Simple Rules for a Complex World

Here is an excerpt from an article written by Donald Sull and Kathleen M. Eisenhardt for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

Artwork: Nuala O’Donovan/Photography: Sylvain Deleu

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A decade ago, in the course of studying why certain high-tech companies thrived during the internet boom, we discovered something that surprised us: To shape their high-level strategies, companies like Intel and Cisco relied not on complicated frameworks but on simple rules of thumb. This was true even though they were in extraordinarily complex, challenging, and fast-moving industries. The rules were not only simple, we found, but quite specific. Typically, managers had identified one critical process—making acquisitions, for example, or allocating capital—where a bottleneck impeded growth, and then crafted a handful of guidelines to manage that process. This approach helped companies to bridge the gap between strategy and execution—to make on-the-spot decisions and adapt to rapidly changing circumstances, while keeping the big picture in mind.

We reported our findings in HBR (“Strategy as Simple Rules,” January 2001). At the time, we knew that simple rules worked in practice, but now—as a result of subsequent research that we and others have done—we have a much richer understanding of why they are effective and how to construct them.

Simple Rules in Action

The story of América Latina Logística (ALL) illustrates how simple rules can help companies shape strategy in an uncertain environment. It also demonstrates that this approach can be useful in a setting beyond the technology sector—such as a dilapidated freight railway in southern Brazil.

In the late 1990s the government of Brazil privatized the country’s freight lines. After decades of neglect, the nation’s freight-rail infrastructure was run-down: Half the bridges needed repair; a fifth were on the verge of collapse. Twenty steam locomotives that were decades out-of-date were still in use. Rail accounted for only 20% of long-haul shipments in Brazil, compared with 80% in most countries.ALL was spun off from the Brazilian railway authority in 1997 to manage one of the country’s eight freight lines. Its new management team took over an organization that was bureaucratic, overstaffed, and bleeding cash. Transport on the line was so unreliable that crops in the areas it served were routinely left to rot in the fields during the harvest season. Middle managers were confused about what to do, and many pushed their local agendas at the expense of the company’s overall best interests.

The team decided to adopt a simple-rules approach to the work ahead. Let’s look at how that approach helped ALL’s executives achieve alignment, adapt to local circumstances, foster coordination across units, and make better decisions.

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To read the complete article and watch a brief 3-minute video during which Donald Sull explains how to simplify your strategy, please click here.

 

Donald Sull is a professor of management practice at the London Business School and a global expert on managing in turbulent markets. His latest book is The Upside of Turbulence: Seizing Opportunity in an Uncertain World, published by HarperBusiness. Kathleen M. Eisenhardt is the Stanford W. Ascherman M.D. Professor at Stanford University and a codirector of the Stanford Technology Ventures Program.

Managing the business risks of open innovation

Here is an excerpt from still another outstanding article, written by Oliver Alexy and Markus Reitzig, featured online by The McKinsey Quarterly (January 2012), and published by McKinsey & Company. To read the complete article, obtain information about the firm, access other resources, and sign up for email alerts, please click here.

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Focus on the factors that could redefine intellectual-property competition in your industry.

Several years ago, something interesting happened in the infrastructure software sector: IBM and a number of other companies pledged some of their own patents to the public to create IP-free zones in parts of the value chain. They did so when a 2004 report showed that Linux, the open-source operating system that had emerged as a viable, low-cost alternative to established operating systems, such as Microsoft Windows and Unix, was inadvertently infringing on more than 250 patents.1 By voluntarily pledging not to enforce hundreds of IBM’s own patents so long as users of the IP were pursuing only open-source purposes, the company led the creation of an alliance of patent holders dependent on (and willing to defend) open-source software against lawsuits.2 One result: IBM substantially increased the share of its new products based on Linux.

This example seems specialized and unusual; after all, who would give away patents to make more money from innovation? But as open-source innovation, “crowd sourcing,” and engaging with open communities become increasingly prevalent, could IP-free zones appear in the competitive landscape of other industries? Having studied the case of infrastructure software closely,3 we believe executives can gain some insight into this possibility by asking three questions that underpin the logic of competing by protecting the open space—open competition, as you might call it:

• Do specialized firms offer proprietary solutions within certain layers of my industry’s value chain?

