As researchers at Ivey have identified, character weaknesses such as overconfidence, inattention, and a lack of integrity and accountability, among other factors, have been observed in the leaders of organizations that suffer. Rather than focusing on these negatives, there is an increasing need to examine the positive characteristics that comprise a good leader. Gandz, Crossan, Seijts, and Reno, find eleven key traits that contribute to a leader with strong character, and advise ways to identify these characteristics as well as how to exercise them within your organization.

Mathew Manimala and Kishinchand Poornima Wasdani from the Indian Institute of Management communicate how a distributed management style at Google has created a work environment that inspires new ideas and invokes greater achievement.  They extract back-to-basics leadership skills guided by the example set by Google, encouraging readers to empower employees and let creativity blossom within their organizations.

Robert J. Thomas et al. explore “leadership ensembles,” and patterns of decision-making which, when realized among a team, can balance each other out and unlock an integrated decision process. These authors preach the importance of collaborative decision-making in making more effective choices in the long run.

We also revisit the ever-elusive topic of big data. It was not a year ago that we discussed big data as the up-and-coming way to gain competitive advantage. Now the term seems stale, and shrouded in misunderstanding. Professor Peter Bell asks readers what we have learned, if anything, about this exhausted buzzword. His article works to breakout what the fuss is really about, and how we can understand data rather than continue to toss the term around, often mistaking it for what it is not.

Some less considerate business decisions have, in many cases, lead to economic, environmental, and human rights catastrophes. Effective and adaptable leadership lies at the core of resolutions to today’s challenges. While a sustainable future may rely on a shift in the way we do business, before that can happen, we must take a closer look at the character of tomorrow’s business leaders.

Maura Paré
Executive Editor, Ivey Business Journal

When it comes to selecting and assessing CEOs, other C-suite level executives or board members, the most important criteria for boards to consider are competencies, commitment and character. This article focuses on the most difficult of these criteria to assess – leadership character – and suggests the eleven key dimensions of character that directors should consider in their governance roles.

Corporate directors look – or should look – for three things in the C-suite level executives they hire, assess and occasionally have to fire: competencies, commitment and character (see Figure 1).

Competencies, commitment and character

Competencies matter. They define what a person is capable of doing; in our assessments of leaders we look for intellect as well as organizational, business, people and strategic competencies. Commitment is critical. It reflects the extent to which individuals aspire to the hard work of leadership, how engaged they are in the role, and how prepared they are to make the sacrifices necessary to succeed. But above all, character counts. It determines how leaders perceive and analyze the contexts in which they operate. Character determines how they use the competencies they have. It shapes the decisions they make, and how these decisions are implemented and evaluated.

Figure 1: Who Good Leaders Are

While specific competencies may differ with the role, we believe that these same criteria should also be considered in director recruitment, selection, evaluation and turnover.

Focus on character

Our research has focused on leadership character because it’s the least understood of these three criteria and the most difficult to talk about. Character is foundational for effective decision-making. It influences what information executives seek out and consider, how they interpret it, how they report the information, how they implement board directives, and many other facets of governance.

Within a board, directors require open, robust, and critical but respectful discussions with other directors who have integrity, as well as a willingness to collaborate and the courage to dissent. They must also take the long view while focusing on the shorter-range results, and exercise excellent judgment. All of these behaviors hinge on character.

Our research team at Ivey was made very conscious of the role of character in business leadership and governance when we conducted exploratory and qualitative research on the causes of the 2008 financial meltdown and the subsequent recession.[1] In focus groups and conference-based discussions, where we met with over 300 business leaders on three continents, participants identified character weaknesses or defects as being at the epicenter of the build-up in financial-system leverage over the preceding decade, and the ensuing meltdown. Additionally, the participants identified leadership character strengths as key factors that distinguished the companies that survived or even prospered during the meltdown from those that failed or were badly damaged.

Participants in this research project identified issues with character in both leadership and governance. Among them were:

• Overconfidence bordering on arrogance that led to reckless or excessive risk-taking behaviors
• Lack of transparency and in some cases lack of integrity
• Sheer inattention to critical issues
• Lack of accountability for the huge risks associated with astronomical individual rewards
• Intemperate and injudicious decision-making
• A lack of respect for individuals that actually got in the way of effective team functioning
• Hyper-competitiveness among leaders of major financial institutions
• Irresponsibility toward shareholders and the societies within which these organizations operated.

 These character elements and many others were identified as root or contributory causes of the excessive buildup of leverage in financial markets and the subsequent meltdown.

But the comments from the business leaders in our research also raise important questions about leadership character. Among them:

• What is character? It’s a term that we use quite often: “He’s a bad character”; “A person of good character”; “A character reference.” But what do we really mean by leadership “character”?
• Why is it so difficult to talk about someone’s character? Why do we find it difficult to assess someone’s character with the same degree of comfort we seem to have in assessing their competencies and commitment?
• Can character be learned, developed, shaped and molded, or is it something that must be present from birth – or at least from childhood or adolescence? Can it change? What, if anything, can leaders do to help develop good character among their followers and a culture of good character in their organizations?

Leadership character dimensions

We define character as an amalgam of traits, values and virtues. Traits, such as open-mindedness or extroversion, may be either inherited or acquired; they predispose people to behave in certain ways, if not overridden by other forces such as values, or situational variables such as organizational culture and rewards. Values, such as loyalty and honesty, are deep-seated beliefs that people hold about what is morally right or wrong or, alternatively, what makes the most sense to do, or not do, in running a business. Virtues, such as courage or accountability, refer to patterns of situationally appropriate behaviors that are generally considered to be emblematic of “good” leaders.[2]

In Figure 2, we posit character as consisting of 11 dimensions: integrity, humility, courage, humanity, drive, accountability, temperance, justice, collaboration, transcendence and judgment. If we were to take just one of these dimensions – accountability, for example – we could say that it is defined by traits such as self-confidence and internal locus of control, values such as a deeply-held belief that good leaders should take ownership for their actions, and the near-universal view that good leaders readily hold themselves accountable for results. Each of these 11 dimensions has a similar underlying structure of traits-values-virtues, and each could be extensively deconstructed and discussed in greater depth.

The following set of dimensions, together with an illustrative set of elements that describe each dimension, is unique in that it attempts to integrate age-old concepts from philosophy with more contemporary thinking from the fields of psychology, sociology, anthropology, evolutionary biology, management and leadership. The wording of these dimensions is heavily influenced by the language used by the executive- and board-level participants in our “Leadership on Trial” research, subsequent qualitative and quantitative work with leaders, managers and students to ensure that we had identified relevant dimensions, as well as endless debate within our own research group.[3] This analysis differs from many other discussions of character in that it extends the definition of character to embrace other aspects of personality traits, values and virtues, rather than focusing exclusively or primarily on its moral dimensions.

Figure 2: Dimensions of Leadership Character

Drive

Drive is essential in leaders so that they will establish stretch goals and the plans to achieve them, behaviors highly valued by boards. Leaders with drive demonstrate a passion to achieve results, the vigor to motivate others; they demonstrate initiative and a desire to excel. We prefer to think of good leaders as having drive that comes from within, rather than “being driven,” which suggests some external force. Drive should not be confused with hyper-competitiveness, destructive excess that can impede required collaboration, or with complacency, a dysfunctional deficiency that can lead to underperformance.

Accountability

Accountability includes a sense of ownership, being conscientious in the discharge of leadership mandates, and accepting of the consequences of one’s actions. Good boards demand this of their executives; shareholders require boards and individual directors to demonstrate high levels of accountability for results and the ways in which they are achieved. However, taking the whole world on one’s shoulders is an excess that can result in burn-out or paralyze someone from taking action. On the other hand, ducking legitimate responsibility results in negligent and reckless conduct that will lose leaders or directors the respect of their peers, those whom they report to, and those who work for them.

Collaboration

Collaboration is highly prized as a dimension of leadership character. It is essential for leaders to form effective teams, to cooperate with others, and to work collegially. They have to be open-minded, and be flexible so that they can cooperate with those in their own organizations as well as in external groups. However, collaboration for its own sake may result in endless deferral of decisions until consensus is reached, while lone-wolf decision-making squanders the opportunities to benefit from a diversity of views, better-quality ideas and smoother implementation of decisions.

Humanity

Humanity, which we describe as consideration for others, empathy, compassion, magnanimity and the capacity for forgiveness, is essential to developing followership. Without it, a person can be an effective boss, but never a good leader. We do not view humanity as a soft or weak dimension of leadership character but, rather, as a fundamental strength that is often at the core of fostering quality, candid conversations, and is essential in supporting other dimensions of character. However, we recognize that being tenderhearted may induce paralysis in decision-making, especially in situations in which some people may be disadvantaged, such as downsizing. We also recognize that being hardhearted, callous, or indifferent destroys human relationships, and usually results in leaders being rejected by their followers.

Humility

Humility has long been regarded as an essential quality for leaders; without humility, it’s impossible to learn from others or from one’s own mistakes. This dimension embraces a degree of self-awareness, the capacity for reflection, and a sense of gratitude toward those who have helped one learn or achieve success. Boards eventually lose patience with CEOs or fellow directors who don’t have an open mind, or who are arrogant and contemptuous of others. However, as with the other dimensions, it is important to guard against excessive humility, such as might lead to self-abnegation. This is actually a failure to recognize personal strengths that can undermine the self-confidence that leaders must have.

Temperance

Temperance allows leaders to be calm when others around them panic, to think things through, and to act in the best long-term interests of the organization. It helps them avoid over-reacting to short-term success or failure, and to assess both the risks and the rewards of alternative courses of action. Temperance as a dimension is one that is often not top-of-mind for directors, until some risk blows up in the board’s face – then it becomes highly prized! However, boards must be concerned when temperance is so strong that it contributes to undesirable temerity. Boards actually want leaders to take risks, provided that the leaders understand these risks and know how to manage them.

Justice

Justice is a dimension of a leader that is central to followers’ decisions to accept an individual’s leadership. This construct incorporates fairness and even-handedness in both procedures and outcomes, such as the allocation of work and dispensation of rewards. It includes a sense of proportionality with respect to praise or censure and – in a broader sense – recognition of the requirement of a leader to contribute to the growth and development of the societies within which they operate. Boards sometimes struggle with this dimension of character, recognizing its importance but wondering about its role in a profit-maximizing context. But leaders who act unjustly soon find themselves violating societal expectations; they court reactions such as over-regulation and excessive controls that will likely undermine long-term performance. We see this happening in the financial sector today, where executive compensation in many organizations that were bailed out by government support during the financial crisis has emboldened regulators and their political masters to push for even more stringent controls on “too-big-to-fail” banks.

Courage

Courage, both mental and sometimes physical, is a requisite character dimension for leaders. It includes preparedness to take risks, to challenge the status quo, to test uncharted waters, to speak out against perceived wrongdoing, and to be prepared to admit to concepts such as “I don’t know,” or “I screwed up.” Sometimes it requires courage to adopt a lower-risk strategy, forgoing the immediate returns of a higher-risk route. It may include a degree of resilience as leaders fail in their first efforts to accomplish something. Boards appreciate courage in their CEOs and fellow directors, although they want to avoid the extreme of recklessness. They realize that absence of courage results in compliance with authority, a moral muteness that allows wrongdoing to go unchallenged and unreported, and average or even mediocre returns.

Transcendence

Transcendence is the dimension that allows leaders to see the big picture and take the long view. It means doing what’s right for their organizations rather than pursuing the expedient or momentarily satisfying route, climbing above petty rivalries or personal feelings. It often requires creativity. Transcendent leaders are optimistic: they focus on the future and inspire others to do the same. Boards look for transcendent leaders who keep their feet on the ground while looking over the horizon. Transcendence is not a detached other-worldliness, which may detract from focus on the here and now. Nor is it the pursuit of perfection to the point where the organization fails to achieve acceptable results in the shorter term.

Integrity

Integrity is essentially about wholeness, completeness, and soundness of leadership character. It is most readily apparent in principles such as honesty, authenticity, transparency, candor, and consistency, but it is also used to describe high moral standards. It’s knowing who you truly are, being true to yourself, and ultimately being complete, together, and morally sound. It’s both saying what you think and doing what you say. Still, there are times when people with high integrity display rigidity of thinking and lack of good judgment when required to make decisions or take actions in complex and ambiguous circumstances that require the reconciliation of opposing principles. 

Judgement

Judgment has a central place in defining an individual’s character. Each of the other dimensions of character represents reservoirs of varying depth – people may have lots of courage or a little, or great integrity or not so much. How an individual’s character influences their actual behavior in a particular context depends on their judgment. It serves to moderate and mediate the way that the other dimensions determine individuals’ behaviors in different situations. It acts like the air traffic controller, determining when courage should be shown and when it is better suppressed; when collaboration is appropriate and when a leader should go it alone; when it’s appropriate to demonstrate humility and when to demonstrate great confidence; when to be temperate and when to be bold; and so on.

Talking about character

In our original “Leadership On Trial” research, participants had little difficulty talking about the role that character appears to have played leading up to the financial crisis. Yet those we have interviewed over the years almost always wondered why such issues were seldom addressed prior to the crisis. They noted the absence of ongoing meaningful discussions about character in their own organizations, even in critical issues such as talent recruitment, selection, development and retention and succession management.

We think there are several reasons for this inconsistency:

• Decades of time and many millions of dollars have been spent by private- and public-sector organizations developing ways of measuring competencies. No such effort has been placed on character. However, we are confident that this is changing. Whether it does or not is largely in the hands of the governance community itself, and we sense that it is ready for the challenge.
• Competencies are manifested in behaviors and we can actually measure them, however imperfectly. Character, on the other hand, addresses a capability in individuals that may not yet have been tested and the evidence for which is frequently vague. Here again, work is underway to develop better assessments and measures. Our discussions with members of the global governance community suggest that directors would welcome this development.
• Character is a loaded word. We tend to avoid talking about character in the workplace because it seems such a subjective construct. It does not have to be so – especially if we are able to describe the good and bad behaviors associated with these character dimensions in the appropriate business contexts. This is the focus of our ongoing research.
• Too often, discussions of character have required people to buy into some particular school of philosophical, ethical, psychological or managerial thought. We have tried to minimize this problem through balance, transparency, careful wording, and clear definitions.
• To date, the language of character has been complicated and inaccessible to those unversed in philosophy, ethics, and advanced psychological terminology. It is often viewed as a “soft” and certainly a non-quantifiable construct in a world that looks for hard data. However, we don’t think that it has to be this way. We believe some adept translation of arcane terminology into contemporary managerial language, which we have tried to do in our framework, is a starting point to making the discussion of character easier and ultimately more valuable.

