Marina Gorbis's Blog, page 1420

Quantify How Much Time Your Company Wastes

Forty-four hours of meetings per week. Forty-six average attendees per meeting. Twenty-two hours of e-mail per week.

These numbers are not a dramatization; they are the actual year-long averages for a large technology company’s vice president. And at the managerial level, things don’t look much better: One IT manager, for example, spends 35 hours a week in meetings, sends emails during 85% of those meetings, and interfaces with an average of eight different teams each day.

There are so many initiatives, goals, people, customers, and vendors competing for our time that it’s extraordinarily challenging to just simply focus. While most would agree this overload negatively affects performance, it’s also something that’s notoriously difficult to measure. This is changing, however – just think about how many companies are utilizing sophisticated social intelligence algorithms to create a deeper understanding of their customers’ patterns and behavior. The next step is turning these analytics inward – harnessing the massive amount of e-mail, calendar, and messaging data a company already has – to diagnose surprising inefficiencies that exist at an organizational level.

Equipped with this information, companies can make decisions about how to better allocate what a recent HBR article (using VoloMetrix data) called their “scarcest resource:” time.

People analytics is not one-size-fits-all, as there are about as many ways to apply it as there are types of organizations themselves. But here are a few examples of how it’s helped managers better align their workforce with their business goals:

Identify expensive errors. A large IT organization we work with combed through its organizational time budget for a big systems integration project and found that a trivial requirement missed by a vendor cost $86,000 in its own peoples’ time to fix later on.
Monitor partner relationships. A new media company working with a partner company discovered it had over twice the number of their own employees working to support that relationship, at a cost of hundreds of thousands of dollars of their own peoples’ time.
Personalize feedback loops. To reduce organizational distractions and allow employees to better focus on priorities, a high tech company delivered personalized weekly reports to employees and managers. The reports were used for performance conversations to identify the issues and specific projects that were distracting people from the work that mattered most.

One fairly easy way to start analyzing your own company’s data is around what we call time fragmentation. This is based on the idea that making any real progress on thoughtful work requires more than a 30-minute increment of time, and that it takes 15 minutes to return to a productive state after an interruption. So when meetings and other workplace realities (such as email, hallway conversations, phone calls, bathroom and coffee breaks, etc.) are taken into account, a two-hour time block realistically equates to one-hour of productive work.

At one large software company, for example, we saw the average manager had only eight of these two-hour blocks of unfragmented time. That’s 16 hours available per week, which equates to about 8 useful hours. These same managers spent an average of 20 hours per week in meetings. After taking this into account, and assuming a 45-hour work week, managers were each left with nine lost hours per week because of fragmentation and too much context switching (45-16-20 = 9). That’s over 450 lost hours per year, per manager.

One solution could be a 20% reduction in meeting load through initiatives aimed at encouraging smaller, shorter and fewer meetings. We’ve found that a change like this can free up even more time for productive, unfragmented work than is saved on paper because people are less frequently interrupted.

While people analytics can be incredibly powerful for revealing patterns, I want to caution that it is not a panacea. In the end, effective management still requires the perspective of an experienced leader to ensure the data is viewed in context, taking into account factors like changing market conditions or the learning curve associated with a new initiative. In addition, companies that use people analytics should factor in a period of adoption, as people determine how they can best use the data and define the value of the analytics for their specific organization.

But by more closely tracking how you and your employees are spending your time, you may find new approaches to time management that go beyond individual attempts to work harder.

How One Law Firm Maintains Gender Balance

No area of the business world is more illogically gender imbalanced than law firms. Every year, top law firms recruit 60% female and 40% male law graduates into their practices. Within two years, their female majorities begin to leave. The percentage of female equity partners is now 17% in the top 100 US law firms.

The strangest part is that women lawyers aren’t leaving the profession. They are only leaving law firms, taking on corporate, government or regulatory roles instead.

Law firms who want to hold onto their female recruits can do so – but they need to behave differently. Gianmarco Monsellato, head of TAJ insists it’s only an issue of leadership.

His own firm is 50/ 50 gender balanced, at all levels – including equity partners and governance bodies. It’s fueled their success over the past decade, and TAJ is now the No. 5 law firm in France.

