronts, whereas breakthrough innovation is more about managing ignorance. The processes are necessarily different.

There is another important dimension along which business innovations differ. Some come from the top down, conceived in the upper ranks of an organization and translated into execution plans for lower levels to carry out. Others percolate from the bottom up.

Combine these two dimensions and you can imagine four distinct types of innovation. First there are incremental innovations driven from the top – the updates and extensions planned to ensure continuous progress. Second, there are incremental innovations driven from the bottom, which we could call emergent improvements. The third group consists of breakthrough innovations driven from the top: these are strategic bets. And fourth, it is possible for breakthrough innovations to start at the bottom, and constitute strategic discoveries.

A firm choosing to pursue one of these types of innovation would rely on different processes than it would use for another type. A goal of continuous progress would involve formal planning processes yielding specific, demanding goals, while a goal of emergent improvements would call for processes such as employee suggestion collection and brainstorming. A firm wanting to place strategic bets would need processes to test the rightness of the vision and the organization’s ability to execute.

Big companies have all these processes in place. The ones they don’t tend to have are processes appropriate for strategic discoveries. The advantage of the startup ecosystem is that it brings together people with diverse skills and perspectives and allows the good ideas that result from their interchange to gain traction, without hierarchies of decision-makers to quash them. Corporate processes not only neglect but often prevent such breakthroughs.

How would a management team change that? To create a “startup corporation” environment, it would need to put a number of things in place, beginning with a different approach to motivation. People should be inspired by the vision and culture of the company, not compelled by its hierarchy and rewards structure. It would need to provide the stimulus to inspire new ideas: ways to interact with others from a rich mix of backgrounds through interest groups, idea fairs, and collaborative networks. It should attract interesting players from the company’s landscape to discuss and test ideas. Mechanisms would have to be designed to enable these diverse people and ideas to be combined. Methods would have to exist by which experiments would reveal the technology-business model combination that could succeed.

The point here is that breakthrough innovation need not be random: How you innovate determines what you innovate. Luck plays a role, but it favors the prepared mind.

It’s up to managers in big companies, then, to work on this missing part of their innovation capability – building the startup corporation strengths to generate strategic discoveries. Established companies can be at least as great a source of high-growth innovation as new, agile ones. They can be effective in devising breakthrough products and services, and they are uniquely positioned to create and redefine markets and industries. If they can learn to believe this about themselves, perhaps we will see that Shumpeter and Penrose were right all along.

When Innovation Is Strategy

An HBR Insight Center




The Case for Corporate Disobedience
Google’s Strategy vs. Glass’s Potential
Why Germany Dominates the U.S. in Innovation
How Separate Should a Corporate Spin-Off Be?

Beware the “Smooth” CEO Succession

CEO succession is an inherently bumpy process. Even when the outgoing leader has performed well and seems ready to retire, the transfer of power is fraught with sensitivities. It’s hard for anyone who thrives in the all-consuming job of a CEO to hand over the reins.

So it’s no surprise that many boards work hard to make succession as painless as possible. They adopt processes that have them anticipating the change far in advance, treat the retiring CEO with full respect, and make him or her feel comfortable throughout.

This emphasis on having the transition go as smoothly as possible is a mistake.  Consider the trouble it caused for one global company. When its long-tenured and highly successful CEO was nearing retirement, the company’s board readily agreed to his designated successor. But while this candidate had risen up the ranks and performed superbly at every level, he had a serious weakness in his lack of experience dealing with the board and other key external stakeholders. Some directors saw this as a worrisome risk, but kept quiet given the current CEO’s confidence and their own hesitation to ruffle feathers. Further assuaging their concerns was the outgoing CEO’s request to stay on as chairman, an arrangement to which they readily acceded.

Instead of focusing on addressing the weakness, however, the chairman continued to have a blind spot about it. Making matters worse, he never encouraged his protégé to develop independent relationships with the other directors. As a result, the new leader launched into his CEO role never having gained an understanding of key stakeholders’ perspectives or a wayof staying abreast of them. Less than two years after he took over, progress had slowed so much that the board had to go through the highly disruptive process of removing both him and his mentor.

It’s only natural for board members to respect the view of the successful sitting CEO who has the most intimate knowledge of the company, its leaders, and the environment. After all, many of the board members are current or former CEOs themselves and can’t help but identify with the CEO’s perspective. They easily fall into agreement with the leader’s strongly held perspective on the future, and they slip into assuming his or her continuing involvement in the company after a transition.

But even today’s best-performing companies need a hard, fresh look at their prospects for tomorrow. With a successful leader in place, the board inevitably focuses on the glorious past, not the uncertain future. The current strategy, as well as the currently available talent, becomes the default option.

There is a way for directors to ask the tough questions without undermining the sitting CEO or the company. But that means giving up on smooth succession as the overriding goal. It’s time for boards to accept and prepare for the bumps and bruises that come with successions geared to serve the company’s long-term interests — rather than the current CEO’s comfort.

Ideally the work starts as soon as a new CEO arrives. The board emphasizes their interest in ongoing succession planning. While the CEO should own the process for most of his or her tenure – focused on developing a strong bench and informing the board of progress – the board should gradually take on ownership of the process as the timing of the transition nears, usually a couple of years or more before the CEO’s likely retirement. The board has to be ready and willing to dive into potentially challenging conversations with the outgoing CEO about future strategy, the timing of the transition, internal and external candidates, and his or her role in the transition and the future board.