Where character comes from

Some elements of character, especially basic personality traits, are inherited, while others are acquired through early childhood development, education, experiences in both work-related and socially-related organizational settings, as well as later-in-life experiences that mold character. People cite such life-changing experiences as being hired and fired; working with “good” or “bad” bosses; marriage and divorce; success and failure; illness and recovery. These crucible events only contribute to character formation if individuals have the degree of humility and self-awareness that allows and motivates them to seize the opportunity for self-improvement. Other “character-forming” experiences include working in different international, industry or corporate cultures, as well as having great critics and mentors who are prepared to have the tough discussions that also shape character development.

Assessing character strengths

Character is revealed by how people behave in situations. For example, we don’t know whether individuals have courage until they’ve faced a major challenge or danger and done the right thing. Similarly, we don’t know if they have humility unless they’ve experienced failure, acknowledged it and learned from it. Whether or not they have integrity can only be assessed by how they have responded to situations that tested that integrity under pressure.

While it is standard for directors to establish selection criteria for competencies, we believe it’s rare for them to discuss the character dimensions they expect in qualified candidates. Nor is it common to address character dimensions when reviewing executive performance or doing peer reviews of other directors. Most of us lack the vocabulary to have these discussions behind closed doors, let alone in face-to-face discussions.

Regrettably, systematic and thorough character assessment is seldom done well, often relying on an “absence of negatives” rather than focusing on positive character dimensions. A full character assessment requires a deep and wide-ranging examination of a person’s life and work history over an extensive period of time, through the investigating of the highs and lows of a business cycle, and the asking of very specific, pointed and often intrusive questions in both the interviewing and reference-checking processes. We all know how difficult this is to do – especially when the candidate has achieved positions of leadership prominence, possesses a sterling reputation, and may even be a personal friend. It’s even harder when the candidates clearly possess the competencies that you urgently need, or have a track record of success.

We look to character to attempt to predict how someone will behave in future circumstances. It is much better to ask well-constructed, probing questions about how candidates have behaved in similar situations in the past, or how they believe they would behave in specific situations in the future, than to settle for impressions formed from loosely-structured interviews, or basing hiring decisions on individuals’ reputations. This focus on behavioral interviewing is not a new idea, but emphasizing character assessment underscores its value and importance.

Building character

There are several ways that directors can influence character development in the organizations they govern. They can talk about these dimensions, especially in their formal processes of CEO appraisal and succession management. They can press management to develop formal leadership profiles that address competencies, character and commitment. They can also introduce character-focused discussion into their own board assessments. Since CEOs are almost always board members, such discussions should start to rub off on their own internal talent reviews.

Boards are in a pivotal position to alter the way businesses are run. If boards put character on the corporate agenda, organizations will have to respond. Boards can begin the process by ensuring that the senior leaders of the organization are selected, evaluated and promoted based on character as well as commitment and competencies.

We are encouraged by the number of business leaders who feel that they themselves must surmount these obstacles to talking about character, and who believe that boards should focus more on it – just as we are sometimes discouraged by stories of character-related scandals, from bribery and corruption to money laundering and near-insane risk-taking in capital markets, that are emerging on a regular basis. We are conscious that we must guard against the cynical assumption that there is, somehow, a natural cycle of wrongdoing (recognition, learning, improvement and relapse) as we go through business cycles and forget the last crisis and why it happened.

There is a lot we don’t know about the role that character plays in governance and effective leadership in organizations. We would like to get a better sense of how boards actually address character-related issues. We also need to improve how we assess character dimensions and measure them more accurately. The holy grail of this line of leadership research is an empirical assessment of whether or not the character of an organization’s leadership is significant in determining its success or failure; there is much work to be done before we can pronounce on that. We are committed to engaging members of the global governance community in this future research.

We recognize that we must be careful and responsible in asking busy directors and executives to master new language and new methods of assessment. But we believe it will pay off in better leadership. In short, while competencies matter, while commitment is critical, character really counts; it must be embraced as a major concern by boards and the governance community.

When making a decision, two heads can be better than one, but two – or even more – perspectives are definitely better than one, especially in today’s dynamic and widely different global markets. These authors call it ensemble decision making and they describe the three steps for making it work.

How do decisions get made at the top of global companies? With individual leaders at the top of global organizations increasingly unable to grasp the full complexity of the firm’s worldwide operations, the task more now than ever falls to groups of leaders at the top.

That poses a challenge, however. To be properly informed about risks and opportunities in diverse markets, these leaders need to form a group that is itself diverse in terms of its viewpoints, perspectives, experiences and expertise. Ideally, members would be geographically distributed as well. And at the same time, this group needs to be perfectly synchronized – able to work together to deliberate, solve problems, make decisions and direct the global organization. These two imperatives – for group diversity on the one hand and for synchronization on the other – are often in conflict. The more perspectives and viewpoints at the table, the more disagreements and conflicts a leadership group might expect.

The way for groups of leaders at the top to overcome this difficulty is to lead together as “leadership ensembles” – groups of leaders who are flexible enough to configure themselves according to the type of decision that is needed. Just as a cellist takes on different roles depending on whether he or she is playing with a quartet, a chamber orchestra, or a full orchestra, so too with today’s leaders. For example, a group of leaders may need to debate a controversial change in company direction, draw on close relationships to quickly ratify a decision or discuss a range of possible solutions to a problem. Each activity requires a different ensemble configuration. This article describes and discusses four patterns of global decision-making.

Leadership ensembles: The global decision makers

Consisting of the top one or two percent of executives and experts at a company, ensembles bridge a host of differences – in language, culture, time zone, experience, and more. They also make it easy for groups of leaders to configure themselves according to the task at hand. Sometimes, consensus is the goal; at other times, tough debate is required. In some cases, it’s critical for the team to make a decision; in others, the decision has been made, but leadership needs to absorb it and explain it far and wide.

Consider how top leaders at global beverage giant Diageo routinely change depending on the group’s objective. Gareth Williams, head of HR, notes that when the executive team gets together to assess the company’s performance and operations, the agenda is often a routine one, involving a fairly predictable array of faces around the table. But when their discussion turns to the question of future growth, the composition of the group changes to include regional executives. The group’s behavior shifts as well, with more viewpoints expressed. For example, a series of discussions examining consumer and value-creation dynamics through a diverse set of quantitative and qualitative data ended up challenging team members’ past assumptions. Top leaders decided together to make a shift in strategic intent and investment, targeted at the emerging middle classes in the world’s high-growth markets.

As this example suggests, effective ensemble leadership teams are characterized by three defining attributes, which we also identified in our research findings. First, rather than perfect a single decision-making routine and establish fixed governance roles for the sake of speed and efficiency, they exhibit disciplined agility. That is, they enlist the widest array of perspectives while also maintaining discipline and speaking with one voice. Second, rather than react to events as they unfold, they exercise foresight and strive to change before they are forced to respond to events outside their control. They can’t just strategize about the future, they have to own it—by bringing the best insights and most important future-oriented perspectives into their discussions. And third, the best ensemble leadership teams apply synthetic intelligence—making sense of massive amounts of information by asking the right questions, embracing paradox and reconciling contradictory points of view.

Four patterns of ensemble decision-making

In our leadership ensembles research, we interviewed more than 50 top-level executives. This helped us identify four general blueprints for decision making which successful ensembles can follow. While these blueprints can be shifted to match the company’s environment and growth strategy, we found that many top leaders often fall back on a default framework that influences how they work together.

The global leadership ensembles we studied varied on two dimensions:

First, leaders generally emphasize either issues of talent and culture or structure and process.

Second, they generally either seek to create a highly integrated organization, with standards that apply everywhere, or they prefer to allow local operations to maintain a high degree of autonomy.

While these dimensions represent a continuum rather than binary choices, they suggest four relatively distinct patterns that frame decisions at the top.

1. Incubators: Ensembles that apply this blueprint value a cohesive corporate culture and see themselves as stewards of the values and behaviors that will generate future success. They make acquisitions with care, emphasizing cultural fit with any new addition.

Ajay Piramal, executive chairman of India-based Piramal Group, explained that as his top leadership group contemplates expanding into new areas such as financial services and real estate, “It’s very important for us to think through what we should do, what in our experience generally has succeeded in the past, and what we need to avoid. [We now] spend much more time thinking about the key values our new businesses should have and the principles for those businesses.” The leadership at Piramal follows through on this concern. “We have a half-day session with newly acquired businesses to lay out the guiding principles and the rules we want to follow. This is so new people who joined us understand clearly where we stand and the sorts of boundaries in which they will be working.”

An incubator blueprint is the preferred choice of ensembles whose companies are growth-oriented and branching into new markets, but aren’t looking for rapid entry or first-mover advantage.

2. Diplomats: Ensembles that apply this blueprint pursue outcomes through a process of give-and-take among local businesses, and between local businesses and headquarters.

“We’re working to establish more global practices,” explained John Mahoney, chief financial officer at the office supply retailer Staples. But rather than dictate change, his leadership’s role is “to challenge: When things are going well, what is it that’s driving that? Is it something that works because it’s tailored to the local markets? Or is it something that the management team should adopt as one of our common, more global practices?” Mahoney notes that the global leadership at Staples “may be fairly certain about the right way to do things, but we may go back and forth between being directive and being cooperative. We’re working to make sure the strategic decisions in the local markets get made properly and get executed properly and with the full support and cooperation of the local market operators.”

Ensembles may often operate as diplomats when expanding globally, and not just to access new markets, but also to integrate new talent and new ideas. They are more concerned with the quality of management and less concerned with speed and efficiency in the short term.

3. Engineers: This type of blueprint wants, above all, to optimize the organizational structures and processes that tie their firms together. Here, ensemble leaders view changes to processes and structure as the most immediately useful tools at their disposal – tools that will ultimately build and foster a single culture across the firm.

Ian Cheshire, group chief executive of the world’s third-largest home-improvement retailer, Kingfisher, is focused on driving a more common product mix across the company’s stores. To do so, Kingfisher restructured the way that regional functional heads interact. “In our effort to have a common product range,” Cheshire explains, “we decided to create a global network among local businesses, who decided which categories to carry.” Ensembles that apply an engineering blueprint often prioritize consolidation of operations ahead of understanding local innovations or enhancing local autonomy.

4. Directors: Ensembles taking this approach want decisions to be made by those who are closest to the operations involved. They therefore see great value in keeping many decisions local and, like engineers they focus on using processes and structures to delegate responsibilities.

The Toronto-based hotel chain Four Seasons has had to learn faster than most other companies what kinds of decisions need to be “contracted out” to local managers. According to former CEO Katie Taylor, “We came to realize that you couldn’t take a North American focus and transplant it elsewhere. In our business it’s very important to understand the cultural nuances of all the different locales.” This ethos runs up to the top of the organization, where Taylor, who in late 2010 took over her role from the company’s original founder, was focused on building a clear separation of labor when it comes to decision-making. “My role as CEO has by definition, got to become less tactical,” she explained. “It’s going to free me up to spend time thinking about and doing things that are longer ranging and more important for Four Seasons’ future success.” Ensembles that take this approach prefer to make decisions quickly and if possible, keep decisions local.

Adopting the right framework

Global leadership ensembles can improve their decision making significantly by following these steps:

Step 1: Understand which blueprint leaders prefer

A useful starting point is for top leaders to explicitly articulate a preferred approach. For many of the companies we interviewed, the approach they were taking was often based on an unspoken agreement among top leaders rather than an informed conversation of benefits and drawbacks.

Step 2: Continually assess how your preferred blueprint helps or hinders your organization’s goals for global expansion

Frameworks for decision making can and should shift and change as firms evolve and new global and local market pressures emerge. In other words, this is not a one-time decision but an ongoing calibration.

Step 3: Understand the connection between the blueprint and the way the ensemble operates

When deciding how to work together, top leaders should make an explicit link between their decision-making blueprints – that is, how the ensemble relates to the firm – and the way that leaders themselves come together as an ensemble at the top. This link not only ensures that the leadership ensemble is most usefully aligned with the imperatives of the global enterprise, but also helps clarify and resolve some of the inherent contradictions when an ensemble of leaders take the helm together.

In today’s dynamic business environment, collaborative decision-making is often more effective than a “Lone Ranger” type of approach. Applying what we refer to as ensemble decision-decision making and following the three steps we describe will generally lead to decisions that are more effective.

Maybe it’s time to have a look behind the generally accepted rules for successful, sustained performance. As readers will learn, and as these authors write, the rules that really drive companies to superior performance are quite different than what many of us have been led to believe.

The evergreen objective of many – and perhaps most – inquiries into how corporations function is to determine how to improve performance.  Some investigators dig deeply into specific functions, such as finance or operations, while others look at more nebulous but equally important objectives such as talent development or innovation.  For many, however – and we place ourselves in this category – the most seductive siren song is the promise of understanding the determinants of superior corporate behavior writ large.

Many others have responded to this same call. In fact, the search for the drivers of exceptional, long-term corporate performance has become a sub-genre in the field of popular management science over the last thirty years.  In Search of Excellence launched and defined the “success study” business book in 1982, and since then there have been, by our count, almost two dozen high-profile attempts to tease out the secrets of corporate success using the genre’s defining method:

1)    Identify high performing companies;

2)    Figure out what they did that made them high-performing companies;

3)    Conclude that any company that adopts those behaviors will also be high performing, if not better.

Yet, despite a field crowded with supernova management gurus – from Tom Peters to Jim Collins and beyond – we felt compelled to try our hand.  Such conceit seems to demand that, before telling you our version of the truth, we take a step back and explain why our approach just might be different enough to warrant imposing two more consultants with a book on the world.

Advice on advice

Our frustration with most success studies is not that any particular directive is wrong.  Rather, somewhat ironically, it is that all too often many researchers offer prescriptions that could never be wrong; that is, their claims cannot be proven to be false.

For example, one researcher tells us that a key to long-run performance is the willingness to confront the brutal facts.  One could perhaps imagine circumstances in which hiding from the truth and self-delusion might be advisable, though it does seem a stretch.  (Note that the advice is not to tell the truth to others, but to face the truth yourself).  In other words, this advice falls short because it cannot be proven to be false.

Worse, this advice is not actionable.  Of all the facts worth confronting, we are told to pay special attention to the “brutal facts.”  But which facts are those?  The “brutal” qualifier connotes “unpleasant,” and perhaps also “important.” But these adjectives do not help much, since we lack an objective, reliable way to assess whether a given fact is indeed unpleasant or important.

This is not to say that confronting the brutal facts is incorrect advice anymore than, say, “Buy only stocks that go up” is incorrect advice.  But it is neither falsifiable nor actionable, and so it is fundamentally bad as advice.

Unfortunately, the success study genre seems, at times, to have little to offer but recommendations that fail these two tests.  Take, for example, the admonition that a successful strategy must be “clear and focused.” Does anyone ever craft or seek to implement a strategy that they felt violated these principles?  Or what about the suggestion that sustained success depends upon finding a “big enough market insight?”  “Get the right people on the bus.”  “Be agile and disciplined.”  “Be specific, methodical and consistent.”  “Do not abandon your core prematurely.”  As opposed to what?  Building a business on a market insight you know is too small, getting the wrong people on the bus, being sclerotic and unruly, being vague, feckless and fickle?  And should you ever do anything prematurely?  (These examples are all taken from popular or credible success studies.)

