Marina Gorbis's Blog, page 1506

As Emerging Markets Slow, Firms Search for “New” BRICs

By all measures, emerging markets are having a tough year. The Economist bemoans their “great deceleration” and HBR featured a well-researched study on how multinationals are becoming less global. However, multinationals still expect their emerging market portfolios to deliver robust growth and increasing profits based on the memory of their performance in recent, more bullish years.

In this new operating environment, I find more and more multinationals looking to new frontier markets for growth while demanding profitability from their emerging-market operations. Using our 200+ clients as a proxy for global sentiment, I find the pivot towards profitability to be significant: 37% of MNCs are focused more on profitability than growth in emerging markets, up 16% from just last year.

To accommodate these new market dynamics, executives are adopting a dual strategy of “going deep” in the BRICs while simultaneously and aggressively pursuing the next frontiers.  Let’s see how this story is playing out in the different emerging market regions.

Asia Pacific

Asia offers a good example of this push to frontier markets. I remember a conversation I had with an executive in 2000. I asked which markets he was focused on outside of China and India. He responded, “for us, China and India are Asia.” It’s been awhile since I heard a similar response, as companies are now expanding aggressively into ASEAN (Malaysia, the Philippines, Singapore, Thailand, and especially Indonesia). This is the result of a growing and affluent middle class that supports private consumption and is bolstered by favorable demographics; over 50% of the population is under 29 years old and approximately 52% live in urban areas.

However, there are some risks. For example, on the Indonesian archipelago, supply chain and distribution logistics present serious challenges — with logistics costs at 24% of GDP, compared with the regional average range of 9-11%. Difficulty in distribution is not unique to Asia and reflects a global trend. According to our recent benchmarking survey of more than 100 senior executives, 94% of executives sell at least partially through distributors, accounting for about 50% of their revenue in emerging markets. Additionally, managing corrupt business practices often makes it difficult for MNCs to realize growth potential in the short term.

Latin America

As executives become more sophisticated in their understanding of these countries, they balance their focus between looking to expand in new markets as the old standbys–namely Brazil and Mexico–have recently slowed to disappointing growth rates. For example, Peru’s rising middle class offers an increasingly attractive choice for consumer goods and retail MNCs looking to diversify their investments beyond established markets.

Quantifying the impressive rise of the middle class, FSG calculates private consumption in Peru is set to grow 54% between 2010 and 2015. Real increases in personal income and access to credit will support growth across all retail categories, but the automotive, consumer electronics, and food and drink sectors will outperform, as consumer taste becomes more sophisticated.  The consumer sector has already begun its high-growth phase as over 36 new shopping centers have been built in Peru over the last 10 years. The three main grocery retail chains in Peru grew from 57 stores in 2001 to 155 stores in 2010.

Eastern Europe, Middle East & Africa

Eastern Europe, the Middle East, and Africa follow the same pattern of slowing growth in traditional strongholds, with opportunities in previously untapped frontier markets. In Russia, having made significant investments in the two largest cities, we are seeing companies expanding into regional markets by relying on third-party distributors, similar to the storyline in Indonesia. Growing beyond Moscow and St. Petersburg allows companies to build market share, strengthen their competitive position, drive profitability, and contribute to long-term sustainability in Russia – and it’s worth remembering that 64% of Russia’s GDP sits outside of the these two cities.

Sub-Saharan Africa is in many ways the last great frontier. Here multinationals are reacting to South Africa’s stagnant growth by looking to the hottest frontier markets globally: Nigeria and, to a lesser extent, Angola. The region has piqued executives’ interest, as it benefits from improving business conditions, demand for infrastructure projects, and a strong demographic profile.  Nigeria is especially attractive, as it is poised to overtake South Africa as the largest African economy after its GDP grows 40-50% as a result of the government changing the way it measures GDP at the end of the year. Nigeria’s automotive industry is booming, as international car makers are expanding their dealerships and setting up local assembly plants.  Case in point: Ford is planning to introduce at least five new models after seeing a 33% increase in sales in the first half of 2013 in Nigeria. Mercedes-Benz and Skoda have recently expanded in the country with new showrooms and models.

In emerging markets, what began primarily as a growth strategy has evolved to a dual mandate of growth and profitability. Executives must act fast to capitalize on the final frontiers, while market share is still there for the taking. Although each region exhibits similar potential, success for multinationals will depend on identifying the most attractive opportunities for their unique businesses and adopting management best practices that account for the local nuances of each market.

To Strengthen Your Attention Span, Stop Overtaxing It

The Iditarod dog sled race covers 1,100 miles of Arctic ice and takes more than a week. The standard strategy for mushers had been to run twelve hours at a stretch, then rest for twelve. Either you ran all day and rested at night, or you rested all day and ran all night.

That all changed because of Susan Butcher, a veterinarian’s assistant keenly aware of the biological limits of her dogs. She trained them to run in four-to-six hour spurts, and then rest for the same length of time, racing at that rhythm both night and day. She and her dogs won the race four times.

Susan Butcher trained her dogs the same way top athletes train in most any sport: an intense workout for about four hours – and then rest. That’s the best routine for the body to attain maximal performance.