How did he do it? Dramatically differently than most law firms. Most of his competitors have spent years organizing women’s initiatives, networks, or mentoring programs that have done little to increase the percentage of women reaching the top. The National Association of Women Lawyers’ recent report is pretty clear: These “fix the women” approaches have not delivered.

Instead, Monsellato tackled the problem personally. He was involved in every promotion discussion. “For a long time,” he says, “I was the only one allocating cases.” He insisted on gender parity from the beginning. He personally ensured that the best assignments were evenly awarded between men and women. He tracked promotions and compensation to ensure parity. If there was a gap, he asked why. He put his best female lawyers on some of his toughest cases. When clients objected, he personally called them up and asked them to give the lawyer three months to prove herself. In every case, the client was quick to agree and managed to overcome the initial gender bias.

This kind of leadership on gender is rare, but spreading. A growing number of courageous male leaders are working very hard to balance their companies – because they ferociously believe it will enhance their businesses. I spend a lot of time with these kinds of leaders. The smartest among them know that gender balance is more about getting male leaders, and men in general, to push for balance than it is about getting women to change their own behavior.

Monsellato laughs at the ideas of “leaning in” and diversity programs. “If partners aren’t convinced, you won’t get anywhere. And diversity programs headed by women reporting to all-male boards will never work.” He never referred to his gender push as a diversity initiative, and he has never run diversity programs. “What I have done is promote people on performance. If someone works 50% of the time, we adjust that performance to its full-time equivalence. When you adjust performance on an FTE basis, maternity issues stop being an indicator.”

He knows just how hard his female lawyers work, and he doesn’t want to lose out on the benefits of their productivity and ideas. “My biggest issue is trying to stop women from working all the time,” he says, “as technology allows them to work anywhere, anytime.” It’s the “tone from the top” that is key, he insists. Speaking to a roomful of female lawyers at a recent conference, he reminded them, “You are not a minority. It’s about balance, not about gender diversity.”

Interestingly, in my experience, most of the leaders who’ve pushed hardest for gender balance are themselves not fully members of their companies’ dominant majority. They are often a different nationality than most of their colleagues, or the first non-home- country CEO. So, for example, the Peruvian-born Carlos Ghosn at Nissan in Japan, the Dutch Marijn Dekkers at BAYER (disclosure: they are a client) in Germany, or the Italian Monsellato at TAJ in France.

There is nothing better than being a bit of an outsider to understand the particular stickiness of the in-group’s hold on power. These are some of the more enlightened leaders on gender balance. They build true meritocracies, they get the best of 100% of the global talent pool – and they will win a huge competitive edge in this century of globalization.

Finding Your Superconsumers When It Isn’t Obvious Who They Are

In the March issue of HBR, some colleagues and I described a growth strategy of selling more to people we call “superconsumers.” In the article, most of the examples involve consumer packaged goods (CPG) companies; the central example involves Kraft’s Velveeta brand. The gist of the strategy is that instead of trying to convince new customers to buy their products, smart managers should find ways to get their best customers to buy even more.

Since the article appeared, my team has received a steady stream of questions about whether superconsumers can cut across product categories, and whether they can exist in big-ticket industries where consumers typically make just a single purchase.

The answers are Yes and Yes.

The trick is using broad data versus just big data, specifically looking across seemingly unrelated categories that are, in fact, related. Our research has found that superconsumers of one category tend to be superconsumers of nine other categories.

We’ve come to think of this as the superconsumer Rubik’s Cube — you solve for one side first, then find that the other sides fall into place. This works especially well for big-ticket items that, unlike Velveeta cheese, most people only buy once, because marketers can identify a superconsumer by observing their behavior in other categories.

We found an interesting link between two seemingly unrelated, big-ticket, long-purchase-cycle categories — insurance and standby power generators. Both are highly valued by the same consumers, those who are very proactive and value protection.

I asked one of our financial services partners, Alok Gupta, to help me with this.

Life insurance is not a topic most people want to think about, so superconsumers do not immediately come to mind. Alok noted that life insurers as a whole are shrinking. According to a McKinsey study, in 1985 life insurers represented 40% of the financial services industry in market capitalization. Today that figure is 25%.