Frustrated by this proclivity to offer Spike Lee-like advice (“Do the right thing”), we undertook our own success-study effort.   But we were also keenly aware that the very works we found so unsatisfying were the fruits of accomplished and careful researchers; we have no reason to believe that we were any smarter than they.  If we were to avoid facile conclusions we would need to design and execute our research in a fundamentally different way.

Sampling error

Moving from complaining about the weather to doing something about it ran us headlong into a particularly vexing feature of the success-study design.  The bedrock assumption of every success study is that the companies chosen for examination have in fact achieved noteworthy success.  Typically, the researcher selects a time period and sets a standard that is intuitively exigent.  Popular choices are periods of 10 or 15 years, with performance that exceeds an industry or overall market benchmark by, say, ten-fold.

It is tempting to believe that such performance merits our close attention. But real science can’t be based on what seems right, and no success study we are aware of tests this assumption for its high performers.  In particular, as far as we know, there has been no accounting for the variation of the system within which all companies compete.  It turns out that the rough-and-tumble of competitive markets creates tremendous noise in company performance:  a series of lucky breaks can catapult a company to the top of its peer group, and perhaps even the top of the market, for far longer than you might think.  Consequently, the level and duration of performance required to stand out in a meaningful way goes beyond the somewhat arbitrary standards set in most success studies.

So we took a very different approach to identifying high performers, employing cutting-edge statistical techniques and the most comprehensive database we could find – one that covered more than 25,000 publicly traded, U.S.-based companies and 45 years of performance.  This allowed us to be more confident that the companies we chose to study were more than just lucky… they had gone beyond the right tail of the performance distribution and had delivered the kind of results that we could, with confidence, lay at the feet of superior management.  (See “Where Have You Gone Joe DiMaggio,” Ivey Business Journal, May/June 2009.)

We defined two types of exceptional companies:  Miracle Workers and Long Runners.  In their lifetimes, Miracle Workers land in the 90^th percentile of performance often enough to have at least a 90 percent chance of being more than just lucky.  Long Runners land in the 60^th to 80^th percentile band, often enough to clear the same probability benchmarks.

Based on these criteria, it turns out that our concerns were well-founded.  When we applied our method for assessing company performance to the samples selected by high-profile success studies, we found that only rarely did putatively high-performing companies perform in a way that warranted examination.  The table below shows how the samples of a selection of success studies fared.

Of course, there are many ways of measuring corporate performance.  We focused on return on assets (ROA), a measure of profitability.  Shareholder return is also a popular measure, as is revenue growth; most success studies use one of these two measures.  It is therefore perhaps not surprising that previous efforts fare rather poorly in terms of exceptional performance as measured by ROA.  What surprised us is that – even when looking at these other measures – such a small percentage was in the right tail of the distributions of those measures. Half of the companies in the samples of the success studies we mentioned were below the 70^th percentile of performance for both growth and shareholder returns.

Comparing success studies

Our take-away from this table is that few success studies are doing what they think they are doing.  With small sample sizes, and with less than 15 percent of their high-performing companies clearing the bar as measured by ROA, less than 18 percent in the ninth decile as measured by growth rate, and less than 30 percent in the ninth decile as measured by shareholder returns, the success-study genre itself might well be thought of as “in search of excellence.” But it has far more typically found only mediocrity.

In contrast, our sample, by design, consists only of companies with exceptional ROA.  As it turns out, these same companies have a lifetime growth rate that is comparable to the allegedly high-performing companies in other studies, and a lifetime shareholder return that is every bit as good.  In short, companies with great ROA seem to have only marginally lower growth and equally strong shareholder returns as those companies singled out in previous work.

Just cause

With a sample in hand that we felt we could trust, we then faced another oft-ignored bugbear of management research:  establishing causal connections between behavioral differences and differences in performance. Although, as 18^th century philosopher David Hume taught, causality can never be observed, only inferred, some claims of causality are stronger than others.

For example, leadership is frequently singled out as a driver of superior performance, based on seemingly strong correlations between differences in leadership and differences in performance.  Yet rarely can researchers quantify these relationships:  how much of the difference in enterprise value over a decade can be tied to differences in leadership?  The inability to establish these links does not undermine the indisputable fact that leadership matters; but it does mean that we cannot know, at least not yet, how much or in what way leadership matters.  We must build our causal explanations on more solid foundations than what should be true, lest we fall into the trap of simply proving what we already believe.

Our performance measure (ROA) provided the opportunity to establish a more direct link between behavior and performance than much prior work.  A company’s ROA is the product of return on sales (ROS) and total asset turnover (TAT).  We exploited this arithmetic identity to identify the drivers of ROA differences among the trios in each industry.  For example, in trucking we looked at Heartland Express (Miracle Worker), Werner Enterprises (Long Runner) and P.A.M. Enterprises (Average Joe).  Heartland endured a TAT disadvantage versus Werner that was more than offset by a strong ROS lead.  This pointed us to Heartland’s high degree of customer focus, which translated into a 10 percent price premium over its closest competitors – which, based on our financial models, accounted for most of Heartland’s ROS lead.

The constraints imposed on our behavioral explanations by the underlying financial structure of the performance advantages gave us a whole new level of confidence in our findings.  What we found is that Miracle Workers tended, by far, to derive their performance edge from higher return on sales, driven, in turn, by higher prices born of a differentiated competitive position.

This observation held in even the most unlikely of circumstances.  For example, Family Dollar, a U.S. discounter, has bested the legends in discount retailing since the mid-1970s. When compared to its much larger, but less profitable, competitors, Family Dollar (like Heartland) tolerates a lower asset turnover, but realizes a much higher return on sales.  What might surprise you (it certainly surprised us) is that – despite the fact that many of the company’s customers are poor – Family Dollar achieves higher ROS through higher prices (rather than lower costs), which it can charge because it offers superior convenience and selection: its smaller stores are easier for customers to get to, and many shoppers buy small amounts of a wide variety of goods.

As part of our case-study analysis, we also built rudimentary financial models to test whether the behaviors we had identified could plausibly account for the timing and magnitude of the performance differences to be explained.  So, when comparing Merck (Miracle Worker) with Eli Lilly (Long Runner) in the pharmaceutical industry we found that asset turnover was a key driver of Merck’s ROA advantage in the mid-1970s and again in the late 1980s.  It turned out that Merck’s sales were growing much faster than Eli Lilly’s during these periods, thanks to more rapid international expansion, and that non-U.S. sales had a higher ROA than the company’s domestically-generated revenues.  Couple this with the observation that the pattern and magnitude of differences in international exposure of the two companies coincided with Merck’s superior overall ROA, and we have what seems to us to be a strong case for a causal link between specific behaviors and performance differences.

Doing versus thinking

Perhaps not surprisingly, each exceptional company had dramatically different drivers of superior performance.  A Miracle Worker in Grocery (Weis Markets) faces very different competitive forces and reaches for very different levers than one in medical devices (Medtronic).  Yet our project would be meaningless unless we could find some set of general principles that spoke to the deep structure of what put these companies on top.

Extracting the signal from the noise proved challenging.  One hypothesis after another was toppled by contradictory observations.  At first, merger activity seemed relevant, but as we worked through the cases, sometimes high-performing companies did big deals, sometime small ones. Yet the same could also be said of companies with dramatically different performance profiles.

Product proliferation, international expansion, business-line diversification, innovation…you name it.  Every general strategy or discipline that we could measure and connect to performance was in evidence with equal frequency in all three performance categories.  We were worried that our answer to the question “What drives superior performance?” would amount to little more than a two-word sentence of surrender:  It depends.

We began to make some headway when we shifted our focus from what exceptional companies did to how they chose what to do.  This reframing allowed us to look past differences in behavior to underlying similarities in apparent motivations.  We ultimately distilled the order that emerged from the chaos into three rules for exceptional profitability. These were rules not for action but for deciding what action to take.

Rule #1. Better before cheaper

Perhaps the most fundamental choice a company must make is how it is going to create value for customers that will differentiate it from its competition.  It is a choice that can usefully be framed in rather stark terms:  provide superior price value (in the form of lower prices) or superior non-price value, in the form of better reliability, durability, convenience, brand, fashion – in short, every sort of benefit other than price.

Miracle Workers don’t compete on price.  In our sample, eight of the nine top-performing companies were focused on non-price dimensions of value.  They systematically chose to find ways to distance themselves from the competition with product or service performance rather than seek to draw customers closer with lower price.

Take, for example, Linear Technology, a semiconductor company that began life as a second-source supplier to the U.S. Department of Defense.  Contracts were characterized by narrowly-specified performance criteria, limiting the scope for non-price differentiation and emphasizing price leadership.

Micropac Industries, a Long Runner in this industry, had mastered this dynamic and met the DoD’s exacting standards. But it had done so in a way that kept its costs down, enabling it to be price competitive, yet still enjoy worthwhile levels of profitability.  Long Runner status, after all, is nothing to sneeze at.

Linear was profitable enough, but it lived in Micropac’s performance shadow.  It wasn’t until the early 1990s that Linear was able to find its recipe for top-tier profitability, by shifting to consumer markets.  Rather than continue to navigate between the Scylla of demanding performance and the Charybdis of price constraints, the company chose to tackle a different challenge:  to provide nearly-bespoke technology for a large number of relatively small accounts.  By the mid-1990s, no single customer accounted for more than 10 percent of sales and Linear was focused on high-performance, mission-critical integrated circuits that typically did not account for a high proportion of its customers’ total cost. This combination of attributes allowed Linear to charge relatively higher prices and so capture much of the value it created.

For example, a representative Linear customer sold high-performance, mobile data scanners for thousands of dollars. Linear’s chips improved battery life, a key differentiator for this product, yet one that accounted for less than five percent of the total materials cost for each scanner. Consequently, this customer typically looked elsewhere to ensure the cost competitiveness of its products. This gave Linear significant pricing power, mainly because of its highly diversified customer base. If a Linear customer became especially price sensitive, the company was less compelled to accede to pricing pressures than, say, Micropac, which had a much more concentrated customer base. With a portfolio of more than 15,000 such customers, Linear was constantly in a position to capture a greater proportion of the value it created through higher prices than most other competitors.

Where Linear’s performance improved with a strong movement toward non-price differentiation, Maytag’s decline illustrates the perils of moving away from non-price differentiation.  A Miracle Worker thanks to a two-decade run of 9^th decile performances beginning in 1966, Maytag is known even today for its iconic “Ol’ Lonely” repairman, endlessly idled by the legendary reliability of Maytag washers.  From the mid-1960s until the early 1980s, Maytag’s distinctive products were supported by a highly motivated network of over 10,000 independent dealers.  Its marketing and strong network was a powerful combination that supported the sort of price premium that typically drives superior profitability.

In the mid-1980s, however, the rise of the big-box retail format began to undermine the viability of Maytag’s traditional channels.  These newly ascendant retailers wanted to deal with a relatively limited number of suppliers that could provide a more complete range of products and price points.  Maytag responded by broadening its portfolio beyond high-end washers and dryers through sizeable acquisitions.

However reasonable this response might have been, it did not work.  Unable to compete effectively on price due to stubbornly high costs, and having compromised its non-price value position, Maytag’s profitability began an almost uninterrupted decline.  The company was acquired by Whirlpool in 2006.

Every Miracle Worker creates its non-price value position in its own way, but the recurring theme is unmistakable:  Differentiation based on non-price dimensions is systematically a primary driver of superior long-term profitability.

Rule #2. Revenue before cost

The logic of competition reduces the choice of how a company can create value to one of price- or non-price-based extremes.  The arithmetic identities that define return on assets similarly distill the choice of how to capture value in the form of profits into a choice between revenue and cost.  Companies with superior profitability must have disproportionately higher revenue – driven either by higher unit prices or higher unit volumes – or disproportionately lower cost.

Miracle Workers rely on revenue.  In fact, not only do Miracle Workers rely on superior revenue to drive their ROA advantage, they are as likely as not to have higher relative cost than Long Runners.  In other words, Miracle Workers create superior non-price value and accept the higher cost they must incur to do so. But they more than recoup that investment in relatively higher revenue.

The relationship between higher price and better profitability is relatively straightforward.  Several of the examples discussed so far illustrate this:  Heartland in trucking, Medtronic in medical devices, Linear in semiconductors, Maytag in appliances (in its glory days).  Driving revenue through superior volume is perhaps somewhat less intuitive, and is illustrated in high relief by Wm. Wrigley Jr. Company, the confectioner best-known for its chewing gum.

When compared to the Long Runner in the category, Tootsie Roll Industries, Wrigley has a strong non-price position based on brand equity.  Through significantly higher relative advertising expenditures – which consist of not only mass market media but also extensive co-op arrangements to secure preferred placement in retail outlets – Wrigley’s portfolio of products are among the best known in the industry.  In contrast, Tootsie Roll has a long history of cost-consciousness, and has traded on the durability of the brands in its stable.  Where Wrigley products are advertised on TV and occupy the top shelf in most convenience stores, Tootsie Roll depends more on customers’ long memories and transient candy preferences across the generations. It is content to see its product on the middle or bottom shelves.

Despite its price premium, and during much of its run of superior performance, Wrigley has actually had lower return on sales than Tootsie Roll. As well, Wrigley’s gross margin advantage was more than eroded though consistently higher SG&A expenses, made up largely of marketing and sales.

Consequently, Wrigley’s higher ROA has perennially been a function of higher asset turnover, which has in turn been a function of higher revenue:  From 1986 through to 2007 (when Wrigley was acquired), Wrigley grew revenues by over ten percent per year while Tootsie Roll grew at just over seven percent per year.  Certainly, Tootsie Roll’s growth is impressive (it bears repeating:  the company is a Long Runner), but in the competition for relative profitability, Wrigley’s higher growth rates carried the day.  Perhaps most important, Wrigley’s superior volume was not, contrary to the prescriptions of your first-year university economics course, a result of lower price.  Rather, Wrigley drove volume through non-price differentiation.

The story of Thomas & Betts, a manufacturer and distributor of electrical wiring components, offers a salutary example of the pitfalls resulting from competing on volume-driven cost reduction when seeking volume through lower price.  A one-time Miracle Worker, T&B enjoyed top-decile performance through the mid-1980s, thanks to its consistent investment in R&D and non-price differentiation in products and services.

In a manner strongly reminiscent of Maytag’s woes, however, T&B found itself subject to industry-level shifts that seemed to mandate a thoroughgoing strategic transformation.  The rise of electronic (vs. electrical) components suggested that strong growth lay outside of T&B’s traditional markets. As a result, the company made several large acquisitions and sought to expand both its production and its markets overseas.