Anders Ericcson, a psychologist at the University of Florida who studies top performers, has found that world-class competitors from weight lifters to pianists limit the arduous part of their practice routine to a maximum of about four hours each day. Rest is part of their training regimen, to restore their physical and mental energy. They push themselves to their max, but not past it.

This work-rest-work-rest cycle also applies to helping our brain maintain maximal focus at work. In the workplace, concentrated focus allows us to use our skills at their peak.  Researchers at the University of Chicago found, for instance, that at moments when people perform at the top of their game they are completely absorbed in the task at hand, whether brain surgery or making a three-pointer in basketball.

Top performance requires full focus, and sustaining focused attention consumes energy – more technically, your brain exhausts its fuel, glucose. Without rest, our brains grow more depleted. The signs of a brain running on empty include, for instance, distractedness, irritability, fatigue, and finding yourself checking Facebook when you should be doing your work.

A reasonable response is one executives today rarely make: give yourself a break. All too often we try to “push through it.” But there is no magical energy reserve waiting for us – our performance will more likely slowly deteriorate as we push on through the day.

The decay in cognitive efficiency as we push past our reserves — well-documented in research labs – shows up in an executive’s day as a mounting level of mistakes, forgetting, and momentary blankouts. As one executive put it, “When I notice that my mind has been somewhere else during a meeting, I wonder what opportunities I’ve been missing right here.”

Given the high expectations on executives, perhaps it’s understandable some have turned to performance-enhancing drugs. One lawyer who daily takes a medication for attention deficit disorder (which he does not have) confided to his physician, “If I didn’t take this, I couldn’t read contracts.”

But there are other ways – legal and healthy — to help beef up our attention to meet the relentless demands of an executive’s busy day: meditation. From the perspective of cognitive science all meditation methods are methods to train attention. An increasingly popular method to grow the power of the brain’s circuitry for attention is “mindfulness,” a meditation method stripped of a religious belief system.

The neuroscience behind mindfulness hinges on the concept of “neuroplasticity.” The brain changes with repeated experience as some circuits strengthen and others wither.

Attention is a mental muscle, and can be strengthened with the right practice. The basic move to enhance concentration in the mental gym: put your focus on a chosen target, like your breath. When it wanders away (and it will), notice that your mind has wandered. This requires mindfulness, the ability to observe our thoughts without getting caught up in them.

Then bring your attention back to your breath. That’s the mental equivalent of a weightlifting rep. Researchers at Emory University report that this simple exercise actually strengthens connectivity in the circuits for focus.

There’s also another option. Call it the Latin Solution.

I was in Barcelona recently, where at lunchtime most shops and companies shutter themselves so employees can go home, have a good meal – and, ideally, take a nap. Even a short rest at mid-day reboots the brain for the rest of the day.

The Truth About Online Rumors in China

The Chinese government has focused considerable energy on managing the Internet, most recently with a campaign against “spreading rumors.”  Potential rumormongers, defined as anyone with over 50,000 online followers, face the prospects of arrest, detention, and public self-criticism.

Ironically, the Chinese government itself is the source of many online rumors, some of which may be efforts to shape Chinese consumers’ perceptions of foreign brands and companies.  The issue, however, is how effective the government’s attempts have been.

The government’s approach follows a standard pattern: Chinese Central Television (CCTV) will attack a foreign company for the way it does business in China.  Later, some discrediting details about the salvo will emerge amidst heated online discussions, and the story will derail, making CCTV look worse than its target.

Social media acts as both sound-check and amplifier for traditional media, so CCTV News, though still mandatorily aired across the nation, can no longer assume that its audiences are believers.  Consumers are seeing through government disinformation, and our research shows that government critiques result in Chinese consumers embracing, not eschewing, foreign brands.

On March 15, 2013, World Consumer Rights Day, CCTV aired a special report criticizing Apple’s i-Phone customer service policy in China for providing only a one-year warranty when Chinese law mandates two.  CCTV also reported that i-Phone-owners had to pay about $90 to replace faulty back covers.  The story quickly gained widespread attention, and Apple’s lack of response induced coverage that was even more negative.

However, when we performed text-based sentiment analysis on a sample of posts from accounts on China’s leading micro-blog site, Weibo, we found that sentiments about Apple before and after the event continued to be divided.  While negative sentiment increased due to the controversy, so did positive sentiment about Apple.

Many Netizens doubted the CCTV report.  A telltale Weibo post ending with the words “send at 8:20 pm” later revealed that CCTV had paid several Weibo users with large followings (online celebrities known as Big V users) to criticize Apple after the broadcast.

A post from one user, Liu Jishou, that was proven to have been arranged by CCTV, read: “@Liujishou: # 315 in action # apple, you have pocketed enough money in China.  But your computer warranty period in U.S. is two years, in China, it is one year; the warranty period of your cell phone in the US is recalculated after repairs, but in China it isn’t.  US companies promote fair and equitable dealings, why are you playing this double standard in China?  You made a big mistake.” 

CCTV has been steadily losing credibility after the veracity of several of its exposes was questioned.  A CCTV reporter was charged with extorting money from Da Vinci, a furniture company allegedly selling fake products, in exchange for silencing reports.  When CCTV reported in July that KFC and McDonald’s ice cubes were “twelve times dirtier than toilet water,” some experts claimed that CCTV’s investigation was unscientific.  Weibo users joked they would eat KFC ice cubes if CCTV reporters drank toilet water.  CCTV’s Apple broadcast also backfired as its share price increased by 2.1% the next day, signaling that the company had won the public opinion war.