• Do integrated firms seek to cut development costs in my industry by drawing on open technologies to substitute for these proprietary solutions?

Are the underlying technologies complex—consisting of so many bits and pieces that a significant number could inadvertently infringe on proprietary IP held by specialized firms?

The more affirmative the answers to these questions may be, the more likely it is that the interests of specialized vendors of proprietary solutions will collide with those of firms drawing on open innovation, which could involve any type of open good, from software to the genetic code to crowd-sourced designs for parts or tools. That’s because if the answer to question 1 were yes, specialized firms would stand to lose business if integrated firms (question 2) cut them out of parts of the business. And the more complex the technologies are (question 3), the more likely it is that competitive offerings of specialized and integrated firms will overlap and, in turn, that specialized firms will choose to defend their IP.

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Article Notes

1 The report was commissioned by the consultancy Open Source Risk Management and carried out by experts in the open-source community.
2 The alliance spent several million dollars to purchase patents held by third-party developers. To reduce the risk of litigation against users of open-source software, it pledged not to enforce these patents.
3 For details, see Oliver Alexy and Markus Reitzig, “Private-collective innovation, competition, and firms’ counterintuitive appropriation strategies,” SSRN working paper, August 2011.

Sidebar

Open competition: The data behind the risk profiles

To illustrate the three-factor risk profiles—capturing the value of proprietary solutions, the viability of open-source solutions, and the complexity of technology—we used the proxies described below. For the sake of simplicity, the three risk factors in the exhibit are combined in a single profile bar for each industry. Unless otherwise indicated, the data are based on aver- age figures for 2006 and 2007 and normalized between zero and one for each risk factor across industries. These are the latest numbers available, and the structural factors they represent change only slowly over time. If anything, incentives to use open-source alternatives may be increasing, which would imply that our risk profiles have a conservative bias.

The value of proprietary solutions is a function of two variables: the presence of private investors, derived from the number of companies in an industry, and an industry’s attractiveness for private investors based on average profits per company.1
The viability of open-source solutions as alternatives is based on four variables: the importance of complementary assets, measured by the inverse of R&D expenses over profits; software’s importance to an industry, based on capital formation in software as opposed to other kinds of capital formation; the hardware assets necessary for innovation, measured by capital formation in computing, communications, and other kinds of machinery and equipment; and the heterogeneity of user demand, measured by the importance of users and consumers as sources of innovation.2

Technology complexity indicates where risk is a function of the volume and spread of new technology. It is measured by the number of patent applications multiplied by the number of unique patent applicants.3

Sidebar Notes

1 Source: UK Office for National Statistics.
2 Source: UK Office for National Statistics, the EU KLEMS project, and the 2009 UK Innovation Survey.
3 Source: Derwent Innovations Index.

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Oliver Alexy is an assistant professor of innovation and entrepreneurship at Imperial College Business School; Markus Reitzig is an assistant professor of strategic management and entrepreneurship at London Business School.

The authors are thankful for the valuable input from Peter Goodridge and Jonathan Haskel at Imperial College Business School. Oliver Alexy further acknowledges financial support from the Engineering and Physical Sciences Research Council’s Centres for Innovative Manufacturing at Imperial College London.

 

Beware the Busy Manager

Heike Bruch

Here is an excerpt from an article co-authored by Heike Bruch and Sumantra Ghoshal for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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If you listen to executives, they’ll tell you that the resource they lack most is time. Every minute is spent grappling with strategic issues, focusing on cost reduction, devising creative approaches to new markets, beating new competitors. But if you watch them, here’s what you’ll see: They rush from meeting to meeting, check their e-mail constantly, extinguish fire after fire, and make countless phone calls. In short, you’ll see an astonishing amount of fast-moving activity that allows almost no time for reflection.

Sumantra Ghoshal

No doubt, executives are under incredible pressure to perform, and they have far too much to do, even when they work 12-hour days. But the fact is, very few managers use their time as effectively as they could. They think they’re attending to pressing matters, but they’re really just spinning their wheels.