Alok and I discovered that life insurance superconsumers do exist. They are the top 10% of the market, and they buy five times more death benefit coverage and have three times more accumulated cash value than the typical life insurance customer.

One might be tempted to say that these are just high-income consumers. But not all high-income consumers are motivated in the same way. In fact, the same analysis of high-income consumers shows that they only have 1.3 times more death benefit and 0.7 times the accumulated cash value as the typical life insurance consumer. And these superconsumers are emotionally engaged in insurance—proactively shopping for insurance, and looking forward to phone calls from their agent

The real question is how do you find them?

It turns out that these are superconsumers of insurance in general. They spend 40% more in annual premiums across all forms of insurance (e.g., auto, home, personal liability, long term care). The challenge is that many insurance companies have access to this data, so no one company has a distinct advantage.

Strange as it may sound, one of the best things an insurance agent can do is to look for consumers with standby generators. Generac is the leading standby generator company. These gas-powered devices provide power when the electrical grid shuts down, usually in extreme weather. The challenge of selling standby generators is that disaster is equally unpleasant to talk about as death. Beyond that, while every consumer has a vague idea of what life insurance is, few people have ever heard of a standby generator.

The CEO of Generac, Aaron Jagfeld, noted that while their growth was strong, it’s historically been reliant on “reactive” consumers — generally people who’ve suffered during a major blackout. We found that the ideal consumer for Generac was a superconsumer of proactive protection, who was willing to learn about and make a large purchase without previously experiencing an extreme event.

This behavior spills out into many aspects of these consumers’ lives. Not only do they have more insurance, but they often have three or more refrigerators and freezers because they enjoy cooking and freezing food for the future—a form of planning ahead. We also found that for them, buying a standby generator was a deeply emotional purchase, not a rational one. When asked to draw a generator, they drew super heroes with bulging muscles, capes flying in the wind, standing on top of buildings. They said buying a generator made them feel like the best providers and protectors of their families. One consumer said, “I actually look forward to when the power goes out. I imagine myself standing in my driveway at night looking at the sea of darkness, with my house as the only bright beacon on the hill. As a result, my family and everyone else knows that I am the man.”

Generac took the broader insight about proactive protection superconsumers and improved their marketing strategy. This has helped their business double in the last few years.

The takeaway: When looking for superconsumers, don’t restrict yourself to considering your own best customers. Often, somewhere in the data, there’s a hidden correlation between the people who’d love to buy your product and people who are already deeply engaged with a seemingly unrelated product, all stitched together under a singular and powerful emotional benefit.

Dealing With Investors the Sam Palmisano Way

Last fall, when it was still not clear who would be the next chief executive of Microsoft, Jack Welch recommended Sam Palmisano for the job.

The two were sitting on stage at Radio City Music Hall chatting about business-y stuff when the retired GE CEO made the suggestion, and I was a little surprised when the retired IBM CEO didn’t dismiss it out of hand.

I’d be interested, Palmisano replied, but only “if Bill took the company private.”

Bill Gates did not choose to take Microsoft private (it would have cost a lot), and insider Satya Nadella became the company’s new CEO. But I tucked Palmisano’s remark away, and when we started putting together a package of articles for the June HBR on American corporations’ relationship with Wall Street, I thought I’d ask Palmisano about it. What was so horrible about publicly traded companies that he’d consider being a CEO again, but only if he could avoid public markets? Are today’s investors really that horrible?

Short answer: no. Palmisano’s main complaint with public companies, he said when I asked, had to do with “the regulatory environment and the role that’s being defined for the board.” Basically, he thinks public-company boards are being forced to spend too much time on compliance and control, which crowds out more important topics like strategic investment and growth. But investors — he didn’t have a problem with them at all.

They do, however, have to be managed intelligently. Palmisano and his executive team struggled with that during his first few years as CEO, but eventually came up with the approach that he discusses at length both in the Q&A published in the latest HBR and in this brand-new Ideacast podcast (we covered some similar ground in the two interviews, but they were entirely separate conversations, so if you’re a glutton for this stuff, you should consume both):

Download this podcast

The abridged version is that Palmisano and then-CFO Mark Loughridge came up with what they called the “investor model” or the “road map” — a strategic plan complete with multi-year goals for investment, revenue growth, and earnings growth that they asked investors to judge them by.  (Here’s a version of it from a couple of years into the process, which started in 2006.) The idea was to avoid the distracting dance around quarterly earnings and quarterly earnings forecasts, but at the same time tell investors more than just “trust us.”