This expectation-setting is key, so the CEO doesn’t see the uptick in board involvement as a sign of disapproval. But the board needs to back up its intentions by doing its own homework. After all, a big reason CEOs tend to dominate the succession process is that they doubt the board’s ability to make a good decision.

An engaged board can manage succession even with a less-than-cooperative CEO. The founder of an industrial company had performed admirably in building his operation into a major industry player. But the board saw that different talents were needed to reach the next level. Three long-time directors that the CEO trusted went to him and strongly encouraged him to set a retirement date. They also insisted on an objective comparison of his favored candidate with other possibilities. When the leader of a growing business unit emerged as better equipped for the company’s future needs, the board went a step further and assessed that leader against some external talent before ratifying the choice.

As the transition date neared, the board reluctantly allowed the outgoing CEO to stay as nonexecutive chairman. But they rejected a variety of requested retirement perks, such as access to the corporate jet. To top it all off, they closely watched how he interacted with the new CEO. After seeing behaviors that undermined the new leader, they had the chairman removed after only a year. While not all of this was smooth, the board had done the hard work of vetting the succession and supporting the new CEO. And the company continued to thrive.

Corporate directors are facing growing regulatory and investor pressures to exert more oversight over succession planning. It’s only natural for them to relax when their companies are thriving. But that’s no excuse for quick agreement to even the best leader’s plans for succession.

The truly great CEOs recognize their limits. They have the humility to expect their boards to challenge them usefully in their thinking on future strategy and succession – and to keep their boards informed enough to do so. Great boards in turn know that their best contribution to the long-term health of their companies is to keep challenging their CEOs in these areas. This can make for a sometimes bumpy road to succession, but a better outcome for the company and its shareholders.

Diversity Is Useless Without Inclusivity

Over the past decade, organizations have worked hard to create diversity within their workforce. Diversity can bring many organizational benefits, including greater customer satisfaction, better market position, successful decision-making, an enhanced ability to reach strategic goals, improved organizational outcomes, and a stronger bottom line.

However, while many organizations are better about creating diversity, many have not yet figured out how to make the environment inclusive—that is, create an atmosphere in which all people feel valued and respected and have access to the same opportunities.

That’s a problem.

Minority employees want to experience the same sense of belonging that the majority does to the group. Indeed, dating back to 1890, William James noted that human beings possess a fundamental need for inclusion and belonging. Research has shown that inclusion also has the promise of many positive individual and organizational outcomes such as reduced turnover, greater altruism, and team engagement. When employees are truly being included within a work environment, they’re more likely to share information, and participate in decision-making.

There are many reasons that inclusion has proved so difficult for most organizations to achieve. Broadly, they tend to stem from strong social norms and the failure to gain support among dominant group members. To understand these issues better, it is useful to look at four dynamics that frequently work against inclusiveness in many organizations.

People gravitate toward people like them. We’ve long known that similarity makes people like and identify with each other. In organizations, leaders often hire and promote those who share their own attitudes, behaviors, and traits. Thus, many organizations unknowingly have “prototypes for success” that perpetuate a similarity bias and limit the pool of potential candidates for positions, important assignments, and promotions.

To counteract this natural tendency, leaders must focus on the systems in place, look at basic statistics, and ask deeper questions, such as: Who is getting hired? Who is getting promoted at the highest rate? Why don’t we have more diversity in various positions or on teams? Who has access to information and who doesn’t? Who is not being included in these decisions? Whose opinions have I sought and whose have I left out? Am I building relationships with people who are different from me?

Subtle biases persist and lead to exclusion. When minority-group employees are hired, they may experience more subtle forms of discrimination such as being excluded from important conversations, participation in a supervisor’s or peer’s in-group of decision-makers and advisers, and may be judged more harshly. I recently completed a study, for example, demonstrating that individuals who were racially different from their supervisors perceived differential treatment in the forms of discrimination, less supervisor support, and lower relationship quality. The findings also suggested that dissimilarity might lead supervisors to favor people who are similar (in terms of race, gender, etc.) and demonstrate bias against people who are different. Researchers refer to this phenomenon as “subtle bias,” which is often a result of unconscious mindsets and stereotypes about people who are different from oneself.

To neutralize exclusion, leaders need to proactively review the access of all groups of employees to training, professional development, networks, important committees, nominations for honors, and other opportunities. Often, employees who differ from the group in power must satisfy higher standards of performance, have less access to important social networks, and have fewer professional opportunities. A recent Monster poll showed that eight out of ten female respondents “believe that women need to prove they have superior skills and experience to compete with men when applying for jobs.” Leaders may need to invest in training to reduce the subtle biases of the workplace.

Out-group employees sometimes try to conform. Often as a coping strategy, those who are different from the majority will downplay their differences and even adopt characteristics of the majority in order to fit in. Female attorneys, for example, might adopt masculine behaviors to foster others’ perceptions of them as successful. But when unique employees move towards the norms of the homogeneous majority, that negates the positive impact of having diversity within the group.

To reduce conformity, leaders need to talk authentically about the issues, seek out, and encourage differences. Leaders should ask important questions such as “What is it like being the only African-American executive?” or “What has your experience been as a female executive?” “How can we leverage your unique perspective more effectively?” While the key is asking the right questions, it is also important to listen to the responses and not react negatively if the leader does not like what he or she hears.