T&B proved unable to compete effectively in these new markets, yet each setback spurred only a deeper commitment and additional acquisitions in a quest for scale-driven cost advantages that never materialized.  It was only through a return to its historical strengths – non-price differentiation in electrical components and services – that the company was able to right itself. It was ultimately acquired by ABB.

The ways in which a company might find valuable non-price differentiation are almost infinite.  In contrast, there are only two ways companies can drive superior revenue:  price and volume.  Six of our eight revenue-driven Miracle Workers relied on price-driven, gross-margin leads.  But for the other two (Wrigley and Merck), volume-driven revenue was a viable alternative.  Either way, however, the underlying rule is clear:  revenue before cost.

Rule #3. There are no other rules

We couldn’t find anything else that mattered in a systematic way.  Whatever superior-performing companies did that contributed to their superior performance was consistent with rules #1 and #2.  Whenever their actions undermined that performance, they were behaving in ways that were inconsistent with the rules.

It is for that reason that we see M&A on both sides of the high-performance ledger.  When T&B went in search of scale to cut costs so it could compete on price, it lost its Miracle Worker-level performance.  In contrast, when Heartland almost doubled in size through a series of acquisitions, it was easy to infer that the company was zealous – even religiously so – about pruning back acquired revenue that was not sufficiently profitable and even those customers that the company could not serve in its traditionally distinctive way.

Similarly, when Maytag globalized in order to reduce its costs while seeking new revenue through lower price, it foundered.  In contrast, Merck’s international efforts were born of an ability to generate new revenue on the back of its underlying differentiation.

The absence of other rules doesn’t give you permission to shut down your thinking. You still have the responsibility for searching actively – and with an open mind – to figure out how to follow the rules in the face of what may be wrenching competitive change. It takes enormous creativity to remain true to the first two rules.    

For example, Abercrombie & Fitch has stayed on top of a constantly changing retail-clothing market by being willing to invent new images for itself and new product lines. For example, its Abercrombie brand is aimed at grade-schoolers, while Hollister is for the 14-to-18s and Gilly Hicks is for women, a feat that the company accomplishes without wavering in its dedication to a position driven by a brand-intensive, non-price value, and a higher-price-driven profitability formula. A&F has avoided markdowns and promotions, and has typically sold its clothing at about 70 percent of full price, which is higher than the comparable figure for many apparel retailers. When the recession hit in 2008, A&F resisted following other clothing companies down the discount path, a choice that earned the company no small amount of criticism from analysts, mainly because its same-store sales dropped more than its competitors’. The company’s persistence, has, however, preserved its brand cachet, and with the recent economic recovery, A&F is now returning to a level of profitability that its competitors are having a tough time matching, especially after it let its customers know that T-shirts don’t have to cost $30 after all.

Using the Three Rules

These rules for exceptional performance are by no means a comprehensive blueprint for success.  They leave a great many important questions unanswered.  For example, knowing that “better before cheaper” is the way to go does nothing to tell you precisely how your company needs to be better today in order to differentiate yourself on those non-price dimensions of performance, dimensions that you know the customer will pay for and value. Neither can “revenue before cost” reveal whether you should focus on price or volume to drive your revenue advantage.

Instead, think of the rules as a compass:  collectively, they point you in the direction you want to go.  But you cannot, of course, simply put your head down and walk north.  To head north without incident, you will sometimes have to head east or even double back and head south for a while.  Watching only the compass could well lead you into quicksand or off a cliff.  Perhaps just as important, the rules help you avoid following red herrings or giving in to dangerous temptations.  Travelers can be led astray by mirages or the sirens of Greek myth, misled into believing that illusory or temporary pleasures are preferable to the hard-won satisfaction of true virtue.

Similarly, following the rules might occasionally require you to deviate somewhat, for a time, from the rules themselves.  The emergence of low-cost competitors, rising commodity prices, or a recession might well have you paying much closer attention to price competitiveness and your relative cost position than the rules might typically imply.  Likewise, pressures for quick wins or the desire to “make the numbers” can delude managers into pursuing the false certainty of cost-cutting at the expense of maintaining a commitment to the seeming uncertainties of investments in non-price value.  That’s why the rules are “better before cheaper” and “revenue before cost.”  Sometimes price competitiveness matters, and sometimes cost control is critical, but in the long run, don’t forget what matters most.

Our research shows that what looks like the easy, sure path of price and cost is actually more likely a dead end.  If it is superior, long-term performance that you seek, the three rules show not just the road less traveled, but also the road best traveled.  And that can make all the difference.

Imagine how difficult it would be to get your meals if there were no supermarkets or restaurants to offer multiple products and services all in one place. If you had to source your meat from one supplier, your potatoes from another, and so on. It would take you a long time to purchase all the food you need in your household. Supermarkets and restaurants offer an integrated solution for customers by bundling the products and services needed for a meal in a manner that is easily accessible. This concept of product/service bundles has been implemented by leading companies such as IBM, General Electric and Magna with great success. Doing so has differentiated them from competitors or even eliminated competitors all together. So why isn’t every company doing it? IBJ discusses this approach with Roger More, whose new book, Marketing High Product/Service Solutions, addresses product/service bundling as a strategic marketing opportunity.

“A product/service super-bundle is created when your integrated solution creates your customers’ most differentiated and desired choice/rejection/experience process. You become the mirror image of the customer’s solution process and life cycle. Looking at your solution, your customers see themselves.”

 – Roger More

IBJ: Why did you write the book?

Roger More: More and more companies are getting interested in providing bundled solutions to customers’ problems rather than the laundry lists of products and services they provide. This is an ongoing trend. Leading companies have been doing this for the last five or 10 years and longer. In fact, I went through these processes with IBM and General Electric (GE), which are two of the examples used in the book. And there are many more. The book is an exemplification of my ongoing experience in my management consulting and research. I wrote it to pursue a topic that is of enormous strategic importance in the world today. It’s a very broad topic and significant to many companies.

How did you research this topic?

The research was done experientially. It’s grounded research. It’s based on years of experience that I have had consulting with these companies – with senior management – and actually grinding through specific examples of product/service bundling and making decisions as to whether they are worthwhile to fund and whether they could be successful. I also discuss what some companies learned from failure. The book is experiential and based on real-world situations faced by real-world managers over many years. When you do something like that, you feel like you’d like to pull some things together to make it useful to other managers faced with the same problem.

Why is product/service bundling so well-received in many cases?

We are used to solution bundles as consumers. When you buy a notebook as a consumer, the product is the notebook, but it is bundled with all the software and the service and everything else that you need. And, of course, notebooks crash and they quit and you need service to get them started again. Bundling of solutions is a naturally occurring thing.

A good example is what has happened at hospitals. Before GE came along with its product/service solution bundling, hospitals bought all of their equipment as individual products and, to some degree, they still do. Of course, the solution from a hospital point of view is what happens on the hospital floor when patients go through the place when they get treated. Patients don’t want to see individual products, they want to see a solution.

So GE went from being a supplier of X-ray, CAT scan, MRI and other imaging equipment to providing integrated radiological floors where they spec all of the equipment and services. GE manages them all and bills for them in one bill. The benefits to the hospital are absolutely staggering. Instead of having to manage hundreds of suppliers, there is one supplier. That one supplier is GE and it bundles a solution. The efficiencies involved are enormous. That’s one example. There are many other examples. The Magna example is a spectacular one because Magna went from being the supplier of individual components of cars to managing and doing the entire manufacturing process for the car itself. Magna actually produces and assembles cars for automakers, which is a huge solution bundle. You can just imagine the efficiencies when you don’t have these hundreds of outside suppliers and you can replace them with one company like Magna that manages the entire solution process for you. You can see examples small and large. It’s almost as if you can pick any industry or company and talk about how they bundled solutions.

With such advantages, why isn’t every company doing this?

There are a lot of products and services that people want to buy individually. They don’t want them to be part of the solution. Most people, when they buy their clothes, don’t go to a clothing store and say, “Empty closet – fill it with clothes that fit me and that I like.” Most people buy clothes one product at a time – a pair of shoes, a pair of socks, a suit, a shirt, a tie, etc.  We want to assemble our own solution. We don’t want somebody else bundling the solution for us.

Another interesting example is home building.  I have some friends in the custom home building business. Like contractors, they build homes. A lot of sub-contractors, electricians and so on, decide they want to become contractors because that is where the money is. Instead of just providing electrical services or drywall, they want to start building houses. The number of people who have gone bankrupt doing this is legendary. So managing a bundle isn’t the same as managing pieces of a bundle. It’s much more difficult and takes a much higher level of professional management. That’s what my book is about. It’s about what is necessary to get into more bundling or bundled solutions. What are the critical questions you have to ask in order to make it a success.

Why is bundling such an important strategic marketing opportunity?

Let’s go back to the GE example. GE created a huge competitive advantage compared to Siemens and Toshiba and some of the other suppliers in the medical business, by bundling products and services. They basically shut other suppliers out of the bundle. The bundle becomes GE’s bag of goodies and it’s all in one. This means there are cost efficiencies. GE can price the entire bundle rather than pricing pieces of the bundle. Competitively, it’s a huge advantage if you can do it well. It’s not an advantage if you can’t do it well. It’s not necessarily good for everyone. One of the six major questions that is asked of managers about bundling is: Can you create long-term net cash flow? Or, more simply, can you make money? One of the problems with bundling products and services is the costs. If you’re not right on top of it with your accounting and finance controls, the costs can spiral out of control very quickly. Manufacturing products has a very well-defined way of cost accounting – figuring out whether products are making money or not. Services are really difficult to manage. Services are people doing things for people. For example, when GE got into bundling medical solutions, it greatly underestimated the costs.

You give examples from three leading companies – Magna International, GE and IBM. Did their successful track record give them an edge or can any company duplicate their results?

Magna is a great example of a relatively small auto component company that just kept putting together bigger and bigger bundles of modules for cars and manufacturing facilities and outsourcing until finally it grew into this manufacturer and outsourcer for entire vehicles. It would be very difficult for many auto parts suppliers, who just supply products, to do what Magna did. There are so many companies that just provide products to the auto industry and it’s very difficult to all of a sudden say, “Let’s be like Magna.” Once Magna has done it, it provides huge competitive differentiation and Magna’s productivity speaks to that. It’s the same with GE. GE’s position in the medical industry is to go into hospitals to the radiological and imaging floors. Everybody knows GE. Customers know GE and they revere GE. They know that GE provides great solutions.

Your book introduces new concepts and tools for managers to provide bundled products – how did you develop these concepts and tools?

I developed the concepts while working with managers. It’s not an academic book. It’s for managers. It’s meant to be used in the teaching of managers and for consulting with managers. The concepts and tools in the book are successful with managers in the real world. For every one that I have in the book, there are two or three that I discarded because they were too complex or the managers couldn’t use them in all the situations. There are a lot of tools and concepts in the book. Each one of them is designed to ask a question that managers need to ask and let them map product/service opportunities in such a way that they’ll start getting an idea of whether they could be successful or whether it’s highly likely they will not be successful.

What is your advice to companies that are considering bundling?

Do it incrementally. You don’t dive in to the deep end of the pool.  Start adding services. Then start bundling products together. Then start bundling services with them. And keep your eye like a hawk on what’s happening with your cash flows. GE didn’t do that. GE jumped right into it and found out the hard way that it had very good cost information on the products side, but it didn’t have good concepts and financial tools to look at the costs of services.  Offering services is a much different scenario from products. So it took GE a while for its services cost methodology to catch up.  GE lost some serious money.

Another good example is Business Process Outsourcing (BPO) from IBM. BPO is one of the biggest product/service bundles the world has ever seen, where IBM will literally do all of the IT globally for large corporations. IBM does all the hardware, software, staffing, connectivity, the Internet – everything. It’s a huge bundle. However, even just the cost of putting together a bid and assessing the customer’s existing IT infrastructures can run into the tens of millions of dollars. And if you bid on the deal and lose, you don’t get any money back. It’s extremely hard to control the costs because IT is rapidly changing, very complex and so forth. The result is that IBM has had a very difficult time being profitable with BPO and IBM admits this.

Your previous book, Transforming New Technologies into Cash Flow, dealt with bundling high technology. Is it a good complement to this book?

It was on transforming new technologies and putting new technologies together, as opposed to products and services. They are kind of distant cousins. The other book focuses strictly on choice of technology, whereas this book talks about choice of products and services in solutions. Obviously, product service bundling involves bundling technologies, but I didn’t want to talk about all of those issues in one book. Technology is a separate issue because it’s such a large issue. To the extent that product/service bundling is difficult, it is much more difficult in the presence of complex, expensive, fast-changing technologies. Take the IBM BPO example again. Samsung has just announced that it has a fifth generation platform, or 5G, smartphone.  Let’s say IBM has a BPO solution in place for a company and all of a sudden along comes 5G. The company wants 5G and IBM just put in 4G. So IBM might say, “If the company wants 5G, that will cost another $100,000,000.” So the company says, “We’re not going to spend $100,000,000 on that – we’re going to go talk to somebody else.” When you bring in a technology aspect, it is an enormously difficult thing to manage.

Are there other books on this topic and, if so, what sets your book apart?

If there are other books, I’d like to know. There have been articles written on bundling, but they tend to be theoretical research, narrow, data-based and not particularly useful to managers. This book contains thought leadership. It is for senior managers in all functional areas, primarily marketing strategy, supply chain management, technology engineering and new product development in a business-to-business (B2B) market. This is not a consumer marketing book; it’s a B2B marketing book.

Where do you go from here?

I want to turn some of the material into articles. And there is obviously a lot of research that people might be interested in doing on this subject.

A successful innovation is a little like an iceberg: Look under or behind the innovation and you’ll see the smart practices, processes and structures that supported the success of the innovation. Herewith, six practices to avoid, and that are sure to compromise the chances of success.

Strategy is undergoing a sea change.  For many years, the ultimate goal of strategizing has been to create a ‘sustainable’ competitive advantage.  Economists and practitioners alike developed tools and processes that worked well – as long as things were relatively stable.  However, in increasingly larger parts of our economy, it is starting to become obvious that competitive advantages and business models are transient. Even in industries that we used to think of as relatively long-cycle and slow moving, unexpected competition and dramatic changes in the operating environment are causing those who develop strategy to challenge their fundamental assumptions.  For example, within 48 hours last week I had calls from strategy people at a mining company and an energy utility, both of which reported that within the last year unexpected challenges had emerged for which they felt their leaders were woefully ill-equipped.  These industries have been thought of as relatively slow moving, yet they are experiencing the sting of competitive advantage that was temporary and had become unsuitable for the times. 