Even when there is no proof of foul play, CCTV’s attacks on foreign companies don’t have their intended effect.  In October 2013, an incident involving Starbucks unfolded, when CCTV aired a segment “exposing” its relatively higher prices in China.  Netizens collectively shrugged at the prices and decried the broadcast as biased and unfair.  As Rachel Lu of Tea Leaf Nation noted: “What really riled observers is that CCTV grossly underestimated Chinese people’s ability to distinguish real injustice from the manufactured variety.”

Numerous mistakes, lack of transparency, and tone deafness have primed Netizens to be on the lookout for rumors originating from their government rather than from each other.  Given CCTV’s lack of credibility, what exactly are state-run broadcasters trying to accomplish?  Are they clumsy attempts to sway public opinion, or are they directed at the companies themselves?

The case with Fonterra sheds light on the effectiveness of these attacks as a form of protectionism.  When Fonterra’s dairy products were rumored to contain bacteria that could cause botulism, China immediately suspended imports of all whey protein and milk-based powder from the New Zealand-based company.  Food safety is highly sensitive, and after the 2008 melamine scandal, Chinese customers overwhelmingly prefer imported milk products.  This time, the scandal involved imported products, causing a greater uproar in the country.  On August 14, 2013, Fonterra’s milk products business head, Gary Romano, resigned over the scandal.

However, the event proved to be a false alarm (an “own goal,” according to Chinese media).  By August 2013, laboratory results revealed that the bacteria found in the whey protein concentrate manufactured by Fonterra was clostridium sporogenes rather than botulism-causing clostridium botulinum.  The Chinese could breathe a sigh of relief; those who knew about the test results, that is.

While news of the contamination had swept the Chinese social media, news of the false alarm hardly made a blip.  Interestingly, right after the New Zealand government announced that Fonterra products may have been contaminated, negative posts about Fonterra began growing on Weibo.  But so did positive ones.  People were scared, but negative sentiments began decreasing on August 4, when Fonterra started a recall.  Positive comments, on the other hand, kept growing.  Part of the reason may have been the Netizens’ mistrust of the government and state-run media.

Chinese media seized the opportunity to cast doubt on foreign brands, running headlines like “Could the worship of foreign milk powder be coming to an end?” and “The myth of foreign milk powder is collapsing.”  Jamil Anderlini, the Beijing bureau chief of Financial Times, who is New Zealand-raised, called the event a “gift” for the Chinese government.

Chinese Netizens reacted to the coverage somewhat differently.  Many who reposted a popular post from Xinhua News criticizing foreign milk expressed doubt about Xinhua’s motives and praised foreign companies’ responsibility in dealing with the incident.  When testing revealed the bacteria harmless, though, many never got the memo.

In contrast to the reporting bonanza surrounding the recall, China’s traditional media barely covered the false alarm: There are some 395,000 hits on Baidu News for 恒天然, Fonterra’s Chinese name, between August 1 and August 8, and just 93,600 from August 28, the day of the recall’s reversal, through November 4.  Kevin Wickham, managing director of Fonterra’s China unit, confirmed: “There are still consumers who are confused and uncertain, and we still have to do more to explain to consumers that it is a false alarm.”

Starbucks and Fonterra still enjoy favorable sentiments, but the two companies have suffered from CCTV’s reporting.  Even Apple, whose financial losses were minor, had to offer a public apology, with CEO Tim Cook promising to revamp customer-service policies in China.  The same script played out later with Samsung, which issued a prompt apology though.

The CPC may believe think that getting foreign brands to change their policies, even if they are minor, could boost overall competition and cut into foreigners’ profits.  But at what cost?  These efforts degrade the ease of doing business in China and may have a negative effect on foreign investment in the long run.  So far, none of the targeted companies has indicated they will scale back China operations.

Rather, the common narrative, the one consumer sentiment that survives Weibo’s short attention span, is that the Chinese government’s deployment of state-run media against foreign companies is unfair and untrustworthy.  If such tactics are part of a protectionist mindset that is designed to affect Chinese citizens, the CPC may well want to reevaluate its online strategy.

China’s Next Great Transition An HBR Insight Center




If You Want to Change the World, Partner with China
Ten Predictions for China’s Economy in 2014
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The Chinese Steamroller Is Already Sputtering

How Europe Is Betraying Its Children

A few days ago, I participated in a debate organized by the Economist on whether the new generation has the skills it needs to succeed in tomorrow’s world. I thought I had the easy job of arguing that, especially in countries like Greece (where the event took place), there is a serious skill gap, with the educational and vocational training being dangerously out of date and misdirected.

The argument in favour of the motion, I reckoned, was straightforward. First, schools in many of the Old World countries, and certainly in the European South, still prioritize memorizing over critical thought; we obsess with teaching technical skills as opposed to fostering the ability to adapt, add and capture value in a shifting economic landscape. Universities, in many a European country, are neglecting the realities that graduates will face, producing degrees better suited to a generation ago.

Of course, all this is perfectly understandable. These school systems were built at a time when information was scarce and valuable, and obtaining vast amounts of it through memorization, was a useful skill. And Universities had evolved to serve the needs of a different polity and economy: skilled professionals destined to work in highly structured societies.