Employees from the majority group put up resistance. Majority employees often feel excluded from diversity initiatives and perceive reverse favoritism. Many companies have experienced backlash when leaders don’t engage majority members in the conversation on diversity and inclusion, explain why change is necessary, and make everyone accountable.

PwC chairman and CEO Robert Morwitz has said that diversity and inclusiveness are major priorities for him personally. Morwitz prefers to serve as a role model and lead from the front. He pushes to have a diverse team on all major issues. Further, he believes that critical thinking comes from inclusion, that is, from the diversity of perspective. Leaders need to put inclusion—not just diversity—at the top of their agendas and mean it. They need to actively talk about its importance, notice when it is present and absent, and set the agenda for the organization.

 

High Frequency Trading and Finance’s Race to Irrelevance

John Maynard Keynes very famously proposed that the actions of rational agents in a market were akin to a fictional newspaper contest, where entrants were asked to pick who, out of a set of six women, was most beautiful. Those who successfully picked the most popular face would be eligible to win a prize. Keynes asserted that a naive strategy in such a game would be for an entrant to pick based on their own personal opinion of beauty; and that a much more sophisticated strategy would be to make a selection based on the broader public perception of what beauty is. The underlying insight behind the Keynesian beauty contest when applied to the capital markets: that people value a stock not based on what they truly think believe the value is, but rather, on an assessment of what they think everyone else thinks its value is.

It was hard not think about that analogy while reading the latest Michael Lewis book, Flash Boys. It delves into the world of high frequency trading (HFT), detailing the lengths that firms have undertaken to get a speed edge of only tiny fractions of a second. The effect of that edge? Well, to continue with Keynes’s analogy, it allowed the high frequency traders to peek at the ballots others were sending in to the newspaper before they arrived, in turn giving them the ability to cast their votes using information not yet available to the rest of the market.

Lewis’s book, and HFTs in general, have attracted a lot of attention of late. A big part of it stems from a deep and somewhat intuitive discomfort we have with how HFTs make money, and whether that’s at all correlated to the value they bring to society. Lewis does a very effective job of mounting the case that the correlation is not very high. But while that case is made, there is also an argument to be made that HFTs are not as destructive as they are made out to be in Flash Boys. Sure, stealing fractions of a cent on millions of trades isn’t doing anyone any good. But those fractions of cents would otherwise most likely be accruing to the big banks instead of these new, smaller HFT firms. As long as people have been trading stocks, there have been middlemen taking a cut; HFTs just mean that the cut is now captured by those with the fastest computers.

The broader point that has been missed in the discussion around HFTs is that they actually have very little impact on how companies are run. Because HFT firms are holding stocks for milliseconds, they’re not ever in a position where they’re voting on corporate governance issues. They have no real interest in the underlying fundamentals of the stock. As long as the stock is trading — regardless of whether it’s going up or down — HFTs can take their cut. Because of this dynamic, executives have no reason to pay any attention to them when making decisions.

In terms of the real world of building businesses and creating value, basically, HFTs don’t matter.

But that, in turn, is exactly what makes them so interesting. They represent the logical extension of a topic that’s captured the attention of a lot of great business minds for some time: the ongoing battle between those who view companies through the lens of building something, and those that view it through the lens of finance. HBR is running a special section at the moment dealing with just this; asking whether investors are bad for business. Clayton Christensen and Derek van Bever dig in on this topic, and they identify a number of reasons companies are being pressured to act with an increasing short-term focus.

This pressure poses a problem for people who are trying to build something. It’s hard to create something truly valuable — it takes a lot of time. A lot of patience. Many mistakes are made along the way. There’s a fantastic interview with Jeff Bezos where he talks about it: “I think some of the things that we have undertaken I think could not be done in two to three years. And so, basically if we needed to see meaningful financial results in two to three years, some of the most meaningful things we’ve done we would never have even started.”

Now, there are some rockstar CEOs — who oftentimes happen to be founders, such as Bezos, Steve Jobs, Reid Hastings — who have the ability to resist the pressure that the markets put on them.  But what about everyone else? Well, it’s becoming increasingly hard to resist that pressure. The financial markets put pressure on you to generate the type of returns they’re looking for: quarterly results. If you’re an executive and your job lives and dies on those results, then you begin to realize that that’s what you need to deliver. Projects that take longer than that to materialize — particularly those that result in an upfront dip in earnings due to investment — get deprioritized.

In effect, financial markets are pushing companies to run a marathon… by having them sprint every lap.

It makes no sense to let such finance-oriented, short-term pressures seep into the economy’s innovation engines. The arguments against doing so continue to mount. And yet, as I was reading Lewis’s book on high frequency trading, I couldn’t escape the feeling that finance itself was making the most convincing argument of all: that given its way, it would reduce itself to computer algorithms, racing to see who can buy and sell stocks the fastest, in the ultimate of zero sum games.

High frequency trading is a different phenomenon from the increasing focus on short term returns by human investors. But they’re borne from a similar mindset: one in which financial returns are the priority, independent of whether they’re associated with something innovative or useful in the real world. What Lewis’s book demonstrated to me isn’t just how “bad” HFTs are per se, but rather, what happens when finance keeps walking down the path it seems to be set on — a path that involves abstracting itself from the creation of real-world value. The final destination? It will enter a world entirely of its own — a world in which it is fighting to capture value that is completely independent of whether any is created in the first place.