The awareness that unproductive busyness—what we call “active nonaction”—is a hazard for managers is not new. Managers themselves bemoan the problem, and researchers such as Jeffrey Pfeffer and Robert Sutton have examined it (see “The Smart-Talk Trap,” HBR May–June 1999). [Note: They later developed their insights in a book, The Knowing-Doing Gap, published by Harvard Business School Press in 2000.] But the underlying dynamics of the behavior are less well understood.

For the past ten years, we have studied the behavior of busy managers in nearly a dozen large companies, including Sony, LG Electronics, and Lufthansa. The managers at Lufthansa were especially interesting to us because in the last decade, the company underwent a complete transformation—from teetering on the brink of bankruptcy in the early 1990s to earning a record profit of DM 2.5 billion in 2000, thanks in part to the leadership of its managers. We interviewed and observed some 200 managers at Lufthansa, each of whom was involved in at least one of the 130 projects launched to restore the company’s exalted status as one of Europe’s business icons.

Our findings on managerial behavior should frighten you: Fully 90% of managers squander their time in all sorts of ineffective activities. In other words, a mere 10% of managers spend their time in a committed, purposeful, and reflective manner. This article will help you identify which managers in your organization are making a real difference and which just look or sound busy. Moreover, it will show you how to improve the effectiveness of all your managers—and maybe even your own.

Focus and Energy

Managers are not paid to make the inevitable happen. In most organizations, the ordinary routines of business chug along without much managerial oversight. The job of managers, therefore, is to make the business do more than chug—to move it forward in innovative, surprising ways. After observing scores of managers for many years, we came to the conclusion that managers who take effective action (those who make difficult—even seemingly impossible—things happen) rely on a combination of two traits: focus and energy.

Think of focus as concentrated attention—the ability to zero in on a goal and see the task through to completion. Focused managers aren’t in reactive mode; they choose not to respond immediately to every issue that comes their way or get sidetracked from their goals by distractions like e-mail, meetings, setbacks, and unforeseen demands. Because they have a clear understanding of what they want to accomplish, they carefully weigh their options before selecting a course of action. Moreover, because they commit to only one or two key projects, they can devote their full attention to the projects they believe in.

Consider the steely focus of Thomas Sattelberger, currently Lufthansa’s executive vice president, product and service. In the late 1980s, he was convinced that a corporate university would be an invaluable asset to a company. He believed managers would enroll to learn how to challenge old paradigms and to breathe new life into the company’s operational practices, but his previous employer balked at the idea. After joining Lufthansa, Sattelberger again prepared a detailed business case that carefully aligned the goals of the university with the company’s larger organizational agenda. When he made his proposal to the executive board, he was met with strong skepticism: Many believed Lufthansa would be better served by focusing on cutting costs and improving processes. But he kept at it for another four years, chipping away at the objections. In 1998, Lufthansa School of Business became the first corporate university in Germany—and a change engine for Lufthansa.

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Heike Bruch (heike.bruch@unisg.ch) is a professor of leadership at the University of St. Gallen in Switzerland. She is a co-author of with Bernd Vogel of Fully Charged, published by Harvard Business Review Press (2011)

Sumantra Ghoshal is a professor of strategy and international management at the London Business School.

Want to Be More Successful? Change Your Mindset

Jeffrey Pfeffer

Here is an article written by Jeffrey Pfeffer for BNET, The CBS Interactive Business Network. To check out an abundance of valuable resources and obtain a free subscription to one or more of the BNET newsletters, please click here.

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I recently interviewed Chip Conley, founder and CEO of the second-largest boutique hotel chain in the U.S., Joie de Vivre hospitality, for a case study for my MBA class on power. As we went over the details of the case, I got a window into the mindset that’s enabled Conley to achieve the success he has, and insight into why others don’t reach that level.

I asked why he thought it was so hard for people to do things like networking that didn’t seem difficult and were clear paths to power. Conley said that for most people, networking, building social relationships with strangers at, for instance, events and functions, was seen as a task. That mindset held true for many of the other actions required to build power–they were tasks. Tasks, he said, are things like taking out the garbage. You don’t try to develop your “skill” at taking out the garbage, you don’t think much about it, you just do it and get it over with.