When competitive advantages are short-lived, one needs to think in terms of developing and managing an entire pipeline of advantages in order to survive.  This suggests, among other things, that a robust process for generating new business models through innovation is essential.  And yet, when one looks at what is actually going on in many organizations, it is clear that the innovation function, in most companies the starting point for creating new advantages, is broken or even dysfunctional.  This situation persists despite a truly vast amount of talk about innovation.  In many organizations, the basic building blocks of an effective innovation process are simply not in place.

I group the warning signs that the innovation process doesn’t work well into six categories. In this article, I will describe each of these categories and offer suggestions for what managers can do to fix what is wrong in each case.

1: Innovation is episodic

The first indicator that the innovation function in an organization has become dysfunctional is that it has become an on-again, off-again process, dependent on the whims of senior people or small groups. 

Innovation can be said to begin when the innovation impulse begins to percolate in an organization.  This could be because company leaders recognize that the existing business has started to become commoditized, or worse, that it is in full-scale competitive retreat.  Only very occasionally it means that far-sighted leaders have recognized that they can’t simply continue to exploit their existing advantages and that they need to refresh them. 

The innovation thrust can take a number of forms.  It might be a small group or team who gleefully go behind the typical organizational rules to explore new opportunities.  It might take the form of a skunkworks, or even a whole New Ventures Division. For a while, things seem to be going along just fine, as the people engaged in the innovation process make interesting discoveries, find new places where the company’s capabilities might be relevant, and come up with new ways to serve customers. 

Unfortunately, the efforts, all too often, end badly.  This could be because the parent company faces some kind of cash, profit or numbers squeeze, and the folks with budget scalpels go looking for something to cut.  It’s easy to ax innovation, as in the early stages these ideas have few real constituencies – after all, a potential customer can’t scream about never getting a product they didn’t know they would love.    More tragically, the group has actually come up with something powerful and novel, but – whoa – someone senior in the organization suddenly realizes that this could have a disruptive or cannibalizing effect on existing cash cows.  The innovators get squashed, the idea is shelved and the old battle-axes live to fight another day [see “Civil War Inside Sony,” Rose, F. (2003). The Civil War Inside Sony:  Sony Music wants to entertain you. Sony Electronics wants to equip you; Wired Magazine. Issue 11.02]

The innovation team, dispirited, disbands and its members move back to the established businesses, or frequently end up leaving the company.  Innovation, after all, is uncertain and many things will not work out as planned.  In fact, most things will not work out as planned.  But this, of course, has not solved the company’s fundamental problem – the lack of a sustained commitment to innovation –which is eroding competitiveness in the core business.  So, new ventures re-appear after some months or years when someone else gets the innovation urge (see Kodak ventures, Xerox PARC, the Nokia New Ventures Organization and Lucent Ventures).

On-again, off-again innovation is worse than doing nothing.  It sends the signal to good people that these are not the kind of projects they should bet their careers on, and it wastes resources.  If you want to get it right, innovation needs to be continuous, ongoing and systematic.  Set aside a regular budget for it. Make it part of good people’s career paths. Actively manage a portfolio in which innovations are balanced with support for the core business.  And build it into the organizational processes that sustain anything else that is important in the company. 

2: The innovation process is invented from scratch

The reality is that it’s difficult work to bring innovations through the processes of ideation, incubation, scaling up and then give them their rightful place in the core business of a company.  It is work, however, that a lot of smart people have studied and for which there is good knowledge about which practices are effective and which are not.  And yet, for some reason, when it comes to innovation, people in companies feel compelled to invent the process from scratch, making it up as they go. 

So someone gets plucked from the management ranks to be the innovation leader, and then he or she assembles a team of enthusiastic volunteers and sets off to pursue glorious new things.  Often, the management practices that they use are ad-hoc.  This almost never works. 

It’s important to realize that innovation, like any other important organizational process, such as quality management or workplace safety, can be managed to some extent.  So before people blunder about reinventing the process every time, it makes sense to step back and understand what works and what doesn’t. 

Fortunately, there are a lot of resources that you can use to become better informed about what an innovation will require, and which can be put into action right away.  There are many books on the corporate venturing and entrepreneurial process, as well as courses and opportunities for people to get mentoring and coaching.  Why so many companies don’t read these books or enroll in the programs remains a profound mystery to me!

The payoff to learning for doing innovation right can be tremendous.  At General Electric, for instance, Prescott Logan, the brand-new leader of the firm’s fledgling battery business, realized that he wasn’t dealing with an initiative in the company’s core business, but rather with a totally new kind of opportunity.  Rather than pursue the project with standard GE methodology, he determined, as he put it, to “get smarter” about what would be required to launch something that would be entirely new to the company.  He could have invested millions in plants and equipment and gone to market immediately.  Instead, he lobbied for and got time to figure out what the true business would be, what customers it would serve and what the business model could yield, using “lean startup” ideas from entrepreneurship educator Steve Blank.  Today, the business is quite different from the original concept, but it is showing extremely positive growth potential.

3: Resources are held hostage by incumbent businesses

In most companies, power and control over resources are tightly linked.  Those individuals running great big, profitable businesses get to make a lot of decisions, and people elsewhere in the organization aspire to be one of those individuals.  But here’s the dilemma: If one or more of those businesses is beginning to decline, the people in charge have zero incentive to re-allocate resources away from what gave them their power base to fund something new. 

Here’s the problem: Today’s successful business may not be tomorrow’s.  While this sounds utterly obvious, many companies don’t allocate resources in a way that recognizes this problem.  For most managers, shrinking their business or redeploying assets and capabilities to somebody else’s business is not in their own best interest.  So, resources are used to shore up the position of businesses that are starting to fade, thus eking out a little more time for the managers in charge, until the declining fortunes of a once-powerful business are obvious to everybody.  This creates two problems:  Firstly, valuable assets are being tied up in a business that doesn’t have a future.  Secondly, the resources that might be used to fund growth are held hostage by a business that represents the status quo.

In 1994, I remember holding a Nokia product that looked like today’s iPad. It connected to the Internet, could access web pages and even had a rudimentary version of an app constellation.  Why didn’t Nokia  capitalize on this groundbreaking innovation?  Because the company’s emphasis was on mass-market phones; resource-allocation decisions had been made accordingly.  There was no mechanism or process for getting the resources to where they were needed. 

To fund innovation systematically, the resource-allocation process needs to be designed to divert or extract resources from established businesses and re-purpose them to fund growth.  This is not easy stuff.  IBM had to re-invent its entire innovation process to tackle the problem, coming up with what they called the “Emerging Business Opportunity” model, in which a senior-level executive watched people and assets allocated to innovation like a hawk, to make sure they didn’t get sucked back into the existing business.  Ivan Seidenberg of Verizon was criticized by many – even his own people – for re-purposing the cash coming out of businesses like land-lines and phone books – to support Verizon’s moves into wireless and entertainment businesses more broadly.  At Lego, the CEO pulled resources from all the sister businesses and forced his team to agree on which innovations would be supported by the freed-up funds.  The core lesson is this: If you allow the existing businesses to determine where people and funds will be allocated, you’re not going to enable and support innovation. Rather, you’re going to get more of the existing businesses. 

4. Innovations are force-fitted into existing structures

When I ask companies about the difficulties they have with innovation, I often hear, “Well, these things fall between the cracks of our organizational structure.”  At DuPont, in the 2000’s for instance, I was involved in a project to move the company more into services and solutions. The project was called the “knowledge intensive growth” initiative.  What the senior leaders eventually realized was that DuPont’s strategic business unit (SBU) structure at the time was incompatible with this initiative, which required aligning its activities with a customer’s experience with the company. The solution ended up being a reorganization – into structures DuPont called ‘growth platforms,’ in order to create the connections to pursue and realize these ideas. 

However, the reorganization created a dilemma, namely that the growth platforms were soon found to be trying to solve a problem that existed in the past.  So then, today we have functional structures that are fantastic at making sure that each function – you know, every piece of the value chain – operates with maximum efficiency.  But that way of organizing is internally focused and doesn’t really allow each manager to control his or her own fate.  So then, companies discover the ‘strategic business unit’ or SBU, which allows each business to run its own operations with each function subordinate to the needs of a particular business.  But….oh, no, the SBU logic doesn’t really capture or leverage core competencies.  Then we find out that a focus on core competencies leaves a firm vulnerable to disruptive innovation, and …well, you get the idea. 

The main lesson here is that an innovation, by definition, is highly unlikely to be well served by the organizational structure that worked well for the business that existed.  Instead, you want to give a new business its best possible shot by assembling a combination of people, assets and other resources that suits its own particular needs. 

At Infosys, for instance, the company goes through a major reorganization on a regular basis.  Interestingly, even though it does take people’s time and utilizes resources, the company firmly believes, as head of Planning, Sanjay Purohit, said, “…that the cost is nothing as compared to the powerful innovations it can release.”  It is worth noting as well that once people become comfortable with changing the structures of the organization on a regular basis, the entire process becomes a good deal easier.  I might even go so far as to say that when you have enough stability and “change management” is required to shift things, innovation is in trouble.

5: Applying the same criteria to evaluate an innovation and the core business

Innovations, by definition, are new.  They are uncertain.  They are small, to start with.  In other words, they are significantly different propositions from the predictable and stable core business.  And yet, companies frequently use the same planning, budgeting and measurement approaches to small ventures as they do for businesses that have been around for decades.  But with new ventures, a different logic needs to apply. 

For instance, consider the process of applying for funds.  I’ve seen companies in which a small request to get a little analytical support to gauge the potential attractiveness of a market segment requires the same approvals as a major capital budgeting effort!  Instead, it would make a lot more sense for the level of scrutiny and permission to reflect the actual cost and risk of a particular initiative. 

Or consider the very definition of failure.  In an established business area, the rate of failure really matters because missing targets can mean damage to one’s brand, thus disappointing customers and leading analysts to view one’s activities with alarm and a host of other ills.  In a new venture, it is normal to have things not go as planned. Indeed, absent the ability to test hypotheses and gather new information by trying and failing, ventures are highly unlikely to make much progress.  With a new venture, product or service, the goal should be to test as many hypotheses as possible in rapid succession and to learn as quickly as possible what the true opportunities are. 

A related issue is the fact that a lot of companies believe that the more assets and people you manage, the better. However, this creates a problem. Internal entrepreneurs should be encouraged to learn as much as they can as inexpensively as they can, in order to keep the cost of failing low.  Assuming that the incentives in the new business will be the same as those in the existing ones will create entirely the wrong behaviors.  It will encourage people to seek senior roles in a bureaucratic system and create barriers to making decisions, which could result in fewer people under management and embed rigidity in structures and decision making.  In one very well managed firm I work with, achieving a role in the “Executive Committee” or equivalent is taken for granted as the appropriate aspiration for up and coming young people.  When I challenged this assumption, I was looked at as though I were speaking in an alien language.

A particularly deadly practice in large organizations is to require managers to have excessively ambitious objectives before a project can be approved.  The dilemma is that in the early months or years of a new venture, it is highly unlikely to become a large and substantial new business.  That will take some time.  And yet, hungry for substantial growth, executives require leaders of the new business to project unrealistically large numbers for revenues and profits.  Even when, in an objective sense, a venture is making good progress, those projections can lead to ventures being seen as failures. 

So I worry when I see the same planning, budgeting and control processes used for things that are pretty predictable also used for things that aren’t.  I worry when managers of innovation are rewarded for being “right,” when the easiest way to be right is to take very few risks. I worry when venture leaders over-promise in order to obtain support.  Indeed, if you take a quick trip through the file in my office in which I document the brief and often costly histories of major corporate innovation flops, you’ll find a common thread, one of treating assumptions as facts and failing to provide adequate tests prior to making major financial commitments.  Iridium phones?  Of course business-people would be prepared to stand outside buildings to make phone calls. WebVan? Of course people hated grocery shopping enough that they would reschedule their lives to accommodate the delivery schedule. Bebo? Of course AOL had to get into social networking in a major way or be left behind…and so it goes. 

6: Insisting on the venture meeting plan

Never, in my entire career of studying innovation, has a project, initiative or idea worked out as initially planned.  Moreover, the great ideas that really did work often started as something entirely different.  And yet, ironically, when many companies start to try to do something innovative, they expect the same reliable, predictable results that you might get if you were tweaking something minor in the core business.  The consequence, unfortunately, is that many innovation leaders find themselves, through no fault of their own, stuck with defending certain guesses and assumptions they made at one point, even though those assumptions failed to consider how the real world worked.  Even worse, because budget and planning processes place a premium on being “right,” there is often no incentive for an innovation team to fess up to having made a guess that was wrong  – at least not until substantial expense has been incurred and angst has been generated. 

It is far better to recognize that in an early-stage venture, you are working with what are mostly guesses.  Some will be right on.  Some will be wrong, but they will be helpful for having generated a valuable understanding of what won’t work.  Some will just be revealed, with the wisdom of experience, to be in the “I should have thought of that” category.  No matter.  They too are valuable.

Today, we know a great deal about what allows a venturing program to succeed, and conversely how to recognize the signs that it is doomed.  I believe that more companies will recognize that a functional, organized innovation process is no longer optional in the long-run pursuit of their strategies. 

It seems that almost every organization is on the “big data” bandwagon. But, as this author writes, rallying around the newest, new thing is one thing. Understanding what big data is and how it can move your organization forward to lead the pack is quite another. Readers will learn how to use big data to create sustainable competitive advantage.

“Big Data:  A New Competitive Advantage” blazed a headline in a recent Ivey Business Journal[1]. But the fact is that while such claims are common, they may also be misleading.  “Big data” is not new and creating and sustaining a competitive advantage is rarely easy.  The key question is “How do we extract the kinds of useful, meaningful managerial insights from big data that will result in a sustained competitive advantage?”  This article will suggest several ways that managers can mine big data to enable their firm to establish and sustain competitive advantage.

Background

Many firms now manage vast daily inflows of raw data. However, data by itself is just a cost item.  What’s creating the excitement – and headlines – is the possibility that used properly and strategically big data has the potential to create competitive advantage. Barry Beracha, the former Chief Executive of the Sara Lee Bakery Group, has been quoted as providing the maxim of the data-driven management school:  “In God we trust.  All others bring data.”[2]  However, few executives can process modest amounts of raw data, let alone gigabytes of the same that flow into many firms daily.  Further, this data is often of very high quality, precluding the use of the traditional wailing of “the data is no good,” often just a convenient excuse for ignoring it. 

Many are now talking about the value and use of big data. But the fact is that there are very few business analytics professionals who understand the business and the business issues and the analytics required to add-value and extract relevant information from the data.   Analytics is to management as a light bulb is to darkness:  it is illuminating and helpful in revealing both future opportunities and pitfalls.  Descriptive analytics seeks to understand past data and is widely used. Predictive analytics seeks to understand the future. This is a challenge for many firms, since it brings in risk (the future is uncertain) and the need to manage risk.  Prescriptive analytics tries to identify what the firm should do. This too presents a major management challenge since humans have intuitive ideas as to what the firm should do that may conflict with the results of prescriptive analytics.  