At first investors didn’t trust them, but as IBM began meeting and surpassing the targets it set for itself, and Palmisano began inviting the company’s biggest shareholders in for day-long discussions of the company’s strategy, criticism of his leadership faded and the company’s stock began a long upswing. He succeeded in charming Wall Street … without ever deigning to participate in one of his company’s quarterly earnings conference calls or talking up its prospects on CNBC.

Obviously, if IBM hadn’t met the targets Palmisano and Loughridge set, it would have been a different story.  And there are indications now that Palmisano’s strategic plan and its focus on earnings-per-share gains may have eventually become counterproductive. In the cover story of the latest Bloomberg Businessweek, Nick Summers reports that many IBMers now refer to what is officially called Roadmap 2015 as “Roadkill 2015.”

But in dealing with the investment community, Palmisano’s approach still seems like the only productive one for the CEO of a publicly traded company to take. Don’t respond to Wall Street, in the sense of paying attention to the day-to-day or even month-to-month movements of the share price or the things that sell-side analysts ask on earnings calls or business-channel anchors ask on TV. Instead, come up with a strategy, communicate it clearly to investors and give them transparent ways to judge whether you’re succeeding or not. Last year I wrote about how Amazon’s Jeff Bezos had succeeded in part by approaching Wall Street with the attitude of a good dog trainer. That’s an extreme case, and in some ways so is Palmisano’s: CEOs of companies with lower profiles than IBM’s sometimes probably do have reason to join in on conference calls and make the voyage to Englewood Cliffs. But they need to figure out what to tune out — and learn to manage Wall Street rather than being managed by it.

Strategy Is No Longer a Game of Chess

Legendary strategists have long been compared to master chess players, who know the positions and capabilities of each piece on the board and are capable of thinking several moves ahead.

It’s time to retire this metaphor. Strategy is no longer a game of chess because the board is no longer set out in orderly lines. Industries have become boundless.  Competitive threats and transformative opportunities can come from anywhere.  Strategy, therefore, is no longer a punctuated series of moves, but a process of deepening and widening connections.

The first person to think seriously about how businesses function was Ronald Coase.  In his groundbreaking 1937 paper he argued that firms gained competitiveness by reducing transaction costs, especially those related to information.  In his view, firms could grow until the point that organizational costs cancelled out transactional benefits.

In the 1980s, Michael Porter built on this idea and made it more possible for managers to act on with his concept of value chains. His ideas provided managers with a blueprint for building competitive advantage.  By increasing scale companies could create efficiencies along the entire value chain through either operational excellence or bargaining power with suppliers and customers.  Costs would be further reduced through scale as firms moved up the experience curve.

In effect, competitiveness was the sum of all efficiencies and you created those efficiencies by building greater scale.

The world envisioned by Coase and Porter was relatively stable.  Transaction costs were like weeds, which managers could gradually root out.  Once the lines of competition were drawn, strategy was a mainly a matter of bringing “relative strength to bear against relative weakness,” as UCLA’s Richard Rumelt has put it.

Yet today we live in a world of accelerating returns, where cost efficiencies can improve exponentially, nullifying scale advantages.  Further, technology cycles have begun to outpace planning cycles.  So in the course of planning and executing any given strategy, relative strength and relative weakness are likely to change—sometimes drastically.

So we find ourselves in an age of disruption, where agility trumps scale and strategy needs to take on a new meaning and a new role.  We can no longer plan; we can only prepare. This requires what Columbia’s Rita Gunther McGrath calls a shift from “learning to plan” to “planning to learn”.

When Jeff Bezos started Amazon, his purpose was to sell books against traditional competitors like Barnes & Noble.  Yet today, Amazon is much more than a retailer.  It offers cloud computing services to enterprises, builds computer hardware, and develops TV shows. It directly competes with firms as diverse as Microsoft, Walmart, and Netflix.