What the EPA’s Clean Power Plan Looks Like in Practice

Something reassuring happened Monday after EPA Administrator Gina McCarthy unveiled the Obama administration’s proposed Clean Power Plan, arguably the most important step the U.S. has taken in the fight against global climate change: The S&P 500 and Dow Jones stock indexes rose to record highs. I’ll take that as a sign investors aren’t buying the old scare tactic that federal climate action is bad for the economy. The public, too, understands that we can’t afford not to do this: More than two-thirds of Americans support carbon pollution limits on power plants, according to a new Washington Post poll. The days when lobbyists could kill climate action by trotting out bogus gloom-and-doom economic studies may finally be coming to an end.

Attitudes have changed since 2010, the last time Washington debated serious climate action, and not only because most of us have connected the dots between climate change and the extreme weather events that ravage our communities. Americans — and American companies — have also connected the dots between clean energy and economic growth, with 87% last year saying that developing clean energy should be a priority for the President and Congress.

Renewables are growing faster than any other kindof of power generation, with more solar panels installed in the U.S. over the last 18 months than the previous 30 years combined. The cost of solar and wind are falling rapidly; in fact, a few days before the new EPA announcement, Xcel Energy, which provides power to the American heartland, revealed that it was acquiring extensive wind and solar assets, “all at prices below fossil fuel alternatives.” Policies such as the new EPA proposal, which would establish firm limits on carbon pollution from power plants, will only help accelerate these much-needed market innovations.

There will be time to debate whether the EPA’s proposed targets are sufficiently ambitious. After all, the power sector is already halfway toward meeting its 2030 target of 30% below 2005 CO2 emissions levels. But the beauty of the EPA framework is that, while the limits on pollution are firm, the paths to reaching the targets are flexible. States and power companies can design their own way to compliance using a mix of onsite operational improvements and “beyond the fence” innovations, such as increased reliance on renewable energy sources, low-cost energy efficiency measures, and demand response, which compensates electricity customers for conserving energy.

These solutions aren’t in any way a mystery: They are market-tested, cost-effective, and proven to work, because many states are already doing what the EPA will require. Their success is evidence that the country is ready to meet and beat the targets laid out in the proposed standards.

Fifteen of these front-runner states wrote to the EPA at the end of last year detailing the health and economic benefits they’d  achieved. All told, they slashed carbon pollution from electricity by 20% from 2005-2011, led by Washington, which saw a 46% reduction during that period.

California is also delivering some big results. The Golden State’s energy efficiency programs have saved its residents $74 billion over the last few decades and avoided the construction of more than 30 power plants.  The state has a successful cap and trade program covering power plant pollution and a 33%-by-2020 renewable energy mandate, the most stringent of the 29 state renewable standards currently on the books.

Meanwhile, in the northeast, the nine-state Regional Greenhouse Gas Initiative (RGGI) has been operating a cap and trade system covering power plants for several years. The program delivered $1.6 billion in net economic benefit between 2009 and 2011 and is on course to cut region-wide power plant carbon pollution by half from 2005 to 2020. The RGGI states are so pleased with their own success they have emphatically asked the EPA to pave the way for other states to join RGGI or to embark on similar regional efforts.

Low-carbon leadership isn’t just confined to the coasts. Illinois, a state heavily dependent on coal for electricity, has aggressive energy efficiency mandates that require utilities to cut energy use by 2% annually by 2015, as well as a 25%-by-2025 renewables standard has been a boon for the state’s wind industry.  A similar renewable standard in Minnesota led to a 900% increase in the amount of wind energy in the state from 2000-2010. In Colorado, the state renewable energy mandate was bumped up from 20% to 30% in 2010. And the U.S. national champion for wind production? Texas, thanks in part to a renewables standard signed in 1999 by then-Governor George W. Bush.

The most exciting action here is coming from dynamic American companies that are developing energy products and services that save consumers money and give them new options. Google’s Nest thermostat, for example, lets homeowners control their appliances remotely to reduce peak load and save money. SolarCity’s groundbreaking solar leasing approach, and SCIenergy’s cost-cutting energy efficiency services for commercial customers, are both changing the energy cost equation.

Since the days of Thomas Edison, the power sector has had but one business model: a power company burned fuel to create electricity, then sent it along inefficient wires to the customers. Today that model is giving way to one in which power and information flow in both directions, and customers not only receive but also produce and store electricity. Given the sheer scale of our energy system, such change doesn’t happen overnight. But the EPA’s Clean Power Plan is focused on where America is going, and designed to help us get there faster.

How to Repair a Damaged Professional Relationship

If you’ve spent enough time in the workforce, you almost certainly have a trail of damaged professional relationships behind you. That doesn’t mean you’re a bad manager or employee; it’s simply a fact that some people don’t get along, and when we have to rely on each other (to finish the report, to execute the campaign, to close the deal), there are bound to be crossed wires and disappointments.

When conflict happens, many of us try to disengage — to avoid the person around the office, or limit our exposure to them. That’s a fine strategy if your colleague is peripheral to your daily life; you may never have to work with the San Diego office again. But if it’s your boss or a teammate, ignoring them is a losing strategy. Here’s how to buck up and repair a professional relationship that’s gone off the rails.