A degree was often the license to practice a privileged profession such as law or medicine, and humanities training was the tool to propel young graduates into the white collar workforce. Vocational training was, by and large, linked to the system of professions, themselves a descendant of the guild system. In other words, education was based on offering the brightest (or most fortunate) in society access to the land of privilege, bestowed by excluding most while anointing some.

This world no longer exists. Professions have lost their monopoly, guilds’ privileges are on their way out, sectors have unbundled, competition has become global, and value creation is the name of the game. With China making a massive push in its academic system, and as the Asian scores in aptitude tests reveal the shifting geography of the talent pool, the Old World cannot afford its old habits.

On the corporate level, as careers shorten and the nature of work evolves, the skills to succeed become ever more complex. Sadly, today’s youth is still kept behind by an antiquated educational system, and a reluctance of corporates to invest in developing their workforce. And on top of that, in Europe, most school and Universities’ lack of financial independence has hit hard in a time of fiscal austerity, depriving them of the resources and agility to react and adapt.

They also face tough governance problems, shown most acutely in places like Greece, where the Rector and the association of administrative employees can literally shut the biggest and oldest university down, as a protest on the mere prospect of having their own jobs redesigned. Dinosaurs die hard, and can wreak havoc on their way out.

It isn’t just the educational system that’s at fault. A recent BusinessRoundtable study of employers found that most complain that they can’t find the right people. Not because they can’t read, or lack computer or job-specific skills but because they lack critical thinking, critical problem solving and teamwork.  Perhaps worse, they also lack professionalism, adaptability, and personal accountability for work. These are skills that the educational system isn’t geared to deliver but they precisely what the new generation must necessarily develop.

Given this context, I was mesmerized by the fact that 51% of the audience in the Economist debate voted for the view that the young generation does have the skills needed. Now, this could be the result of debating prowess of my opponent, Steve Bainbridge, who played up the need to believe in the younger generation, and of the value of hope, in an auditorium of a crisis-striken country.

But it just might be something deeper: a reflection of just how hard it is to recognize some uncomfortable truths, especially when we have no ready solution to offer. Yet, what could happen if we keep confusing wishful thinking with optimism? Most probably, a wasted generation and, for sure, further loss of competitiveness. And, on the personal level, the biggest drama for parents in plighted countries, who sacrifice all they have for the education of their children, is the realization that they may be making a bad investment. Unwavering faith in their offspring and their future may be detrimental for their ability to succeed.

Perhaps worst of all is the likelihood that this trend will make an uneven society even worse.   Those who can attend the best universities, or go to the best business schools, will be able to cope effectively. But this will exacerbate societal imbalances, helping the 1% “in the know”, while leaving the majority behind. Our lack of courage in dealing with the skill gaps risks hurting the Old World and making it more uneven.

This isn’t an easy fight. It takes courage to accept the problem, and even more courage to address it, with entrenched interests as well as skill gaps in the educational system. But it’s an important fight, if we want to regain both prosperity and balance.

We Could Be Better at Giving Thanks

Although people say they want to be thanked more often at work, fewer than 50% of Americans polled for the John Templeton Foundation, a philanthropic organization, reported that they would be very likely to thank salespeople, their mail carriers, or cleaning crews, and just 15% express daily gratitude to friends or colleagues. 74% never or rarely express gratitude to their bosses—but 70% said they’d feel better about themselves if their bosses were more grateful.

Will Your Bad Boss Make You a Bad Boss, Too?

One of the best predictors of whether a person will become an abusive parent is if he or she was abused as a child. On the face of it, this is puzzling. Certainly, as children, these people did not say to themselves, “This is how I want to treat my kids.” To the contrary, our guess is that they said to themselves, “I am definitely not going to treat my children the way I have been treated.”   And yet they did; they did not escape the influence of that terrible role model.

This got us to wondering whether there might be a leadership analogy to this sad phenomenon. That is, we wondered, “Do people who work for terrible leaders turn out to be terrible leaders themselves?”

In our research we’ve demonstrated that a great leader can have powerfully positive effects on an organization: decreasing turnover of team members and greatly increasing customer satisfaction, profitability, employee engagement, sales revenue, and even workplace safety—virtually every business outcome that’s measureable.  In those studies, we’ve looked primarily at the relationship between individual leaders and their groups of direct reports. Recently, we’ve become fascinated by the question, “How much impact does a great or poor leader have at the next level down—on those who work for those direct reports?”

When we ask individuals about how their bosses influence their own leadership styles, they often respond that they are their own persons. Whether working for a great boss or a nightmare one, they feel that they are in control of themselves and the situation. If there’s a bad boss above, they serve as a buffer.

When we look at three levels of our 360 evaluations of the leadership effectiveness, correlating the scores of executives and their direct reports with those of the teams of those direct reports, we find some truth in this: we do see some leaders performing substantially better than their bosses. But we also see influences, good and bad, cascading down the line.

For this study we matched up data from 6,094 leaders (whom we will arbitrarily label “alpha leaders”) with their direct reports who were also leaders (whom we’ll call “beta leaders”) and the beta leaders’ direct reports. We assessed the overall effectiveness of each leader and the engagement level of that person’s direct reports.