However, Amazon is not a conglomerate; it is a platform.  The same cloud architecture that runs its online store is what it offers as a service to enterprises and distributes entertainment to consumers.  As it expands connections to into new areas, it deepens capabilities at its core.   This is why, if you’re looking at the competitive landscape, it doesn’t make sense to talk about Amazon’s “industry position” as much as it does to examine its ecosystem.

When Coase wrote his famous paper in 1937, transaction costs were a much heavier burden.  Today’s most valuable corporate resources aren’t tied to a physical place, don’t substantially diminish with use, and are easily distributed.  The world has changed and so must strategy.

Many have argued over what this shift should entail. For instance, McGrath argues, in her excellent book, The End of Competitive Advantage, that sustainable competitive advantage is no longer possible and we must be content with achieving transient advantage.  In her view, rather than focusing on a distinct set of capabilities, firms must constantly be moving on to greener pastures. And yet I’m not sure this part of her argument holds.  Clearly, there are plenty of firms such as Amazon, Walmart, and Apple that are able to not only maintain, but deepen their advantages over time.  Sure, they’ve increased their scope as well as their scale, but their core businesses have also improved.

What’s changed is that competitive advantage is no longer the sum of all efficiencies, but the sum of all connections.  Strategy, therefore, must be focused on deepening and widening networks of information, talent, partners, and consumers.  Brands, in effect, have become more than assets to be leveraged, but platforms for collaboration.

You’ll Absorb More if You Take Notes in Longhand

College students who take notes on laptop computers are more likely to record lecturers’ words verbatim and are thus less likely to mentally absorb what’s being said, according to a series of experiments by Pam A. Mueller of Princeton and Daniel M. Oppenheimer of UCLA. In one study, laptop-using students recorded 65% more of lectures verbatim than did those who used longhand; a half-hour later, the laptop users performed significantly worse on conceptual questions such as “How do Japan and Sweden differ in their approaches to equality within their societies?” Longhand note takers learn by reframing lecturers’ ideas in their own words, the researchers say.

Why Germany Dominates the U.S. in Innovation

Reading the headlines, you might think that the most urgent question about national success in innovation and growth is whether the U.S. or China should get the gold medal. The truth is: Germany wins hands down.

Germany does a better job on innovation in areas as diverse as sustainable energy systems, molecular biotech, lasers, and experimental software engineering. Indeed, as part of an effort to learn from Germany about effective innovation, U.S. states have encouraged the Fraunhofer Society, a German applied-science think tank, to set up no fewer than seven institutes in America.

True, Americans do well at inventing. The U.S. has the world’s most sophisticated system of financing radical ideas, and the results have been impressive, from Google to Facebook to Twitter. But the fairy tale that the U.S. is better at radical innovation than other countries has been shown in repeated studies to be untrue. Germany is just as good as the U.S. in the most radical technologies.

What’s more important, Germany is better at adapting inventions to industry and spreading them throughout the business sector. Much German innovation involves infusing old products and processes with new ideas and capabilities or recombining elements of old, stagnant sectors into new, vibrant ones.

Germany’s style of innovation explains its manufacturing prowess. For example, many, if not most, of the Chinese products we buy every day are produced by German-made machinery, and the companies that make them are thriving.

It also explains why Germany’s industrial base hasn’t been decimated, as America’s has. Germany is better at sustaining employment growth and productivity, while expanding citizens’ real incomes. Even with wages and benefits that are higher than those in the U.S. by 66%, manufacturing in Germany employed 22% of the workforce and contributed 21% of GDP in 2010. The bottom line: German manufacturers are contributing significantly to employment growth and real income expansion.

In the U.S., by contrast, fewer and fewer people are employed in middle-class manufacturing jobs. In 2010, just under 11% of the workforce was employed in manufacturing, and manufacturing contributed 13% of GDP. Inequality is on the rise, and the country’s balance of payments is getting worse.