First, it’s important to recognize that making the effort is worthwhile. Obviously it’ll ratchet tension down at the office if you’re not glaring at your colleague every time they enter the room. But resolving this tension will actually aid your own productivity. A core tenet of efficiency expert David Allen’s Getting Things Done approach is “closing open loops” – i.e., eliminating unresolved matters that nag at your mind. Just as you can’t rest easy until you respond to that scheduling request, you’ll have a much harder time focusing professionally if you’re constantly in the midst of fraught encounters.

Next, recognize your own culpability. It’s easy to demonize your colleague (He turned in the report late! She’s always leaving work early!). But you’re almost certainly contributing to the dynamic in some way, as well. As Diana McLain Smith – author of The Elephant in the Room: How Relationships Make or Break the Success of Leaders and Organizations – told me in an interview, “You may be focusing on another person’s downside – and then starting to behave in ways that exacerbate it.” If you think your colleague is too quiet, you may be filling up the airtime in meetings, which encourages them to become even quieter. If you think he’s too lax with details, you may start micromanaging him so much, he adopts a kind of “learned helplessness” and stops trying at all. To get anywhere, you have to understand your role in the situation.

Now it’s time to press reset. If you unilaterally “decide” you’re going to improve your relationship with your colleague, you’re likely to be disappointed quickly. The moment they fail to respond to a positive overture or (yet again) display an irritating behavior, you may conclude that your effort was wasted. Instead, try to make them a partner in your effort. You may want to find an “excuse” for the conversation such as the start of a new project or a New Year’s Resolution, which gives you the opportunity to broach the subject. “Jerry,” you could say, “On past projects, sometimes our perspectives and work styles have been a little different. I want to make this collaboration as productive as possible, so I’d love to brainstorm with you a little about how we can work together really well. Would that be OK with you?”

Finally, you need to change the dynamic. Even the best of intentions – including an agreement with your colleague to turn over a new leaf – can quickly disintegrate if you fall back into your old patterns. That’s why McLain Smith stresses the importance of disrupting your relationship dynamic. In the aftermath of a conflict, she suggests actually writing down a transcript of what was said by each party, so you can begin to see patterns – where you were pushing and she was pulling. Over time, it’s likely that you’ll be able to better grasp the big picture of how you’re relating to each other, and areas where you can try something different. (If you were less vehement, perhaps she’d be less resistant.)

We often imagine that our relationships are permanent and fixed – I don’t get along with him because he’s a control freak, and that’s not likely to change. But we underestimate ourselves, and each other. It’s true that you can’t give your colleagues a personality transplant and turn them into entirely different people; we all have natural tendencies that emerge. But clearly understanding the dynamics of the relationship – and making changes to what’s not working – can lead to markedly more positive results.

Focus On: Conflict




The Best Teams Hold Themselves Accountable
Win at Workplace Conflict
Managing a Negative, Out-of-Touch Boss
Most Work Conflicts Aren’t Due to Personality

Asian Leaders Value Creativity and Intuition More than Europeans Do

Do leadership styles differ around the world? This is one of the questions explored by our recent International Business Report. We asked 3,400 business leaders working in 45 economies to tell us how important they believe certain attributes are to good leadership.

Patterns in their responses point to some intriguing cultural differences. While the top traits – integrity, communication, and a positive attitude – are almost universally agreed upon by respondents (and confidence and the ability to inspire also rank high globally) not everyone is aligned on the importance of two other traits: creativity and intuition.

Nine in ten ASEAN leaders believe creativity is important, compared with just 57% in the EU; while 85% of ASEAN leaders think intuition is important, compared to only 54% in the EU. More generally, we find greater proportions of respondents in emerging markets falling into the leadership camp we would call “modernist.” They put more emphasis on intuition and creativity and also place greater value on coaching than leaders who are “traditionalists.”

This is an intriguing discovery, but it immediately raises a follow-on question. It’s conceivable that our survey captured a gap that still exists for now but is shrinking, as globalization brings a certain sameness to businesses around the world. Will we see a steady convergence in leadership – and toward the Western style – as developing economies mature?

Many believe so. As one example, Harvard Business School’s Quinn Mills has made this prediction: “As Asian companies rely more on professional employees of all sorts, and as professional services become more important in Asian economies … Asian leadership will come to more resemble that of the West.”

I’m not so sure. Given the superior growth rates of their economies, it might be that leaders in emerging markets are gaining the confidence to stick with the management approaches that have apparently been working for them – or that they have the agility to adapt to whatever techniques and tone prove best suited to their fast-evolving local markets. A separate Grant Thornton study on Chinese leadership finds that chairmen of companies there are deliberately blending imported and home-grown management techniques and approaches to create a new “Chinese Way” of leading, rather than copying and replacing.

And here is the really big factor in play as leadership styles continue to evolve: Women still have far to come as business leaders. Today, just 24% of senior business roles around the world are held by women, but the proportion of female CEOs is on the rise. Awareness is growing that diversity, of all sorts and in any walk of life, leads to better decisions and outcomes. There is now a wealth of empirical evidence proving that greater gender diversity correlates with higher sales, growth, return on invested capital, and return on equity. One recent study from China even finds that having more women on company boards reduces the incidence of fraud. Meanwhile, uniformity of background often yields uniformity of opinion and worse decisions. The pressure is on to make boardrooms and management ranks less “male and pale.”