However, if you think of networking as a skill, then that mindset changes everything. Skills are things that can, and maybe even should, be developed. You think about how well you are performing skills, you work on getting better, you get feedback, you apply thought, you learn.

The implication of Conley’s insight: the difference between people who build effective networks and those that don’t, the difference between people who develop political skill and grow that skill over time and those that don’t, has much less to do with intelligence or charisma or charm and everything to do with how people see and define what they are doing – as skills or as tasks.

When Lyndon Johnson became the Assistant Democratic leader in January, 1951, he took on what was commonly considered to be a “nothing job.” As described by Robert Caro in Master of the Senate, to LBJ, there was no job that was a nothing job. Johnson developed skill in this new role: skill in counting votes on pending legislation, skill in scheduling non-controversial bills for action, skill in raising money to help members’ political campaigns, skill in getting legislation through the House of Representatives. Johnson used this “nothing job” as Senate minority whip to build favors and a reputation so that when the Democrats took control of the Senate, he became the youngest Senate majority leader.

Most management consulting professionals think the road to the top is through doing your consulting job well. Getting asked to set up a seminar series to bring in outside speakers from government and the nonprofit world looks like a task that’s irrelevant to your job. But one former student saw in this task an opportunity to build skill–and contacts. Skill in discerning the interests of senior partners, skill in building bridges to outside speakers and organizations, and skill in organizing an interesting seminar series that would help the firm learn more about the opportunities for public sector and nonprofit work. By approaching this assignment as an opportunity to build skill, this consultant increased his visibility in the firm and wound up with much more interesting assignments.

So here’s some practical advice: the next time you find yourself at some meeting or event, the next time you get what you think is a boring, trivial assignment, consider how your mindset affects your approach. Chip Conley is right–there is a big difference in what we do and what we learn depending on whether we define some activity as a task or a skill. As a consequence, our ability to build power and influence derives as much from how we think about our activities as from our abilities.

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Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Stanford Graduate School of Business, where he has taught since 1979. He has authored or co-authored 13 books on topics including power, managing people, evidence-based management, and the “knowing-doing gap.” His most recent book, Power: Why Some People Have It and Others Don’t, was published by HarperBusiness (2010). He has lectured in 34 countries and has been a visiting professor at London Business School, Harvard Business School, Singapore Management University and IESE in Barcelona. Pfeffer has served on the board of directors of several human capital software companies as well as other public and nonprofit boards.

Are You a High Potential?

Here is a preview of an article co-authored by Douglas A. Ready, Jay A. Conger, and Linda A. Hill that was  featured in the June 2010 issue of Harvard Business Review. To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Review’s Daily Alerts, please click here.

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Some employees are more talented than others. That’s a fact of organizational life that few executives and HR managers would dispute. The more debatable point is how to treat the people who appear to have the highest potential. Opponents of special treatment argue that http://www.bnet.com/photos/business-blunders-of-the-year/493483?seq=1all employees are talented in some way and, therefore, all should receive equal opportunities for growth. Devoting a disproportionate amount of energy and resources to a select few, their thinking goes, might cause you to overlook the potential contributions of the many. But the disagreement doesn’t stop there. Some executives say that a company’s list of high potentials—and the process for creating it—should be a closely guarded secret. After all, why dampen motivation among the roughly 95% of employees who aren’t on the list?

Should You Tell Her She’s a High Potential?

For the past 15 to 20 years, we’ve been studying programs for high-potential leaders. Most recently we surveyed 45 companies worldwide about how they identify and develop these people. We then interviewed HR executives at a dozen of those companies to gain insights about the experiences they provide for high potentials and about the criteria for getting and staying on the list. Then, guided by input from HR leaders, we met with and interviewed managers they’d designated as rising stars.

Our research makes clear that high-potential talent lists exist, whether or not companies acknowledge them and whether the process for developing them is formal or informal. Of the companies we studied, 98% reported that they purposefully identify high potentials. Especially when resources are constrained, companies do place disproportionate attention on developing the people they think will lead their organizations into the future.

So you might be asking yourself, “How do I get—and stay—on my company’s high-potential list?” This article can help you begin to answer that question. Think of it as a letter to the millions of smart, competent, hardworking, trustworthy employees who are progressing through their careers with some degree of satisfaction but are still wondering how to get where they really want to go. We’ll look at the specific qualities of managers whose firms identified them as having made the grade.