Three factors are at work here:

Germany understands that innovation must result in productivity gains that are widespread, rather than concentrated in the high-tech sector of the moment. As a consequence, Germany doesn’t only seek to form new industries, it also infuses its existing industries with new ideas and technologies. For example, look at how much of a new BMW is based on innovation in information and communication technologies, and how many of the best German software programmers go to work for Mercedes-Benz. The U.S., by contrast, lets old industries die instead of renewing them with new technologies and innovation. As a result, we don’t have healthy cohesive industries; we have isolated silos. An American PhD student in computer science never even thinks about a career in the automobile industry — or, for that matter, other manufacturing-related fields.


Germany has a network of public institutions that help companies recombine and improve ideas. In other words, innovation doesn’t end with invention. The Fraunhofer Institutes, partially supported by the government, move radical ideas into the marketplace in novel ways. They close the gap between research and the daily grind of small and medium-size enterprises. Bell Labs used to do this in the United States for telecommunications, but Fraunhofer now does this on a much larger scale across Germany’s entire industrial sector.


Germany’s workforce is constantly trained, enabling it to use the most radical innovations in the most diverse and creative ways to produce and improve products and services that customers want to buy for higher prices. If you were to fill your kitchen and garage with the best products that your budget could afford, how much of this space would be filled with German products such as Miele, Bosch, BMW, and Audi?

Germany actively coordinates these factors, creating a virtuous cycle among them. Germany innovates in order to empower workers and improve their productivity; the U.S. focuses on technologies that reduce or eliminate the need to hire those pesky wage-seeking human beings. Germany’s innovations create and sustain good jobs across the spectrum of workers’ educational attainment; American innovation, at best, creates jobs at Amazon’s fulfillment centers and in Apple stores.

It’s high time for the U.S. to revamp its innovation system. Americans need to recognize that the purpose of innovation isn’t to produce wildly popular internet services. It’s to sustain productivity and employment growth in order to ensure real income expansion. We need new policies that allow American innovation to be scaled up and produced on American soil, by American workers. Changes need to happen in how we transfer radical inventions from the lab to the marketplace, via a set of public-private institutions that do for America what the Fraunhofer centers do for Germany. We need to think about skills training as a lifelong endeavor, with workers across the spectrum of education being taught how to use new technologies to increase productivity.

Economic growth doesn’t happen at the moment of invention. Only innovation policies that target the complete innovation cycle will succeed in creating economic growth that enhances the welfare of all citizens. There is nothing a German can do that a properly trained and incentivized American cannot.

When Innovation Is Strategy

An HBR Insight Center




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When to Pass on a Great Business Opportunity
Is It Better to Be Strategic or Opportunistic?
Your Business Doesn’t Always Need to Change

Where There’s No Margin for Toxic Leadership

Growing a midsized firm takes a top team with zero weak links.  Even one ineffective executive weakens a firm’s ability to address big problems. But building a consistently strong top leadership team is difficult for at least three reasons: the tendency to be loyal to existing members, the lack of management depth to promote from, and many CEOs’ lack of experience in many functional areas.

To be sure, this is not just a problem for midsized firms. Plenty of large companies have dysfunctional executives, as many Fortune 500 human resource consultants can tell you. But big firms can afford one or two dysfunctional leaders because their executive teams are sizable. Ford Motor Co. (a $134 billion company) has a corporate-level team of 41; Western Union (a $5.6 billion company) has 15. One troublesome executive out of 41 or even 15 is not likely to be fatal – unless, of course, he is the CEO. But when it’s a team of six? It’s a different story.

Consider the case of a $30 million manufacturer. Back in 2001, it was growing rapidly. The CEO thought he needed to step out of the chief sales role to focus on operations and finances. He hired a head of sales who quickly asked for broader authority and a fancy title: Chief Lightning Catcher. In fact, he wanted the CEO to stay out of sales altogether, and he succeeded in pushing him out of that function.

Everything seemed fine for the first few years. Three years later, the firm’s sales growth ground to a halt and it continued to be flat for two more years. The CEO sensed a problem with the sales chief, but wasn’t clear what it was so he left him alone. But the sales head kept blaming others for sales opportunities that went sour. The self-appointed Chief Lightning Catcher said he needed more control to right things.

By 2005, the Chief Lightning Catcher found a company that wanted to acquire the firm and provide badly needed investment capital. The Chief Lightning Catcher led the talks, which became serious. But in December 2005, the offer fell through. The reason, the CEO found out later: the would-be buyer didn’t like the Chief Lightning Catcher. It turned out he was manipulative, divisive, and ineffective.