It has often been claimed that a key way in which business women differ from business men is in their leadership styles. For example, research shows that women leaders, on average, are more democratic and participative than their male counterparts. Studies have also shown that, as investors, women are more risk-averse and, at the household level, tend to invest a higher proportion of their earnings in their families and communities than men.

Looking across the global landscape today, we find women more prevalent in the upper echelons of companies in Eastern Europe and Southeast Asia. Perhaps it is not just coincidence that where we see more women leading, our survey finds more openness to using creativity and intuition – and also a higher value placed on the ability to delegate. In any case, these parts of the world, with their higher proportions of women in leadership, have a fair claim to be arriving sooner at the well-blended leadership style of the future.

Decision-making based on analytics is all the rage now, and certainly represents progress in many areas where managerial decisions have been made in the past on “gut feel.” But there are still many decisions in business that, either because they relate to future possibilities or because they involve trade-offs of competing values, can’t be reduced to data and calculations. One could argue that those are the very decisions – the ones requiring creativity and intuition – where leadership is most called for and tested. In a fast-moving, digitally-powered world, creativity and intuition could be the difference between gaining ground as an innovator and getting left behind.

The Industries Apple Could Disrupt Next

After an unprecedented decade of growth, analysts wrote off 2013 as a year to forget for Apple. Most pundits agreed on what was wrong — a lack of breakthrough innovation since the passing of founder Steve Jobs. But in our view, Apple faces a deeper problem: the industries most susceptible to its unique disruptive formula are just too small to meet its growth needs.

Apple has seemingly served as an anomaly to the theory of disruptive innovation. After all, it grew from $7 billion in 2003 to $171 billion in 2013 by entering established (albeit still-emerging) markets with superior products — something the model suggests is a losing strategy.

Back in 2008, we suggested that the key to Apple’s success was that it had perfected a particular disruptive strategy we dubbed “value chain disruption.” That is, rather than employ a new technology to disrupt a company’s business model, an upstart disrupts the entire breadth of an entrenched value chain by wresting control of a critical asset. Thus Apple’s integration of its iPod device, iTunes software, and iTunes music store disrupted the existing music industry value chain from the record labels to the CD retailers to the MP3 device makers. The key to Apple’s success was that Steve Jobs was able to convince the major record labels to sell its critical asset — individual songs — for 99 cents.

Achieving such a wholesale disruption of an industry is exceeding rare because the key players in the existing value chain typically have controlling rights to the scare resource, which prevents a new value chain from forming. And they are understandably loathe to give it up. But at the time, the music labels were under attack by upstarts giving their offerings away for free and were embroiled in a fairly hopeless effort to sue Napster and other music-sharing services into oblivion. In relation to nothing, 99 cents looked pretty good.

The deal Jobs struck allowed Apple to form a new digital value chain for the legal distribution of music content with itself at its center, reaping high margins on its iPod hardware. Apple quickly became the largest music retailer in the U.S. The record labels grumbled that Apple sucked the lion’s share of the profits out of the industry, but it was too late.

Jobs and Apple were able to run this play again with the introduction of the iPhone. About a decade ago, wireless carriers like AT&T, Verizon, and Sprint tightly controlled the wireless telecom value chain through the critical asset – so-called “walled gardens” they had placed around their service that prevented users from putting any nonauthorized content on their phones.

Jobs made the iPhone’s success possible by negotiating the famous deal in 2007 with the then-struggling AT&T Wireless which, in an effort to distinguish itself from its rival carriers, surrendered control over phone content in exchange for exclusive access to the iPhone in the U.S. for three years. As a result, Apple was once again able to create a new value chain, with the App Store playing a role similar role to the iTunes store, and once again reaping high margins on its hardware.

AT&T’s deal with the devil allowed it to grow substantially, but it started a process that has led wireless carriers to increasingly complain that profits have shifted from them to the device and content producers. Customers now decide first what mobile value chain they will join (Apple or Android), and choose a carrier second.

Today, Apple sits at a crossroads. In our view, the question facing CEO Tim Cook isn’t how Apple will remain “insanely great” without Jobs at the helm. It’s whether there are any other value chains it can disrupt in industries both desperate enough to be vulnerable — and big enough to fuel Apple’s further growth beyond its current $171 billion in annual revenues. After all, even modest 6% growth at this point equates to more than $10 billion in new revenue.

Let’s look at four value chains Apple could disrupt, each of which in markets that, on the face of it, seem large enough to offer hope: television, advertising, health care, and automobiles.

The TV market is immense, and Apple has a toe in the door with its Apple TV, a special purpose device that allows users to stream content from the iTunes library and a select group of partners to existing televisions. But by this time, content owners like Time Warner and cable operators like Comcast have learned from the music and mobile phone industries and won’t cede sufficient control over content to enable Apple to disrupt the entire value chain. So, at the moment Apple TV is a $1 billion line of hardware that is so small, relatively speaking, that Jobs dismissed it as a hobby. What’s more, Apple already has to contend with competing offerings from start-ups like Roku and other tech companies like Google and Amazon, both of which have introduced set-top boxes with streaming content services.

Just as traditional television will be with us for many more years, so will traditional television advertisements. The market looks more than big enough for Apple, and it has made several acquisitions that edge onto the market, including Quattro Wireless (a platform for mobile advertising) for $250 million in 2010. But the critical asset in that value chain is the viewership data that Nielsen provides, which sets the price for advertising. And Nielsen has no reason to cede control of it.