In our new book[3], Analytics for Managers, co-author Greg Zaric and I argue that analytics has been and can be a source of competitive advantage. Tom Cook led an analytics group at American Airlines (AA) that created a competitive advantage for AA for more than 15 years (from about 1985-2000). Joe Hinson, General Manager of Operations Research at Federal Express, chaired the corporate strategic planning committee and reported directly and regularly to CEO Fred Smith.  “FedEx is an archetype of a company that has succeeded by applying the scientific methods to its operations.  Models and analysis have informed many of [FedEx’s] crucial, business-shaping decisions.  In cases in which[advanced analytics] wasn’t used … the company performed poorly.”[4]

A 2013 survey found “67 percent of respondents reporting that their companies are gaining a competitive advantage from their use of analytics,” up from 58 percent in 2012 and 37 percent in 2010[5].

Analytics, however, is often misunderstood and seen as a threat by many senior managers. But analytics at its best informs decision makers, leading to improved decisions. Analytics does not make decisions but input from analytics can help intelligent, knowledgeable, experienced people make better decisions.  Creating a competitive advantage from big data requires both the big data itself and the skills of the analytics professional.

Starting into business analytics

Executives frequently ask how their firm can start a business analytics function. In fact, there is no standard approach.  Hiring an analytics champion to develop a team that can produce useful and valuable input to firm decision-making, while being sensitive to the management and personal issues involved, generally requires poaching someone from another firm.  If this firm is a direct competitor, conflicts over intellectual property (IP) rights might result.  Increasingly, a common alternative is to buy analytics from a domestic or offshore supplier.

IBM, Accenture, SAS Institute and others have invested heavily to become major domestic and global suppliers of analytics to business and governments:

“Over the past five years, IBM has invested more than $14 billion in 24 analytics acquisitions. Today, more than 8,000 IBM business consultants are dedicated to analytics and over 200 mathematicians are developing breakthrough algorithms inside IBM Research.”[6]

India has emerged as a major offshore supplier of analytics due to its history and focus on mathematics and statistical training. Dhiraj Rajaram, an MBA from Chicago and former strategy consultant for Booz Allen Hamilton and PricewaterhouseCoopers, founded Mu Sigma in 2004. Mu Sigma has emerged as an analytics powerhouse:

“With over 2,500 [analytics] professionals, and over 75 Fortune 500 clients across 10 industry verticals, [Mu Sigma is] one of the largest decision sciences and analytics companies. Our interdisciplinary approach to problem solving using cross-industry expertise corroborates our sustainable engagement model with our clients, making us one of the most preferred analytics and decision sciences partners among our contemporaries.”[7]

Other offshore analytics suppliers started as captives of multinationals and were eventually spun off. American Express was a leader in setting up a captive analytics supplier in India, while General Electric established GENPACT in countries that focused on education in mathematical sciences; centres were set up in India, China and eventually Hungary.

“Driven by a passion for process innovation and operational excellence built on the legacy of serving GE for more than 15 years, [GENPACT’s] 60,500+ professionals around the globe deliver services to its more than 600 clients from a network of 74 delivery centres across 20 countries supporting more than 30 languages.”[8]

Firms that outsource some or all of their analytic processes offshore include Wal-Mart, Allstate, Goldman Sachs, HSBC, Citibank and Royal Bank of Scotland.  Outsourcing and/or offshoring analytics needs to be managed with great care, especially if the analytics or data involved is critical to the competitive package of the owner (more details see “Competing with Analytics by Taking Analytics Offshore”[9].)

Outsourcing and competitive advantage

The ease of access to outsourced analytics complicates the task of creating competitive advantage through the use of big data and analytics. Ease of access also makes sustaining any competitive advantage more difficult.  However, many firms manage to do this by recognizing and exploiting the factors that make it difficult for competitors to replicate the work.  Examples of big data prescriptive analytics at Dell and the Industrial and Commercial Bank of China (see[10] for more examples) showcase two common approaches.

Dell was founded on a configure-to-order (CTO) business model, where customers chose the various components of their PC and the custom PC was then assembled and shipped.  Using CTO, Dell grew to become one of the top PC brands. But this business model began to tire about 2007 and Dell decided to expand to new channels including retail, and value-added networks in the emerging nations.  This channel expansion required Dell to specify a product line of “off-the-shelf,” pre-configured PCs, which they could have designed experientially. But instead, Dell turned to prescriptive big data analytics.  By accessing their billions of records of customer-purchase history and using advanced analytics that evaluated millions of combinations of possible product configurations, Dell analysts were able to define a product line of pre-configured PCs that (allowing for some trade-ups) captured almost three quarters of Dell’s notebook and desktop sales.   Today, these configurations make up about half of Dell’s sales.[11]

This is an example (there are many others) of big data and analytics informing a major business decision.  It was a strategically important, one-time decision that was made by using proprietary data, where the combination of data and advanced analytics contributed to a great decision.  The competitive value of the data and analytics appears in the resulting product line, which is likely sustainable. 

Industrial And Commercial Bank of China (ICBC) has some 16,000 branches throughout China and is by many measures (market capitalization, deposits) the world’s largest bank.  The branch network is a key strategic asset of any retail bank and managing the branch network is a core banking competency. The branch network was seen as ICBC’s most important service and marketing channel, since the branches were the most effective means of customer acquisition.

As China’s economy expanded and modernized, the centres of business and customer activity moved around, with new urban districts and satellite cities emerging, and personal wealth increasing. These fast-changing conditions and the competitiveness of the Chinese banking market make it essential for ICBC to quickly identify new high-potential locations for branches, as well as moving or reconfiguring existing branches. ICBC needed to determine how many branches should be in each city and their locations, identify new high-potential regions for expansion, and improve branch location decision-making in order to minimize costs and avoid poor location choices.

In 2006, ICBC partnered with IBM Research to begin development of ICBC’s branch network optimization system, which was driven by analysis. Each city was divided into tens of thousands of 100-metre square cells, and the business activity and demographic data for each cell were identified from Geographic Information System databases.  This data was used to calculate a base, market-potential value for each cell, which was then refined using human opinion and optimization models to produce a final market potential estimate.  Finally, large-scale optimization coupled with expert judgment were used to find the cells which offered the best locations, taking into account market potential, competitors’ locations, and other ICBC branches in the neighbourhood. 

This process has been implemented with great effect in over 40 major cities in China.  ICBC attributed US $1.04 billion in deposit increases in Suzhou to the use of this system for improving branch locations.  ICBC has trained 500+ employees to use the system and now sees branch location as a strategic problem that is ongoing and needs constant attention.

The massive data required to address this problem and the ability to acquire, maintain, and process this rapidly changing data using complex large-scale optimization makes it very difficult for a competing bank to replicate the system quickly.”

This example uses public-domain data, so the data is not the source of advantage. Rather, it is the complexity of the analytics, which few competitors can copy (providing that ICBC has some control over the IP developed by IBM).  Further, there is a first-mover advantage from capturing the best locations.  Consequently, this work should provide a competitive advantage to ICBC for some time.

Many executives have not embraced the Big Data movement 

These examples illustrate the considerable benefits of big data and analytics-based decision-making. So then, why doesn’t everyone do this?  A large part of the answer is the strong resistance from managers who are not comfortable with data or analytics.  There is a scene in the movie Moneyball[12] where the Oakland A’s scouts are discussing their recruiting strategy for high school prospects. Billy Beane (the decision maker) arrives and informs them that the data shows that this recruiting strategy does not work and that the A’s are not going to use it anymore.  The scouts, who have built their careers on their special skills in evaluating and recruiting high school players, react to this news quite sharply.  Senior executives are also likely to react strongly and negatively if their deeply held intuition is challenged by results derived from data that used analytics that they do not understand.  

Executives who are more comfortable with data and analytics recognize the fact that the future is so uncertain that it is difficult, even after the fact, to tell a good decision from a bad one based on its outcome.  A horrendous decision can run into a stream of good fortune and turn out well, while a great decision can hit bad luck and be a disaster.  It is therefore important, when assessing a decision or a decision maker, to look at the process by which decisions are made.  Increasingly, when we look for great decision makers we have actually begun to look at the way they handle the data and analytical input to their decision-making processes. 

Many C-level executives have strong people skills but weak quantitative skills. However, in a data analytics world, she who understands the spreadsheet often exerts disproportionate control over the discussion.  Those C-level executives who make an effort to achieve an understanding of data and analytics will be able to control the discussion and capture the great benefits from data-driven decision making.    

McGuire et al.¹³ point out that Big Data has the potential to replace some managers. But, on the positive side, we are seeing more and more situations where analytics-based systems are enriching the manager’s role.  For example, personal loan approval systems, airline and hotel pricing systems, and supply chain optimizers routinely make the millions of decisions that are required daily to manage these complex businesses.  These are cases where feedback loops are short, and where it is better to have fast, consistent and robust decisions made by software algorithms than to have humans try to keep up with a non-stop demand for decisions. Consequently, the manager’s job is enriched when it is changed from being an operations-level, decision-making function to a managerial role, where the individual is the supervisor of a complex system.  The manager now needs to understand both the operations system and the analytics that drive the decision making for that system. Otherwise, the manger will override the decisions from the algorithm too frequently and so reduce its effectiveness.

While the wise use of big data and analytics can improve management decision making generally, the greatest promise of big data and advanced analytics is also the most elusive, namely that it will lead to new business models[13].   Google is reinventing people management using advanced analytics[14].  Others see that firms that use analytics and big data can segment markets according to the needs of the individual customer, a capability that creates opportunities for new kinds of businesses.  This is a decided advantage, as many businesses exist largely because they do not know the needs of individuals. For example, the retail store exists as a display of variety.  Retailers or supermarkets that know the precise needs of their customers do not need to display variety and may not need the costs of retail space. 

The future for the senior executive

Successful senior executives will play a leading role in directing the firm’s efforts to glean useful, relevant information and knowledge from big data. They will also be involved in developing and directing innovative methods and business processes.  Those executives who rely on instinct for decision-making will be increasingly challenged to understand and accept new ideas and innovations emerging from big data and analytics.

The impact of big data is destined to appear first in highly competitive industries.  Competitive advantage works both ways:  If your firm can create an advantage using big data and analytics, then your competitors can also do so, putting your firm at a disadvantage.  This can occur swiftly, as in the case of Peoples Express Airlines, where a highly successful and growing air carrier was put out of business in less than three months because it was unable to respond to what founder and CEO Donald Burr called “sophisticated computer programs” that were able to immediately match or undercut his prices.[15]  The successful senior executive will need to constantly sense the environment and be aware of leading-edge analytics being used by competitors.

The world of big data will require new organizational structures:  Chief Data Officers and Chief Analytics Officers are appearing (although the titles are not yet standardized).  Finally, the executive skill set has expanded and the job of the C-level executive has becoming even more complex.  Leadership, visioning and people skills remain important. However, the executive must now also have the skills to critically assess the innovations emerging from data and advanced analytics, incorporate their own knowledge and experience, and arrive at decisions and actions that move the firm forward.  Those executives who doubt the benefits of investing in big data and analytics may find, like Donald Burr, that their firms have no response to “sophisticated computer programs.”^15. 

Remember Blockbuster? Well then, surely you’ve heard about Kodak, that is its untimely and altogether avoidable demise? What caused those companies’ failures is the very thing that enabled others like Netflix to own the franchise in their industry: It’s called Thinking Lean. Readers will learn that Lean is more – much, much more – than reducing the head count, and is actually the platform for launching industry leadership.

The economy has been languishing for several years now, an economy that I call a “sleeping beauty.”  We know she will wake up at some point, and when she does, she will likely be terrific.  We just don’t know when that will happen.  In the meantime, we leaders and managers will try to wait it out.  We don’t invest for growth, innovate or really drive the business.  We wait for the economy to improve and then plan to act.

This is not a strategy with which I agree.  While the organization hunkers down, it also stagnates.  Star employees will leave for more interesting situations, customers get bored, and our competition likely isn’t sitting still.  We need to be driving to “Next.”

Yet, Next is a difficult place to get to, and the journey is fraught with doubt, failure, questions and expense along the way.  How do we know this is the right path for us?  How do we know what customers will want (especially tomorrow’s customers)?  Where will we get the resources?  Key concerns indeed.

Management thinkers Gary Hamel and Gary Getz[i] did a survey where C-level executives of Fortune 500 firms were polled and asked about the largest challenges they face in implementing strategy (strategies, to be very clear, that include significant growth and innovation targets).  The overwhelming response?  A lack of resources and short-term thinking.  They know what they want to do, but believe they don’t have the people, space, time or money to do it.  While the survey was done in 2003, its results are every bit as appropriate today.

Resources. That’s what Lean has to do with it.

Tell your team on Monday that you are launching a Lean initiative and some of them will update their resume.  People perceive Lean as being about cost cuts, headcount reductions, and other painful processes where we try and do more with less.  That’s the bad reputation that Lean is unfortunately labelled with most often. But that’s not what it is about.

For me, Lean is the enabler.  Lean is about value.  Value is the single-minded focus on driving what the customer wants, while we eliminate the processes, services and products from our portfolio the customers don’t care about.

Let’s flesh this out a bit.  We did a survey in 2011 with roughly 130 leaders and managers who were part of our Executive MBA programs at Queen’s University.  Over 70 percent of the respondents believed their businesses have too much complexity.  Looking further, over half of them agreed that their customers don’t understand or appreciate all of their available products or services.  So we say that we have too much complexity, and our customers don’t understand everything we are trying to provide them. 

Think about the menu board at your local Starbucks.  Most of us order one of four types of beverages – Coffee, Tea, Latte or Cappuccino.  Over the years, however, the menu at Starbucks grew increasingly complex, to the point where the poor baristas were struggling to make everything accurately and efficiently.  Starbucks has recently started to simplify their core offerings, but they still need to shut down the entire chain of stores periodically to support employee training[ii].

It’s as bad for customers too.  Think back to the first time you entered a Starbucks, probably with a friend or colleague who had been through the process.  You looked at the menu board, and the line of people around you, and felt anxious.  What if I get it wrong?  How do you pronounce that?  That thing is $4 – what if I don’t like it?   Anxiety?  Bad decision risk?  Absolutely.  Starbucks has done a great job creating a market around that ‘affordable indulgence’ category. But the complexity still creates issues. 

Your organization has some of this going on as well.  Most do.  These excess products or services that overlap each other are a result of a lot of things.  Think acquisitions and mergers, where they had a product like one of ours, and we left both running when we bought them.  We launch a new credit card for customers of our bank, but continue with legacy products.  Some long-time product offerings exist only because sales executives have successfully argued for years that they have customers that will leave if we discontinue that offering.

The challenge here is identifying the waste.  We can’t send our people forth and say, ‘Conquer the waste and complexity!’  We’ll get blank stares and calls for our replacement.  While I use Lean in my book as an enabler for innovation, I will save the how-to discussion for another paper. 