First off, examining the best (top 10%) and worst (bottom 10%) of the alpha leaders (as assessed by the beta leaders who work for them), we were able see a substantial difference in the engagement levels of the beta leaders (as assessed by their direct reports).  Not surprisingly, beta leaders who worked for the worst alpha leaders suffered; their engagement was abysmal, averaging in the 24th percentile.  Meanwhile, the average engagement level of the betas who worked for the best alphas was at the robust 82nd percentile. This mirrors our global study of these same variables with over 30,000 leaders.

One level down, the effect is similar, but not as strong in either direction: Engagement levels of teams headed by beta bosses laboring under horrible alphas average in the 39th percentile while those of teams headed by betas working for the best alphas are only at 61th percentile, considerably lower than their bosses.

If alpha leaders had no effect on beta leaders, we’d have expected the average beta leader engagement scores to be at the 50th percentile, since with this large a sample, the good and bad leaders would balance each other out. So clearly, it’s not easy to be a buffer: a bad boss is a drag on a leader’s effectiveness. In fact, teams rated the leadership effectiveness of the beta leaders who worked for the worst alphas 11 percentile points below average, while teams rated the betas working for the best alphas 11 percentile points above average.  The symmetry here is striking.

Still, our data show that it is possible to work for one of the worst leaders and yet be rated as one of the best yourself. While 14% of beta leaders working for the worst alphas fell themselves in the bottom 10% in leadership effectiveness, 7% of those harried betas were rated by their direct reports as among the top 10% of leaders. At the same time, fully 24% of beta leaders working for the best alphas were themselves also in that top group, while only 7% of them fell in the bottom 10%.

What are we to make of this?  First, we’d argue that our data show, happily, that great leaders do more good than poor leaders do harm. And to those who say their destiny is in their own hands, we’d say they could be right — the cycle of poor leadership can be broken.

On the other hand, we’d argue that good leaders are expending a lot of energy they could be using more productively when they have to manage and buffer a bad boss. This should be blindingly obvious. And yet, so often in our practice senior leaders ask us to “fix” the leaders below them. The reality is our job would be much easier if the leaders at the top were as highly committed to fixing themselves first.

Three Strategy Lessons From the Latest Round of Xbox vs. PlayStation

In 2008, when the Harvard Business School case study was written on the launch two years earlier of the PlayStation 3, the question was whether it was “game over” for Sony. The electronics giant had seemingly lost its dominant position in the gaming console market, with the Nintendo Wii’s surprise success overshadowing the more powerful but pricier PS3.

Few product releases are as hotly anticipated, fiercely competitive, or widely debated as those that keep the console wars waging. And as Sony and Microsoft each released a new console last week, the latest battle for gamers’ dollars is finally here. While it is, of course, far too early to declare a winner of this “8th generation,” two case studies written since the last round offer insights into the state of the industry heading into this holiday season. There are already strategy lessons to be drawn from the contest.

Learn From Your Mistakes

The easiest way to understand Sony’s position with the PS4 is to review the mistakes it made last time around, beginning with its price. Ranging from $499 to $599, the PS3 was significantly more expensive than previous consoles, and than both the Xbox 360 ($299-$399) and the Nintendo Wii ($249). The Xbox 360 had the advantage of beating the other two consoles to market by a year, while the Wii introduced a novel motion-sensing wireless controller that allowed for significant innovation in gameplay. Despite its impressive specs, the PS3 was widely viewed, according to the case, as too expensive.

Both the price of the PS3 (which Sony reportedly sold at a loss at launch) and the timing of its release could be attributed in part to the inclusion of a Blu-ray Disc player, then a new technology of Sony’s that was in competition with Toshiba’s HD-DVD format to become the standard for high definition discs. The inclusion of Blu-ray in the base model not only allowed for better, faster games; it meant that the PS3 was a next generation DVD player as well as a gaming console. It was the ultimate home entertainment device. (By contrast, the Xbox 360 offered an HD-DVD drive only as an option with its premium model; the Wii played DVDs but not in high definition.)

The HBS case quotes Holman Jenkins of The Wall Street Journal writing in 2004 about Sony’s strategy:

…somehow, some way consumers in the future will probably need a device to organize all the digital fun streaming around their lives. Sony believes the superbox will sneak into the living room in the guise of a non- threatening consumer appliance…In one swoop, Sony will place a supercomputer in an innocent-looking piece of entertainment hardware and drop it into the home, leading couch potatoes painlessly to their digital nirvana.

But as Sony soon learned, what mattered most to gamers was, not surprisingly, games. And a weak lineup of games at launch, combined with the high price translated into a weak holiday season for Sony in 2006.

“They were touting both messages,” said Elie Ofek, Harvard Business School professor and author of the PS3 case. Sony talked up its gaming platform, of course, but also that it “want[ed] to be the center of your home.” In Ofek’s view that created “confused messaging.”

Sony responded to its mistakes quickly, notably by lowering the price of the PS3 over time, to eventually sell 80 million consoles, roughly equivalent to the Xbox 360. But evidence of these stumbles can also be found in last week’s PS4 launch. This time around, Sony came to market a week ahead of Microsoft, priced its console $100 cheaper than the new Xbox One, and has been careful not to muddy its message — it’s talking the PS4 up simply as the ultimate gaming platform.

In other words, Sony learned from its mistakes. The problem is, it could be over-correcting.