Apple might try to compete with Nielsen directly by offering up a superior metric, such as a measure of audience engagement or a way to track actual transactions generated by a broadcast advertisement. That’s not entirely impossible, given the obvious limitations of Nielsen ratings as a predictor either of audience size or of a commercial’s ability to increase sales. But that approach would take substantial investment, and the fight with entrenched incumbents on their own ground would be fierce.

The delivery of primary health care in the United States is ripe for disruption. Apple might conceivably go beyond what seems to be inevitable forays into the fitness and health-monitoring markets to create new disruptive ways to diagnose and deliver primary care and support the ongoing treatment and management of chronic illness. Doing so would require some nifty regulatory maneuvering. It would also require the company to crack a problem that has flummoxed Google and Microsoft: the creation of a simple, common electronic medical record, which could function as the glue of a new primary care value chain.

IBM with its Watson computer seems to be positioning itself as a vital partner for the world’s most complicated problems, but Apple has a demonstrated history of bringing elegant simplicity to the kinds of everyday problems that serve as the core of primary care. Our view is this is the most complicated of the organic options and therefore the one with the lowest chances of success, but the one that also has the most upside potential.

These first three paths are primarily organic in nature. But what if Apple followed through on rumors that it might acquire Tesla, Elon Musk’s rapidly growing electric vehicle company?

Tesla is clearly attempting to disrupt the automobile value chain by building charging stations and battery factories and challenging independent dealers with direct sales. Perhaps combining with Apple would help Tesla navigate the complicated regulatory challenges facing its deployment. However, rather than leveraging preexisting assets at the center of the sprawling petroleum-powered car value chain to disrupt it, Apple and Tesla would have to invest heavily to create an entirely new one. Apple’s vast assets would certainly help Tesla wage that battle, but the required investments would be gargantuan.

None of these options is a slam dunk, of course. If they all end up being strategic dead ends and Apple can’t find another mega-industry value chain ripe for disruption, perhaps the company needs to consider something more radical. A recent article in The Economist counseled Warren Buffet to break Berkshire Hathaway into smaller pieces. Perhaps Cook should consider a similarly radical decision to break Apple up so that the remaining pieces are small enough to again love niche opportunities that aren’t quite so difficult to pull off. Otherwise, Apple’s next decade runs a high risk of looking like Microsoft’s last — steady performance, attractive cash flows, but an overall sense of stagnation.

When Innovation Is Strategy

An HBR Insight Center




The Case for Corporate Disobedience
Google’s Strategy vs. Glass’s Potential
Why Germany Dominates the U.S. in Innovation
How Separate Should a Corporate Spin-Off Be?

When an Inability to Make Decisions Is Actually Fear of Conflict

When a company’s planning and decision-making process involves a lot of meetings, discussions, committees, PowerPoint decks, emails, and announcements, but very few hard-and-fast agreements, I call that “decision spin”. Decisions bounce around the company, from group to group, up and down the hierarchy and across the matrix, their details and consequences changing as different stakeholders weigh in.  Often, the underlying problem isn’t an inability to make decisions – it’s a tendency to avoid conflict.

Decision spin doesn’t prevent decisions from being made altogether.  But they often don’t stick, because people hesitate to express their disagreements during the discussion.  There is a lot of head nodding, smiling, and camaraderie — which is undermined later when participants don’t follow through on the decisions that they didn’t really buy into.

Decision spin can be incredibly frustrating at all levels of the organization.  It also has a huge impact on cost, productivity, and customer service.  For example, when managers at one company I worked with couldn’t agree on the best way (or the few best ways) to configure their sales management software, they ended up with dozens of variations, which not only increased licensing fees, but also made it much more difficult to coordinate sales across divisional or geographic lines.  Similarly, when another company needed to reduce its expenses, the pain was spread like peanut butter across the different cost centers because the senior management team couldn’t reach a decision about where to focus — which meant that areas with growth potential lost as much muscle as those with less opportunity.

From the outside, of course, this kind of behavior looks silly.  Why can’t managers — even at a very senior level — have open, honest and candid debates, work through their differences, and then reach agreement?  That’s what they’re paid to do.  Unfortunately, it’s not that easy, for two reasons:

One is that managers are people and have a very human desire to be liked.  They want others to think well of them and not feel that they’re difficult to work with.  They want to get along and seem like team players.  So even when they disagree with something, they often hold back on expressing it too vociferously so as not to get into a fight. In fact, many managers I’ve talked to are afraid that disagreements might turn into uncomfortable battles that will damage or destabilize relationships. So they unconsciously pull their punches to keep things calm.

The second reason for avoiding conflict is that many managers lack the skills to engage in it constructively. Perhaps because of the psychological issues described above, these managers don’t get a lot of practice at conflict, or they’ve never been trained in conflict management. As a result, they miss some of the basic principles and tools necessary to engage in positive conflict, such as defining the overarching goal to be achieved, identifying common ground, focusing on the problem instead of the person, objectively listing points of agreement and disagreement, listening more than talking, and shifting from debating to problem-solving.  While none of these principles are rocket science, they’re also not necessarily skills that everyone is born with.  And in the absence of these skills, it’s easy for business conflicts and disagreements to quickly escalate into interpersonal tensions — which triggers the avoidance syndrome described above, and a continuation of decision spin.