But Lean does two important things for us in our drive towards innovation.  The first is that it frees up resources – people, space, time, money – in our environment to apply to those innovation projects.  If we don’t have the people to implement the idea, there is no point in being more creative.  The second thing is more of a fundamental culture shift: When we start dealing with the complexity in our business, morale goes up.  We are eliminating the processes and products that waste time, that frustrate customers, and that don’t add value.  We free up the time for people to start thinking about Next.

Generating ideas

Where do the ideas come from?  That could be anywhere, as long as we are listening.  See Figure 1.  Your suppliers are a terrific source of ideas, and they want you to succeed – when your firm wins, they win through more business.  We used to do some business with 3M and representatives would visit from time-to-time, leaving products for us to try.  A lot of times we couldn’t do anything with the sample, but occasionally it solved an issue for us and we were able to put it in play.

Figure 1 – Idea Sources

A Board of Directors or Advisory Board should be able to generate ideas based on their experience or that of other non-competing organizations with which they work.  Two great sources of ideas are the people who build your products or provide your services (employees), and those people that use those products and services (customers).

R&D is always a source of ideas, but many firms don’t have significant R&D resources.  Our focus here is on a simpler means, and one requiring less heavy lifting.  The new knowledge coming out of Research and Development is essential, but I prefer not to lay responsibility for innovation at the feet of one department.  The key, however ideas are gathered, is to recognize the new doors and opportunities presented by a thorough review of the idea.

In 1985, management-guru and business professor Peter Drucker wrote Innovation and Entrepreneurship[iii], one of the earlier works connecting innovation and leadership.  Drucker talked about other sources of ideas beyond R&D, sources that required more awareness of what was going on around us than investment in a lab and PhD’s to run it.  Specifically, he used terms like:

• The Unexpected
• Incongruities
• Process Need
• Changes in Perception

This is where Lean and Innovation come together.  It is sometimes referred to as a recombination of existing elements — exaptation, or products and services from other industries that we bring together to make work in our business. 

Figure 2 – The Lean Innovation Framework

In Lean Innovation: Understanding What’s Next in Today’s Economy[iv], I devote two chapters to the Idea process. For the purpose of this article, I want to focus on what needs to happen after we have the idea (see Figure 2).

Refining ideas

When Reed Hastings launched Netflix in 1997, it looked a lot different than it does today.  In a classic example of a great idea evolving from a dissatisfying experience, Hastings started the DVD movie-by-mail business after being charged over $40 in late fees when he discovered an overdue copy of Apollo 13 in his closet[v].

At the time, the Internet was growing in popularity, as was on-line shopping and other transactions over the Web.  Connectivity speeds and bandwidth were increasing as well.  Amazon and other retailers were growing nicely, changing public perceptions about what could be done on the Internet.  Congestion, traffic and increasing fuel costs made staying home more appealing, supported by much improved home-entertainment systems with exceptional video and audio capability.

When Netflix was born, Hastings and his team had made some enhancements right away over the traditional movie rental model in the market dominated by Blockbuster. For example, Netflix offered thousands of titles, compared to hundreds in your local Blockbuster.  In the spirit of Lean, there were no physical store fronts, reducing the investment in real estate required by the company.  Given Blockbuster’s strategy of having a physical location within 15 minutes of 75 percent of the population, the investment required to compete on that level would have been extreme, indeed.  Distribution centers for DVD inventories popped up around the U.S. very quickly to reduce shipping time to customers.  DVDs arrived at your house with a pre-paid envelope in the package – when you were done with the movie, you simply dropped it back in a mailbox and forgot about it.

Still, there were issues, and customer adoption wasn’t what Hastings had hoped for.  One of the challenges faced early on was a perception by the customer that they weren’t being compensated for waiting for the DVD to arrive.  In the Netflix model, consumers selected DVDs on-line, and those DVDs were mailed to the customer.  When we selected a movie on a Wednesday, it could be Thursday or Friday (or later) before it arrived.  Customers, however, were initially charged the same rental rate as they would have paid when going to a Blockbuster location, yet they were forced to wait for the movie.  Call this version of the company Netflix 1.0.

Netflix 2.0 (my words, not theirs) arrived not long after, once Hastings and his team evaluated consumer feedback and the adoption rate of new subscribers.  The big change with Netflix 2.0 was the unlimited subscription.  For a flat fee of around $15, customers now could watch as many movies as they wanted through the month.  As well, viewers generally always had one or two movies from Netflix on-hand, changing the “movie night” paradigm to one where any night became movie night.

Netflix 2.0 also included a search algorithm on the Netflix website that helped customers find movies they would enjoy watching, based on past selections and other movies they had in their queue.  Similar in nature to the search process developed by Amazon, the algorithm added value for customers in a way the part-time help at Blockbuster never could.

The refinement of Netflix 1.0 to Netflix 2.0 (and from 2.0 to the current Netflix offering Video On Demand) is the primary reason the company is still here today.  Many of their initial customers rented exactly one movie from Netflix before returning to their original movie habits.  It wasn’t until the improved version of Netflix came along — one that allowed unlimited rentals, no late fees and ‘assistance’ selecting movies – that subscriptions really took off.  In fact, between 1999 and 2006, subscriber volumes increased by 50-88 percent per year.  Netflix continued to refine their model, as we will discuss later.

Why an innovation fails

The most significant reason an innovation doesn’t stick in the market is the failure to identify the appropriate target market for the idea.  Part of the appeal of an innovation is the ability of the idea to attract new customers.  Our challenge is to understand who those customers will be, as most existing customers will be satisfied with the current offering available to them.  One could argue that Hasting’s 1.0 version of Netflix targeted the wrong customer, the movie night ‘event’ customer who wanted the movie now.  That version of Netflix needed to be refined in order to seek the appropriate customers and market.

Before committing to his DVD-by-mail business, Hastings packaged up a couple of dozen CDs and mailed them from different locations in different packaging to himself, testing the durability of the media when transported through the post.  CDs and DVDs are made of polycarbonate, coated with aluminum and a protective barrier.  It is very uncommon for one of the discs to actually break in transit, but scratching can occur, which essentially destroys the movie.  Through this low-cost evaluation process, Hastings developed several packaging options and ultimately determined that this part of his business model would work fine.

What problem are we solving?

In determining how to refine our ideas, it helps to frame the situation with a question – What problem are we solving?  The idea connects to something, however abstract it may seem at this time.  Does it simplify the customer interface?  Does it eliminate a step in an on-line transaction?  Does it solve something customers have highlighted as an issue to us, or will it reduce errors below the line of visibility to the customer?  Once we identify the problem we are solving, we can decide how to break it down, how to experiment, or how to make it real and evaluate the idea.

Our Lean environment keeps us from pursuing the wrong strategy for too long.  The idea of unlimited resources allows people to pursue the wrong strategy for a long time, when the probability that we will get it right the first time is extremely low[vi].  Maintaining a focus on value will bring the experimentation back to what matters most – what the customer wants.

In all cases, it’s a collaborative process involving team members, employees, customers, and sometimes suppliers or competitors.  The 1.0 version of our idea has a place – to help the organization get to a 2.0 version that will really appeal to the market.  The 1.0 version should be tested, challenged, reviewed, bent, broken, tasted and turned, but if it gets launched, it’s a limited release to capture attention and input from Early Adopters.  It’s not a bad idea, but we need to make it better.  2.0 should be close on 1.0’s heels.

Refinement not only improves on the idea, but it prepares our organization for rolling out the idea itself, training employees how to deal with the idea and its related processes, and warming the team up to the change in company focus.  It reinforces a culture of innovation where we look after our current customers, though we are always thinking about who the next customers are and what they look like.  Refinement can prepare those customers for the idea too.  They’ve heard about the 1.0 version, maybe in a tech blog or company press release.  We use the testing and validation process to build momentum in the marketplace, getting it ready to launch.

The case for an innovation culture

Do you remember your first digital camera?  Ours was a Canon Digital Elph, with a 2.0MP processor in it.  It was small, heavy and the screen on the back was about an inch across, barely able to display the pictures we had taken.  When you turned the digital images into an actual printed picture through the local photo depot, you couldn’t print it larger than a 4” by 6” image, or it was grainy and of very poor quality.  Vibration was an issue, but it wasn’t evident until you developed your pictures.  We loaded many of the images onto our computers and e-mailed some of them, but bandwidth and Internet speeds were still young, so that was  cumbersome.  Such was the nature of early digital photography.

Consider the current state of the art.  Even photography enthusiasts and professionals have been using digital for years, and film and film cameras are virtually unavailable in all but the specialty stores.  Cameras now included in our phones, computers and tablets are superior to anything on the market 10 years ago, capable of taking stills and HD movies, and easily editing them in seconds.

Kodak didn’t get it

Given that Kodak was one of the founders of digital camera technology back in the early 1970s, we would expect them to be a major player in this market. Sadly, the company filed for Chapter 11 in January of 2012, and now one of the iconic brands of the last 100 years has just about vanished. How does that happen?  How does a company that develops Next in their industry fail to adopt it and direct the course of their firm and that of their competitors?

In hindsight, it is easy to question the leadership of the organization, who failed to seize the opportunity, failed to see the proverbial writing on the wall, and failed to adapt.  We often look at disruptive innovations like this and say that leadership was too focused on their existing markets, that current success and a focus on today’s customers kept them from seeing the prospect on the horizon.  In Kodak’s case, however, they were already threatened, as Fuji had begun making significant inroads in their paper and film business, a market Kodak had long owned.  There should have been more urgency around the conference room table in Kodak’s leadership meetings.  Perhaps hubris or even inertia, but without having been a fly on the wall in their executive chambers over the last 40 years, it is difficult to decipher.  What is clear, however, is that a culture of innovation in Kodak was virtually non-existent.

In the interest of clarity, we need to revisit an early discussion for a moment.  In my mind there is a big difference between innovation and research.  Kodak spent millions on what they called R&D, though it really wasn’t Research and Development.  They did the research, but how many of those concepts developed in R&D were actually brought to market?  In fact, a significant part of Kodak’s strategy (as they struggle to reinvent their business in the Chapter 11 proceedings) is to raise funds through the sale of thousands of patents and intellectual property.  There are so many things wrong with this picture that it’s tough to begin.  That they had the ideas but didn’t pursue them is unfathomable, especially considering the pressure they were under in the market.  That they believe a competitor may be interested in buying Kodak’s patents is very curious, as those competitors likely have their own technology, and are less interested in propping up a failing Kodak regardless.

In my model, innovation includes the implementation of an idea, its commercialization if you will.  R&D by itself generates the new knowledge, but that knowledge has little or no value until we bring it to market through its launch and adoption.  Innovation creates that value for the firm.  In telling their scientists and engineers to keep digital technology on the shelf, Kodak was stifling innovation.

At the time of its inception in the 1970s, the market was obviously not ready for digital picture technology.  Decent personal computers were still a dream, and there was no simple way to share or even store images.  Film technology and imaging was far superior, and digital was nowhere close to being a threat. 

Since we know how the story turned out, what would it have taken at Kodak to not only lead the charge as digital emerged over the next 20 years, but perhaps even accelerate it?  Where in the firm do we look for that inspiration?  The solution begins to appear when we circle back to our culture, but not culture alone, as there are other factors as well.  Within Kodak, there was no culture of innovation either, no curiosity or drive to see what the company was capable of doing.

Perhaps a more appropriate term of reference is fear – there was no fear at Kodak that something would come along and actually shake the foundation of their business.  How sad that the game-changing technology was within their four walls the whole time.  For me, a leadership perspective has a healthy dose of paranoia present in any long-term planning process. Once we realize that, the fear itself can be inspiring and can help drive the culture of the company towards innovation.

Let’s change industries (slightly) and look at the movie and DVD rental business again.  We spent some time earlier on Netflix, and how Reed Hastings and company refined their initial DVD-by-mail concept into a workable model and a multi-billion dollar business over a 10-year period.  The growth in that market came primarily at the expense of companies like Blockbuster, who hung on to their investment in retail locations, limited inventories, late fees and part-time sales help.  When DVD-by-mail rental appeared on the market, Blockbuster executives were quite public with their claim that the new business model would not appeal to consumers and that they would stick with their existing strategy.  Why wouldn’t they?  Blockbuster was very profitable at the time, growing its customer base and opening new stores all over North America, as more people invested in quality home entertainment systems and DVDs became broadly available.

Therein again is the challenge with disruptive innovations – the incumbent firm more often than not is unprepared to deal with the appearance of a new model, fails to adapt and begins saddling up the horses for its ride off into the sunset.  These firms may possess some culture of innovation, but it is typically cosmetic and ineffectual at best – in this case, new store layouts and décor, multi-day and weekly rentals, video games and member loyalty programs.  Look at us go now!

A firm with a genuine culture of innovation goes far beyond that – they look at the horizon for opportunities and threats.  They reward creativity and embrace challenges.  They take the approach that if something is going to threaten their business, it may as well be them that initiates and controls the innovation.  Such was the approach by Netflix when Video-on-Demand (VOD) emerged around 2005.  The firm had already leaned out the previous model of video rental with their Internet-based DVD business.  With VOD, however, Netflix recognized that the technology had the potential to replace their business model of relying on hard media on DVD.  Their options?   Netflix could continue to grow for several years, remaining profitable for the foreseeable future.  Hastings himself had built and sold a company prior to Netflix – perhaps now was the time to sell the business and move on to the next big thing.  Or, they could take the position that if someone is going to develop and commercialize the next innovation in home entertainment, it was going to be Netflix. And in a classic case of trial and error, that is what they did.

Initially launched to customers with Xbox and other gaming consoles, Netflix launched limited VOD availability in 2008.  Supporting technology was still developing, but feedback from Early Adopters helped them tune the process while they negotiated access to certain movies and television series.  Releases were never current, as the studios remained concerned over piracy and payment for anything digital.  Netflix encountered their share of turbulence along the way, most significantly with the failure of their Quikster initiative in 2011, where high pricing for VOD alienated many of the customers Netflix had worked so hard to cultivate over the years.  Evolution in the VOD market is occurring every day, with the networks themselves developing strategies, and Apple’s iTunes always on the threat board.  How it shakes out over the next five years is the territory of speculation, but I wouldn’t bet against Netflix in some form or other. The young firm embodies the spirit of an innovation culture, willing to cannibalize their own revenues in the pursuit of Next in their industry.  In effect, they were creating a new service life cycle while their current model was still growing.  How many of us as leaders would have the courage to do something similar?

As we look back over the last hundred years, we will see that only a handful of companies have truly reinvented themselves.  IBM no longer makes computers at all; 3M is a long way from the Minnesota Mining and Manufacturing days; Johnson & Johnson has evolved.  Are there many others?  With disruptive innovations, you don’t need to be the first mover, but you do have to move.  Had Kodak or Blockbuster reacted, they would both still be in the game.  These companies didn’t possess an innovation culture. 