Yesterday’s Mistake Could Be Tomorrow’s Advantage

While Sony may be stressing gaming above all else with its latest console, Microsoft is offering a different narrative with its Xbox One, as The Washington Post summarizes:

The main difference between the two is that Microsoft wants the Xbox to be an all-in-one entertainment system while Sony is sticking to making games the main feature of the console.

Despite early pushback from the gaming community, Microsoft hasn’t shied away from this positioning, advertising the Xbox One’s television integration, as Polygon reports in its review:

It’s not just that Microsoft is more aggressively courting video content and providers with Xbox compared to the competition. With Xbox One’s TV integration, their plan seems to be that you’ll never need to switch away from the system for all the entertainment you’re already consuming in your living room. It becomes a part of the television experience seamlessly and drifts into the background until you’re ready for it — or, say, when you receive a game invite or Skype call.

At first glance, Microsoft seems poised to repeat some of Sony’s mistakes. It has the priciest console on offer (Nintendo’s Wii U came out last year and has not been selling very well) and it includes the latest and greatest in non-gaming entertainment. It’s too early to know how this strategy will work out for Microsoft, but there’s an argument to be made that the console-as-entertainment-hub moment is finally here.

“In 2000, when we taught about the 6th generation it was already a question of whether this should be the entertainment hub,” Ofek told me. Sony’s attempt in the 7th generation was not successful. But the proliferation of entertainment across multiple devices and apps makes such a hub more useful. “Now we’re on the 8th generation [and] the need for what I’d call a digital entertainment convergence is more acute today than it was before.”

Despite differences in positioning, it should be noted that while the PS4 does not have the same level of TV integration, it does offer streaming services like Netflix, Hulu, and Amazon Instant Video.

“The boxes aren’t that radically different at the end of the day,” said Lewis Ward, an analyst with IDC. “Gamers have absolutely embraced the idea of streaming movies and TV at least on their consoles. The game consoles are moving out from a beachhead of gaming into multimedia in general.”

But if consoles are finally broadening their competition beyond gaming, the threats are as notable as the opportunity.

Your Biggest Competitor Isn’t Necessarily Your Biggest Competitor

For all the attention paid to the head-to-head competition between Sony and Microsoft, the biggest threats to the console makers are external, as explained in the 2012 HBS case “Videogames: Clouds on the Horizon?”. In it, authors Andrei Hagiu and Kerry Herman argue that the industry faces challenges from the rise in mobile and tablet games, as well as from cloud-based gaming.

“Both cloud gaming and tablets and smartphones are essentially substituting away from the console gaming market,” Hagiu told me, adding that “the most vulnerable victim is Nintendo” because of its focus on more casual gamers.

Cloud-based gaming poses a higher risk to the casual end of the market because it allows relatively complex games to be played on simpler, cheaper devices.

“Both Sony and Microsoft are very reluctant to embrace cloud gaming,” said Hagiu. “They’d be very happy if they’re able to delay [it].” That’s because, he says, the widespread adoption of cloud-based gaming could lower barriers to entry in the gaming industry, increasing competition and lowering profit margins for the incumbents.

“Cloud is one of these perennial ‘right around the corner’ technologies,” according to IDC’s Ward. Nonetheless, the threat and opportunity was imminent enough for Sony to last year shell out $380 million to acquire Gaikai, one of the pioneers of cloud gaming. For now, Sony plans to use the service to stream PS3 games for the PS4, and to stream game previews.

Finally, to the extent that Sony and even more so Microsoft are in the entertainment hub business, they must compete with Roku, Apple TV, and similar entertainment devices which, particularly if cloud-based gaming catches on, could also encroach into the casual gaming market.

Sony and Microsoft each have their own strategy for dominating the living room, and edging out the other this holiday season. But for all the spec comparisons, the PS4 and Xbox One may not be each others’ biggest threats.

Five Challenges China Must Meet by 2034

China’s resurgence has been driven by a combination of private entrepreneurship and top-down bureaucratic capitalism; by an unmatched and unchecked culture of engineering ambition; of rote learning and educational experimentation; of sophisticated tastes along with basic concerns with food safety; of a China at once cosmopolitan and confused in its new global roles. How will those conflicting strategies, shortcomings, and achievements play out in the future? How do we imagine this great and resurgent nation with its embedded conflicts and challenges will look in 2034?

We pose five challenges that must be met. They are dealing with the environment; successfully making the shift from an infrastructure state to a consumer society; becoming an innovative economy; having a positive impact on the world order; and finally, and perhaps most importantly, making the transition from Xi Jinping’s “Seven No’s” to a more sustainable political model. Each is addressed below.

Environment. Today, China has 16 of the 20 dirtiest cities in the world, a mostly befouled freshwater system, and growing desertification. We are confident progress will be made here, because no one is more hurt by environmental degradation in China than the Chinese people themselves. Environmental remediation has become a matter of national priority. In recent years, we have seen remarkable investments being made in every environmental asset class from nuclear power stations to wind farms, solar panels, and hydroelectric facilities. There is broad perceived need from the top of the government in Beijing down to the provinces and the villages at the very bottom on the importance of these issues and a demonstrated ability to act on them. There is little debate on either the scope of environmental challenge or the science. Global climate change is not an area of controversy in China. We expect with significant government subsidies that over the next two decades, Chinese firms will emerge as the global leaders in clean energy.