Breaking this kind of cycle is not easy, particularly if it’s deeply engrained in the culture of your company, and in the emotional makeup of key senior leaders.  However, if you want to address it  — from wherever you are in the organization — here are two steps that you can take:

First, convene your team, or a group of colleagues, and talk about whether decision spin is an issue.  If it is, discuss some real examples, how they played out, and the consequences for the company.  Consider whether these are isolated instances or part of a recurring pattern, and what the payoff might be to reduce some of the spin.  The key here is to avoid abstractions and build some awareness and alignment about the need to make improvements.

Once you’re in agreement that decision spin is worth attacking, work with your team or your colleagues to develop some ground rules for constructive conflict.  These might include giving everyone two minutes to share his or her views; appointing someone to write down pros and cons of an issue; reminding everyone that disagreements are not personal attacks; setting a time limit for debates; or agreeing that decisions don’t get changed unilaterally.  Obviously, this is not the same as full-blown conflict management training, but it’s a way to get started — and if you experience some success, it could create the readiness for additional developmental work.

Companies can’t afford to let decisions spin around with no resolution.  Shortening that cycle, however, requires managers to understand that conflict should be embraced, rather than avoided.

Focus On: Conflict




Managing a Negative, Out-of-Touch Boss
Most Work Conflicts Aren’t Due to Personality
Conflict Strategies for Nice People
Senior Managers Won’t Always Get Along

Finding the Balance Between Coaching and Managing

Ask 100 people if they have good common sense, and more than 95% will tell you they do. Ask them if they are good coaches, and almost as many will say yes. Executives we talk to assume that if they’re good managers, then being a good coach is like your shadow on a sunny day. It just naturally follows.

This would be good news, if it were so, since more and more top executives are expecting managers to coach their subordinates. In fact one at Wells Fargo announced that he expects the bank’s managers to dedicate fully two-thirds of their time to coaching subordinates.

What’s more, employee surveys we’ve conducted over the past decade show that subordinates want coaching. Our own empirical evidence echoes myriad studies in finding that effective coaching raises employee commitment and engagement, productivity, retention rates, customer loyalty, and subordinates’ perception of the strength of upper-level leadership. Responses we’ve collected over the 10 years from some half-million individual contributors worldwide, evaluating about 50,000 of their managers in 360 reviews, show just about a perfect correlation between the leaders’ effectiveness in developing others and the level of their subordinates’ engagement and discretionary effort:

Unfortunately, our long experience helping executives find and develop their strengths has taught us that coaching is not something that comes naturally to everyone. Nor is it a skill that is automatically acquired in the course of learning to manage. And done poorly, it can cause a lot of harm.

What’s more, before they can be taught coaching skills, leaders need to possess some fundamental attributes, many of which are not common managerial strengths. Indeed, some run counter to the behaviors and attributes that get people promoted to managerial positions in the first place. Here are a few of the attributes we have recently begun to measure in an effort to determine what might predict who would make the most effective coaches. You’ll quickly see the conflict between traditional management practices and good coaching traits:

Being directive versus being collaborative. Good managers give direction to the groups they manage, of course, and the willingness to exert leadership is often why they get promoted. But the most effective managers who are also effective coaches learn to be selective about giving direction. Rather than use their conversations as an opportunity to exert a strong influence, make recommendations, and provide unambiguous direction, they take a step back, and try to draw out the views of their talented, experienced staff.

A desire to give advice or to aid in discovery. Subordinates frequently ask managers questions about how they should handle various issues or resolve specific problems. And managers are often promoted to their positions because they are exceptionally good at solving problems. So no one should be surprised to find that many are quick to give advice, rather than taking time to help colleagues or subordinates discover the best solution from within themselves. The best coaches do a little of both.

An inclination to act as the expert or as an equal. We’ve all seen instances when the person with the most technical expertise has been promoted to a supervisory or managerial position. Organizations want leaders to understand their technology. So, naturally, when coaching others, some managers behave as if they possess far greater wisdom than the person being coached. But in assuming the role of guru, the well-meaning manager may treat the person being coached as a novice, or even a child. Still, the excellent coach does not behave as a complete equal, with no special role, valued perspective, or responsibility in the conversation.

How effective is your approach to coaching? We invite you take a coaching evaluation to see where you stand in comparison to outstanding business coaches. It will measure the how strongly you prefer to behave collaboratively or dictatorially, how prone you are to giving advice or enabling other people to discover answers for themselves, and how apt you are to exert your expertise or treat everyone as equals. While certainly the best coaches adjust their style to the particular person and situation at hand, we have found that there are ideal ranges on the scores for all six of these dimensions.

Neuroscience is consistently reminding us that the brain is remarkably plastic. So even though we’ve found a strong correlation between certain traits you may not already possess and the ability to be an effective coach, we have found that people can learn to acquire them — if they are willing to work at it. What that takes is a willingness to step outside your comfort zone and behave in ways that may not be familiar. It’s just like learning to play golf or tennis. What feels awkward at first begins to be more comfortable in time.

Leaders can learn to be more collaborative as opposed to always being directive. They can learn the skill of helping people to discover solutions rather than always first offering advice. They can learn how satisfying it is to treat others with consummate respect and to recognize that in today’s workforce, it is not unusual to have subordinates who are more comfortable with the latest technology than their leaders are.