I’m going to end with an interesting quote from a journal that may help put things in perspective:

Steve Jobs was the whiz-kid of the computer boom after designing the Apple computer at twenty-three.  But his vision of building a corporate counterculture in California’s Silicon Valley ended in 1985, when Apple’s management, responding to declining sales and poor morale, relieved him of his responsibilities.  Like all personal computer manufacturers, Apple was hard-pressed to fight IBM’s dominance of the market.[vii]

Oops.  We know now that this story wasn’t over.  Things change, constantly.  The executive teams that look for and lead that change with a clear view of what the customer wants will create new opportunities, markets and industries.  They will build a culture of innovation that embodies the way people in the firm think, talk and act.  They will become the icons in their field.

The announcement of this new policy direction gives rise to lots of practical questions that likely won’t be answered until both the government and the private sector get a few more transactions under their belts.  However, it is worthwhile to consider these developments in a broader framework and think about what this means for Canadian foreign investment policy more generally.

A good starting point is to look at the data. Remember that foreign investment – both direct (i.e. acquisitions for control) and portfolio (i.e. debt and equity purchases that do not result in a change of control) – flows in and out.  Looking first at direct investment, we see that Canadians have invested about $685 billion (2011 data) abroad while foreigners have invested about $608 billion in Canada.  Turning to portfolio investment, the figures show Canadian holdings of $479 billion versus foreign holdings in Canada of $885 billion.  

We draw three lessons from the data. First, Canadians control significant foreign holdings, equivalent to almost $20,000.00 per person   Second, foreign direct investment holdings in Canada are of roughly equivalent size, with the balance slightly in Canada’s favour. Third, there is a large imbalance in favour of foreigners in terms of portfolio investment. Interestingly, portfolio investment is what the government’s new policy seeks to encourage for SOEs investing in resource development.

Turning to the issue of SOEs, we note that Canada is home to many significant domestic SOEs.  Well-known examples include the large hydro utilities (e.g. BC Hydro, Manitoba Hydro, Hydro Quebec).  But the list is actually much longer.  BC owns a ferry service and an insurance company.  Alberta owns a financial institution. Saskatchewan owns a telephone company, a power company and an insurance company among others.  The federal government owns several financial institutions (Central Mortgage and Housing Corporation, Export Development Canada, Business Development Canada) and a postal service.  Finally, the federal government and the provinces control a number of sovereign wealth funds like the Canada Pension Plan, Alberta’s Investment Management Corporation and Quebec’s Caisse de Depot. A number of these funds have substantial foreign equity holdings.

Like investment by foreigners in Canada, Canadian investment abroad makes an important contribution to our economic prosperity. If we want Canadian firms to grow to be global competitors, they need foreign markets.  Sometimes, the goods and services they sell need to be produced close to the foreign customer.  Foreign operations create value chains for the firms’ Canadian operations and opportunities for Canadians to gain valuable foreign experience. Likewise, we want Canadian sovereign wealth funds to be well diversified.  To accomplish this, they need to consider foreign as well as domestic investments.  Some of those investments may require controlling interest.

What are the implications for Canada’s foreign investment review?  Simply that we need to consider both the ins and the outs of foreign investment. Foreign investors won’t be the only ones to look at our regime and track record when assessing investments in Canada. Foreign governments will do the same when assessing investments in their countries by Canadians.  Helping Canadian firms (including Canadian sovereign wealth funds) succeed abroad may start with the way we treat foreign investors here at home.

By any standard or metric, Google is a standout company, and perhaps the main reason for its superiority is its remarkable style of leadership. What employee turnover or attrition? That enviable style, however, was not established overnight. At least, not quite, as readers will learn.

Google now provides free net-search services in more than 120 languages, with a large number of web-based products in its portfolio and generates about 97 percent of its revenue through online advertisements (Google Adwords and Adsense). The Google brand is valued at USD 100 billion, making it the world’s first ‘one-hundred billion brand.’ In 2009, Fortune magazine ranked it as the best place to work in the U.S., which is indeed a tribute to the company’s leadership and people-management practices.

Like many other well-known companies, Google Inc. too had a garage startup. When Larry Page and Sergey Brin met in the Stanford PhD program in computer science, they developed the idea of a search engine company. They decided to drop out of the PhD program and to launch the new company from a friend’s garage, which they did in 1998. Both Page and Brin have academic ancestries: Page’s father, Dr. Carl Victor Page, was a computer science professor at Michigan State University; Brin’s father and paternal grandfather were both mathematicians, and his mother was a research scientist with NASA. Brin was Russia-born and emigrated to the U.S. when he was six years old.

Both Page and Brin were researchers at heart (though neither of them completed their PhD). Their venture was a rather ‘unanticipated’ outcome of their research project on “The Anatomy of a Large-scale Hypertextual Web Search Engine.” The search engines available at that time were not very efficient in quickly finding the most relevant results for the user. This issue was becoming increasingly complex, with the explosive growth of the materials on the web. Hence, the duo took up the challenge of designing an efficient system for crawling information from the web, keeping the crawled information up to date, storing the indices efficiently, and handling many queries quickly. In the process, they developed the PageRank technology (now proprietary to Google), which ranks the quality of each web page using a complex calculation of link structure based on the linkages among web pages. Their confidence in their invention was so high that when selecting a name for their company they picked up a modification of a mathematical term (GOOGOL, which is the name of the number represented by 1 followed by 100 zeroes). In doing so, they indirectly conveyed the company’s unique vision to organize and procure ‘infinitely’ large amounts of information for users, and possibly make as much money.

The Google style

The academic ancestry of the founders and their own inclinations for independent thinking and research may have had an impact on their leadership style, especially in matters of empowering their employees and encouraging them to come up with innovative ideas and implement them. They have a policy of recruiting only class-A employees and giving them the freedom to exercise their creativity. While there could be some cost saving in recruiting class-B people, it would push the organization into mediocrity in the long run.

There is a 70-20-10 norm about time allocation by employees: 70 percent of the time should be devoted to Google’s core business of search and advertising, 20 percent to off-budget projects related to the core-business, and 10 percent to pursue ideas based on one’s own interest and competencies. There are also generous rewards and awards for implementing innovative ideas. Though employees perceive such systems as perks, the company sees these systems as “the seed corn for its future,” as it would ensure that entrepreneurial employees implement their innovative ideas within the company rather than go out and create a competing new venture. It is estimated that about 50 percent of Google’s new products are generated using the ‘free’ time that employees are granted.

Leadership that empowers

Interestingly, the choice of a new product or strategy is not dictated by the founders nor is it based on the grandeur of its sponsor’s title. Ideas must compete on their merits, in a ‘Darwinian environment’ of survival of the fittest. Many of Google’s popular products and strategies came on the market through this process, as exemplified by the creation of Gmail by Paul Buchheit, or the informal motto of the company (“Don’t be evil”) coined by Buchheit and Amit Patel. Though this slogan does not appear in the exposition of the official management philosophy of Google, it was a major theme in the founders’ letter in connection with their 2004 IPO, so much so that this letter was subsequently called the “Don’t-Be-Evil Manifesto.” The basic thrust of this manifesto is that one should not exploit customers’ ignorance, but should be ready to forego short-term gains if this is what is required to provide sustainable services to society. One specific implication of this belief is that the company will not strive to get the authentic search content confused with or influenced by the advertised material.

Who wouldn’t want to work for Google

Communicating the vision and granting employees the freedom to implement it is one part of Google’s people-management system. The other is to provide the employees with a hassle-free environment so that they can concentrate fully on work. In other words, the goal is to strip away everything that gets in the employees’ way. The company provides a standard package of benefits to employees that it tops up with a seemingly endless – and highly enviable – array of perks: first-class dining facilities with a free and unlimited supply of wholesome food, snack stations in various parts of the office, gyms, laundry rooms, massage rooms, haircutting salons, car washes, dry cleaning services, commuting buses equipped with bike racks, leather seats, internet access, and facilities to carry pets onboard — and just about anything a hardworking employee might want to be taken care of while he/she is at work. In fact, employees don’t even have to worry much about getting dressed up, as Google’s corporate vision includes such axioms as: “You can be serious without a suit.”

Leadership’s policy of empowering and facilitating employees’ work has led to a large number of innovations and, consequently, to the explosive growth of the company. As a startup, Google had relied primarily on the personal funds of the founders.  “We had to use all of our credit cards and our friends’ credit cards and our parents’ credit cards”, recalls Larry Page. Finally, Page and Brin decided to bring in venture capitalists. They also started to allow unobtrusive text advertisements alongside search results. By 2000, the company had started making a profit.

The founders managed the company until 2001, with Larry Page as the CEO. By the year 2001, Google had grown to more than 200 employees, and it had widened its board to include representatives of the venture capitalists. They brought in a professional manager, Eric Schmidt, as the CEO, with the responsibility for providing the organizational and operational expertise and company leadership. Page and Brin continued to provide the engineering, technological, and product development leadership – Page as President of Products, acknowledged as the company’s thought leader, and Brin as President of Technology, with the responsibility for advertisements, the major source of the company’s revenues. Thus, the foundation of the leadership triumvirate at Google was laid in the year 2001.

Between 2001 and 2004, the salaries of the top three executives were US$250,000 per annum for Schmidt, and US$150,000 each for Page and Brin. However, just before the IPO in 2004, the trio asked the board to cut their salaries to US$1, with a view to boosting investor confidence in the company. This was indeed a smart move whereby the leaders could convey to potential investors the immense confidence they had in their company’s performance and tell them that they were willing to link their own remuneration to the market performance of their company.

They also adopted an innovative method for fixing the price of the IPO; they used a Dutch auction, in which the market determined the initial stock price, and that helped prevent insiders and institutions from selling immediately for a quick profit. Their confidence in their own company and the market was not misplaced. Schmidt’s 12.45 million shares of Google are now worth about US$4.86 billion. Similarly, Brin’s 31.6 million shares and Page’s 32 million shares are each worth more than US$12 billion. Considering the strong performance of the company following the IPO, the board in 2006 offered to raise the salaries of the top trio from the nominal amount of US$1. All three declined.

As pointed out by Ken Auletta in his book, Googled, Eric Schmidt was primarily the choice of venture capitalist and Google board member John Doerr, which was why others viewed him apprehensively, at least initially. His past performances gave out mixed messages. He had been a successful chief technology officer at Sun Microsystems in its glory days, but had performed poorly in his one stint as CEO at Novell. Besides, there was worry that the Mercedes he drove and the suit and tie he wore would not go down well with Google’s informal culture. In any case, nobody thought that he was an inspirational leader, a great speaker or salesman, a take-charge leader like Paul Otellini of Intel, Carol Bartz of  Autodesk, or John Chambers of Cisco. While the founders themselves shared some of the apprehension, Schmidt’s staunchest critic was another venture capitalist member of the board, Michael Moritz of Sequoia Capital. He felt that Schmidt lacked the toughness required for pushing ahead with the revenue plan based on the advertising formula being experimented with during 2001-02.

But for a company like Google, which took pride in its “distributed leadership” culture, it was perhaps possible that the patient, unobtrusive engineering management style of the mild-mannered Eric Schmidt was better than the more aggressive, go-getter style of individual-oriented leadership. However, it took some time and another intervention by John Doerr, who brought in Silicon Valley’s best-known management coach, Bill Campbell, to mentor and coach the triumvirate and mediate between the new CEO and the founders as well as the two VCs, Moritz and himself.

Campbell, then 61, was probably the right person to mediate between the founders, then in their twenties, and the new CEO, who was 20 years older than they were. Campbell’s prior work experience also added credibility to his new role. He had once been Columbia University’s head football coach, a senior executive at Apple, and the CEO of several Silicon Valley companies, including Intuit. His major contribution was to take emotion out of the decisions and help the principal decision-makers evaluate the options in an objective manner. It would not be an exaggeration to say that the mentoring and mediation by Bill Campbell have made a major contribution to the development of Eric Schmidt into a ‘Superman CEO’ who could win over not only the founders but also the ever-skeptical, venture-capitalist critic on the board, Michael Moritz. Google’s results speak for its performance. The company reached $1 billion in revenue in six years, 10 years faster than Microsoft. In April 2007, Schmidt was elected chairman of the board while simultaneously holding the position of CEO. In 2011, Schmidt became the Executive Chairman, as Larry Page once again assumed the post of CEO.

Eric Schmidt’s best leadership practices

Analysts are of the view that, though Eric Schmidt came from a corporate background, his leadership style had many things in common with the culture already created and put in place by the founders of Google.

Schmidt’s leadership practices could be summarized in the following five precepts:

1. Get to know your employees.

2. Create new ways to reward and promote your high-performing employees.

3. Let your employees own the problems you want them to solve.

4. Allow employees to function outside the company hierarchy.

5. Have your employees’ performance reviewed by someone they respect for their objectivity and impartiality.

Examples of such behavior include the following:

• Schmidt used to make a list of his best employees, as identified by multiple levels of peer-references, and interact with them personally to encourage them to implement their innovative ideas and to insulate them from unwanted interferences by others.
• For rewarding high performers, there were a few systems already in place, such as financial incentives, stock option plans, dinner with the CEO, and so on. In addition, Schmidt created a five-hour long video called The Factory Tour, where the protagonists themselves would explain the idea and its working.
• In order to make the employees the owners of their work, Schmidt used to provide a very broad definition of the company goal and leave the implementation entirely to the employees. In defining the goal, care was taken to highlight the benefits to the customers and society at large rather than to the company.  For example, Schmidt has defined Google’s goal as: “Organizing the world’s information and making it universally accessible and useful.” This is something that every employee can easily relate to, compared to a statement of company targets like increasing turnover by 200 percent.
• As corporate hierarchies can often obstruct employees’ work, Schmidt reinforced the existing system of allowing employees a certain degree of freedom to create their own projects and choose their own teams.
• In reviewing employees’ performance, Schmidt made it a point to identify reviewers from among professionals whom the concerned employee respects for their objectivity and impartiality.

The happiness trickles down and out the door

The leadership practices of the triumvirate cascaded throughout the organization and had an enormous impact on the cadres. According to Laszlo Bock, Google’s innovative Senior Vice-President for Human Resources, the teams working under the best managers perform better, are happier, and stay longer with the company. He therefore initiated a project to identify the key qualities of such managers based on an analysis of data available and collected internally. His research team has come up with the following eight qualities of leader-managers at Google (listed in the order of importance as identified by the study):

1. Be a good coach
2. Empower your team and don’t micromanage
3. Express interest in your team members’ success and well-being
4. Be productive and results-oriented
5. Be a good communicator and listen to your team
6. Help your employees with career development
7. Have a clear vision and strategy for the team
8. Have technical skills so you can advise the team