Infrastructure State to Consumer Economy. The massive investment in infrastructure of the past 35 years, most recently as a result of the government’s 2008 stimulus package, will run out of steam by 2034 as the current population migration from the country to the city begins to slow. There will still be significant new infrastructure needs for the over 60% of China’s population living there. This will include everything from sewers and water to quality schools. Their future prosperity, however, will depend on sharp increases in domestic consumer spending. This will depend in turn on dramatic improvements in the pension and other social safety nets to drive down domestic savings rates and release the necessary spending power. We believe that the political will exists to make this happen. Nonetheless, a sustainable and growing consumer economy depends on service sector reforms, especially in the banking sector, to meet the needs of lower cap private-sector borrowers at the base of the pyramid. We are not sure this will happen because of institutional rigidities.

An Innovation Economy. Enormous investments have been made in science and technology in Chinese universities. Similarly, hundreds of thousands of Chinese students who study abroad are concentrating overwhelmingly on science and technology. A focus on encouraging indigenous innovative capabilities, however, has not been the strength of China’s educational system. Politics has. Central concepts of liberal education, which are valued so highly in the West and aim to liberate the individual to be a critical thinker and active citizen, are currently the subject of experimental programs in China. They are highly valued by educational leaders, if not yet by senior government leaders (see below). All this suggests a struggle in the realm of education, for without the depoliticization of education, China can hardly lead in education and, by extension, innovation. This is in spite of the fact that no country is counting more on education for its future than China. We see these tensions and shortfalls as likely continuing to be a challenge in 2034, even though the number of people receiving higher education will have doubled to over 62 million students.

The Chinese World Order. We do not see an inevitable military collision between the USA and China: Chinese-American competition will be primarily economic, not military, in nature over the next two decades. But more pressing for China is China’s need for and desire to embody and project, in some form, universal values of civilization. In the past, it was a set of broadly shared values — of how families, communities, and states are organized — that defined the governance of the empire over the centuries. This was a primary reason why Chinese civilization spread over East Asia. Historically, Chinese civilization had an enormous amount of soft power. This is not the case today. It is a responsible member of many global organizations, but not a leader of them in the broadest sense. It does not shape values. Today, the world respects China for its growing hard power — an infrastructure state with a military at the core — but not its soft power. We see few signs of this changing by 2034.

The Seven No’s. Within months of Xi Jinping’s accession to power, the Chinese Communist Party issued a directive banning discussion of “dangerous” topics. Universities and media were to cease discussing what had been areas of open argument for years. Whether this was Xi’s deep conviction or a short-term political maneuver is critical in assessing what 2034 will look like.

In brief, the Seven No’s that cannot be discussed or promoted, and in the order presented in the now famous Document No. 9 were:

Western constitutional democracy including an independent judiciary, nationalized army, and general elections
Universal values, such as human rights
Civil society and other Western theories of governance
A limited state role in the economy
Freedom of the press
Discussion of past Party mistakes
Criticism of an emerging capitalistic class

If this directive reflects real policy, then we are faced with a China that may be open to greater economic reform while remaining politically regressive. Having Seven No’s is hardly supportive of a culture of innovation, as it denies the very foundation upon which innovation has flourished elsewhere. Can China truly advance in this and other realms if its political system remains fearful of open debate about China’s future?

In sum, we see China making real progress in many areas by 2034. In one area, however, deep uncertainties exist which must cause even the most pro-China investors to want to hedge their bets.

Abrami, Kirby, and McFarlan are the coauthors of the forthcoming book, Can China Lead?: Reaching the Limits of Power and Growth (HBR Press, February 2014).

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How One Bad Thanksgiving Shaped Amazon

It’s officially the holiday season, which means 70,000 people have temporary jobs at Amazon fulfillment centers to ensure that your gifts arrive exactly when they’re supposed to. While these jobs aren’t exactly easy or high-paying – there’s been plenty written about the not-so-awesome working conditions – it’s in many ways remarkable that Amazon is able to easily leverage the population of a small town less than 15 years after a panic-filled Thanksgiving led to the mammoth and tightly-controlled supply chain system that’s in place today.

The “Save Santa” incident, described in Businessweek reporter Brad Stone’s recent book The Everything Store: Jeff Bezos and the Age of Amazon, was an “all-hands-on-deck emergency” in 1998 resulting from one of the biggest problems an online store can have: there were far more orders coming in than shipments going out. This required all employees – including the executives – to work a graveyard shift at one of two warehouses. “They brought their friends and family,” writes Stone, “ate burritos and drank coffee from a food cart, and often slept in their cars before going to work the next day.” Bezos held contests to see who could pick items off shelves the fastest. Then he vowed the company would never have an inventory shortage again.

“The underlying truth is that Amazon becomes, like almost like all retailers, a different company during the holidays,” Stone explained to me over the phone. “Volume grows over the previous year. The already aggressive and fast-moving environment in the headquarters and fulfillment centers become manic. I describe it as two Amazons: one that operates for 10 months and the other that operates for two months out of the year.”