Four months later the CEO fired him. To his surprise, the sales team was relieved; they had been micro-managed. Customers didn’t care; the sales chief had hardly communicated with them. In fact, several customers told the CEO they had stayed with his company despite the sales chief’s presence.

With a re-energized sales team and a new product whose revenue quickly became about a quarter of the company’s sales, rapid growth returned. By 2013, the CEO, his business partner and an early private equity investor received an offer to sell some of their shares to a large company.  They accepted the deal and the CEO and his co-founder continue to run their firm.  In retrospect, the CEO wished he had fired his ex-sales chief two years earlier than he did.

Many CEOs of midsized firms are loyal to the team that got them there, but that loyalty is misplaced if it erodes the company’s ability to grow. Any leader’s first loyalty must be to his firm’s health, not his direct reports’ continued employment at the firm.

Getting rid of subpar leaders — quickly — is hard, especially if they were once outstanding performers. It’s even harder if viable replacements aren’t on the immediate horizon.  This is why it’s the role of midsized company CEOs – not their HR heads — to build the leadership pipeline, both internally and externally. That requires mentoring and developing middle managers as well as building a network of external candidates in critical functional areas.  Those who can build a great team give their companies far more upside potential, stronger growth, and far fewer crises to manage.

How Separate Should a Corporate Spin-Off Be?

Businesses sometimes need to invest in new opportunities that do not fit the current business or current strategy well.  The traditional advice, from Clayton Christensen’s work on disruptive innovations and Michael Tushman’s on organizational ambidexterity, is to set up the new activity as a separate unit, reporting to a manager at the corporate headquarters who can sponsor the new activity and help to integrate it with the rest of the company.

This generic advice is good, but it does not deal with a large number of related decisions. Which corporate policies should apply to the new division and which should not? Should the managers in the new division have similar terms and conditions and bonus arrangements to those of their colleagues in the existing businesses? How much time should the corporate executive committee spend on this new activity?   How should it be monitored and targeted? Should the new activity be a joint venture with a third party?  Should the new activity have a separate stock market listing or separate funding?

Getting the right answers depends on understanding two factors: the particular opportunities for synergy and the risk that the parent company will subtract value. Both factors are unique to the particular business division, its parent company and the other businesses in the family.

Synergy may come from economies of scale. If so, some activities will need to be centralized or shared. But synergy can also come from cross-selling, coordinated strategy, or many other sources. Hence the nature of the integration between the new division and the rest of the organization should be tailored around the particular sources of synergy. Even once the sources of synergy are clear, there are still choices to be made, and in making them managers should look for the type of integration that has the lowest risk of subtracted value.

Subtracted value can come from corporate policies and habits, people decisions, strategic guidance, performance management processes, and more (my book Strategy at the Corporate Level lists eight typical sources). New ventures, for example, often complain that the corporate finance function requires them to meet budget or lose bonuses or funding; or they can’t recruit the talent they need because of the corporate job evaluation approach.

Whenever a division has a business model that is different from that of the core businesses, the risk of subtracted value is particularly high: the corporate rules of thumb are often toxic. Shell’s preference for a strategy of vertical integration proved a disaster in aluminium, and BAT’s belief in market share was as damaging when the company entered financial services.

This, of course, is the reason for creating as much separation as possible and as much decentralisation as possible. Minority investors, separate stock quotes, managers with significant shareholders can all help give extra protection against subtracted value. If these mechanisms do not significantly undermine the synergy opportunities, they are worth considering.

Let’s look at an example. At Britain’s Virgin Group, the main source of synergy is the shared brand — which is therefore managed centrally through a company that licenses the Virgin brand to divisions in wildly different types of business. The divisions pay for what they get, and contribute a negotiated amount to the development of the brand.

But there’s significant risk of subtracted value from interference in operating units by managers at the Group level. To get around this problem, Virgin encourages the management team in each division to take a significant, sometimes 50%, stake in the division. If their own money is at risk, they are less likely to follow central advice or policies, unless they believe it helps their business.