One of the reasons it runs so efficiently during those two crazy months now are lessons stemming from the holiday chaos of Amazon’s first 10 years. “It ranges from employees cleaning out the Pokémon section of ToysRUS.com or requiring all its white-collar workers to [work] at the distribution centers in Seattle,” says Stone.  “It’s harsh, but a character building moment for the company. Any Amazon employee remembers that time.”

One of the more memorable debacles involved distribution center in Georgia that had a massive backup of unfilled orders. The surprise culprit? A missing pallet of Pokémon Jigglypuffs. Thus, a search team was organized to scour the entire 800,000 square foot warehouse for the pallet. It was found — three days later and at 2 a.m. It was a great learning moment for the company, explains Stone, because “it showed just how fragile the system was.” And it showed the lengths employees would go to ensure on-time holiday delivery.

Today, Amazon has fulfillment centers in 14 U.S. states and in 36 cities around the world. They’re the brainchild of senior vice president Jeff Wilke, a student of Six Sigma who turned “distribution centers” into finely-tuned facilities that run on algorithms and the speed and accuracy of their workers — think Bezos’s 1998 picking contest taken to the extreme (and without the burrito cart). Wilke used to lead a whistlestop tour right before the holiday season, visiting fulfillment centers to check on progress (while wearing a flannel shirt to show solidarity with his on-the-ground employees). Now there are too many fulfillment centers to visit.

Today’s well-oiled Amazon “hides the chaos” of holiday shopping, explains Stone. This is in part what makes Amazon so appealing to consumers who aren’t into the shelves-askew, people-trampling hoard that symbolizes Black Friday at brick-and-mortars. And while the company has plenty of competition – from the Costcos and Walmarts of the world to online niche sites like Blue Nile to the local independent stores that many shoppers have vowed to support – there is no doubt that the frictionless nature of Amazon, combined with shipping products like Amazon Prime, give the behemoth a huge advantage. “Save Santa” may have just about saved Amazon, too.

CEOs Should Get Out of the Saddle Before They’re Pushed Out

When is the best time for a CEO to leave the top spot?

I can’t help but think of the Mel Brooks film Blazing Saddles — a satirical comedy of what happens when a new sheriff comes to town. In those days, it usually meant the old sheriff failed or was fired – or worse!  A similar problem plagues corporate CEOs: usually, they don’t leave until they’re forced out.  But the question is why do they wait to be pushed from the saddle, when they can simply quit?

Recent events have seen a rash of the departures from large corporates: Steve Ballmer from Microsoft, Jeremy Levin from Teva Pharmaceutical, and Thorsten Heins from Blackberry. When CEOs find themselves in trouble, shouldn’t they step down rather than wait to be pushed?  Donald Hambrick, a guru on CEOs and top teams, argues that long-tenured CEOs tend to grow “stale in the saddle”, ceasing to make adaptive changes.  I say we should have term limits for CEOs as we do in academia, where Deans typically serve for a maximum of five years.

Consider: the average tenure of a Fortune 500 CEO is about 4.6 years (shorter than the average for all CEOs, which is 8.6 years).  So it’s consistent with market forces.  And a 2013 study by Xueming Luo, Vamsi K. Kanuri and Michelle Andrews at the University of Texas, Arlington suggest that long tenure can actually hurt a company’s performance.  After the initial rush of enthusiasm and energy, established routines and networks can smother the drive for innovation.  Their work concurs with previous studies on the importance of CEO succession and how new CEOs are more open, inclusive, and search for new solutions (Miller, 1993). Yes there are exceptions — Steve Jobs and Jack Welch leap to mind. But according to Professor Luo and his team, the optimal length of time in the proverbial saddle is 4.8 years.

Those who overstay their welcome may do so for any number of reasons.  Some argue that CEO narcissism, organizational inertia, or even rigid industry dynamics prefer maintaining the status quo.  Thus, it requires some degree of self-awareness and iconoclasm to jump to another horse – especially if the horse you’re on hasn’t yet shown signs of slowing down.  But, with a number of studies suggesting that the pace of CEO turnover has increased in the last decade, some may have no choice.

A look at the more successful CEOs shows that they do quit while they’re ahead.  Angela Ahrendts’ move from Burberry to Apple is an example of what the wise ones do.  On 1 March 2009, Burberry’s share price opened at £254.75.  Under her reign, on 1 November 2013, it closed at £1,498.00.  This represents nearly 600% increase in company value.  While some might say that it’s a good time to get out, my take is that her drive is to reinvigorate.  It’s partly based on the fact that her new job is not another CEO role.

James McNerney, Jr is another example.  After leaving GE, as the President and CEO of Aircraft Engines for three years, he spent five years as CEO of 3M, then left to become CEO of Boeing from 2005 to date.  His average CEO time has been 5.3 years over the last 16 years and all were very successful terms.

Finally, Alan Brown is another.  He recently stepped down from Rentokil-Initial having turned the company around over the last 5 years.   He said to me: “I think there’s a natural cycle to most roles… but for a mere CEO my view is that it is about six years. This is more than enough [time] to get your thoughts straight and to put them into action. It might not be long enough to reap the full benefit of what you’ve done, but cruising through a further two to three years comes at a cost – to the business, but also personally, as one could have been off doing something more productive.”

So that’s a clear warning for those who are tall in the saddle today.  Staying there too long may lead to falling off a stumbling horse. The best way to avoid this problem is to dismount while you are ahead.