Mass-market brand-behemoth Unilever applied a creative solution to the problem of subtracted value when it acquired the up-market brand Elizabeth Arden. It appointed a gatekeeper. Anyone in Unilever who wanted to contact someone in Elizabeth Arden had to go through this person.

By creating a deliberate bottleneck, Unilever protected Elizabeth Arden from distractions and interference, and the acquisition prospered. Unfortunately, after a year or two the bottleneck was removed, and Elizabeth Arden began to struggle. Later, Unilever sold Elizabeth Arden. Released from the mother company, the new owners doubled margins within 18 months.

Designing an appropriate degree of separation is vital for a new investment that does not fit easily within a company’s existing strategy. The broad advice to keep things separate is useful, but it does not help managers make the fine-grained decisions that are needed. It is only by defining clearly the precise areas of synergy, looking for ways of getting the synergy without risking negatives and setting up mechanisms to help the new business resist corporate smothering that managers can design the right, tailored solution for each new investment.

When Innovation Is Strategy

An HBR Insight Center




How Boards Can Innovate
When to Pass on a Great Business Opportunity
How Samsung Gets Innovations to Market
Is It Better to Be Strategic or Opportunistic?

Business School Professors Should Be Like Movie Directors

As business school professors, we always ask ourselves why we are needed. Because we train future leaders and shape how organizations create value for societies. But will students need us in the same capacity in the future? Not if we don’t change to meet shifting educational needs.

A January Economist article on the Future of Jobs quoted experts saying that 47% of all job categories, including high-skill professions in medicine and law, will be automated within two decades. Among the professions that were said to be safe from automation (for the moment) are those that require human interaction and emotive and social competencies, such as management; those that rely on craft mastery, such as recreational therapists and actors; and those that involve understanding complex systems of human and institutional interaction, such as economists. Luckily, b-school professors seem to be hybrids of economist, therapist, actor, and manager. We have knowledge to bestow on students, a stage to practice our craft, and design capabilities for pedagogy.

But with more and more technologically disruptive change affecting our classrooms – through social media, wearable computing, Massive Open Online Courses (MOOCs), gamification, and so on – it’s time we shift away from the business school model of sage-on-a-stage. Classrooms are becoming a mesh of virtual and real, inspiring more collaboration, and expanding across hundreds of cultures as campuses globalize. Employers expect us to train our leaders to create value on this new frontier, as they should.

However, our current business model is ill-prepared for these trends. We need to think beyond presentations and videos, Socratic method and quizzes, case analyses and papers. Professors must think of themselves as experiential movie directors for a production of Global Business in the Networked Economy, orchestrating and coaching a multinational cast of actors through experiments – and stepping off of the stage for a broader purview. This new frontier demands something inconceivable from professors: Risk not knowing what the outcome would be, or the metrics associated to it, a priori. By reshuffling the fundamentals to meet and shape new conditions, b-school professors can better address the changing needs of students in a rapidly digitizing world.

Build immersive landscapes to design and test business solutions in near real-world settings. Incorporate the various actors, pressures, and uncertainties that create actual problems for leaders. The classroom should be more akin to one big reality game that simulates a market or industry. It could imitate the lifecycle of a real firm with different stages running for an entire one- or two-year MBA program.

Script and direct large-scale complex simulations. Help could come from the entertainment industry: screen writers, game developers, and producers. Integrate content and logic from different business functions into gripping narratives with dramatic arcs. Use incentives to stimulate moves and counter-moves. Teams would diagnose problems and synthesize solutions for them, and then act those out in the landscape, starting a dynamic exchange.

Optimize students’ own wisdom by coaching teams through their challenges and guiding them so they can make the right decisions. Have students gather insights from their own behaviors and responses as a simulation progresses.

Equipping students with the skills to master these challenges is how learning takes place. By encountering roadblocks and unforeseen messes, students are forced to exercise strategic agility. They learn to demonstrate innovation aptitude, how to handle value gains and losses in economic, environmental, and technological systems, and when to ask for signals and feedback from teammates, competitors, outside experts, and professors.

As a result, students would be more deeply engaged and satisfied, employers would be better served, more positive business outcomes would be accessible, and professors would remain highly valued (and our jobs secured).

The young leaders of tomorrow need to be ready for it. Can we change to help them?