The Anatomy of a High Potential

Let’s begin with our definition of a high-potential employee. Your company may have a different definition or might not even officially distinguish high potentials from other employees. However, our research has shown that companies tend to think of the top 3% to 5% of their talent in these terms:

“High potentials consistently and significantly outperform their peer groups in a variety of settings and circumstances. While achieving these superior levels of performance, they exhibit behaviors that reflect their companies’ culture and values in an exemplary manner. Moreover, they show a strong capacity to grow and succeed throughout their careers within an organization—more quickly and effectively than their peer groups do.”

That’s the basic anatomy of a high potential. Gaining membership in this elite group starts with three essential elements.

Deliver strong results—credibly.

Making your numbers is important, but it isn’t enough. You’ll never get on a high-potential list if you don’t perform with distinction or if your results come at the expense of someone else. Competence is the baseline quality for high performance. But you also need to prove your credibility. That means building trust and confidence among your colleagues and, thereby, influencing a wide array of stakeholders.

Note: To continue reading, subscribe now or purchase a single copy PDF, please click here.

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Douglas A. Ready (dready@icedr.org) is a visiting professor of organizational behavior at London Business School and the founder and president of ICEDR, a global talent-management research center in Lexington, Massachusetts.

Jay A. Conger is the Henry R. Kravis Research Professor in Leadership Studies at Claremont McKenna College and a visiting professor of organizational behavior at London Business School.

Linda A. Hill is the Wallace Brett Donham Professor of Business Administration at Harvard Business School.

Four Ways You’re Sabotaging Your Own Power at Work

Jeffrey Pfeffer

Here is an excerpt from an article written by Jeffrey Pfeffer for BNET, The CBS Interactive Business Network. To read the complete article, check out an abundance of valuable resources and obtain a free subscription to one or more of the BNET newsletters, please click here.

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My recently published book, Power, asks why some people have it and others don’t. That’s the question I am most often asked. Naturally people should want power –it can be monetized, it helps you get things done, and having power leads to a longer life.

When the Clintons left the White House, they had debts from the Whitewater and Monica Lewinsky imbroglios, but a few years later they had translated their power, fame, and connections into more than $100 million in earnings from books, speeches, and investment opportunities.  UC San Francisco’s Dr. Laura Esserman is running projects to cut the cycle time for learning about the effectiveness of breast cancer therapies, but doing so requires her building influence to overcome bureaucratic obstacles. And research by Sir Michael Marmot and others shows that the degree of job control one has positively predicts cardiac health and longevity.

The barriers to obtaining power aren’t so much competitors or external circumstances, but ourselves. If you really want power, you need to be willing to make the tradeoffs required and then get out of your own way.

Some of the most important reasons people don’t seek power are:

[Here are the first two of four. To read the complete article, please click here.]

1. The effort required. I don’t know of any powerful people who don’t work a lot. Esserman sleeps little and so does Rudy Crew, the former school superintendent in New York and Miami-Dade County who was named the best school superintendent in the U.S. in the spring of 2008. CEOs travel constantly and are always “onstage,” working and thinking. Great results require enormous energy and effort. Some people think they want power, but aren’t willing to devote the time. As marketing guru Keith Ferrazzi told my class, “you have to work really, really hard. Maybe you’ll get lucky, but don’t count on it.” Studies of genius in every field ranging from art to science to athletics show that while individual talent matters, it is practice and coaching – effort — that is the key to success. Why would attaining power be any different?

2. The time spent on strategic relationships. Most people, naturally enough, want to spend their time with friends, family, and close work associates. The problem is that people who are closest to you are also more likely to be close to each other and to have the same information and contacts as you do. In other words, they can provide you mostly redundant information and contacts. That’s why network research consistently shows the importance of weak ties — people whom you don’t know particularly well but who enable you to access different information and social networks.

I saw someone with no scientific background or preexisting ties build an influential network and then get a job in biotechnology by assiduously reaching out to people he did not know for information and advice, and then thanking them and connecting them to each other. But doing this requires getting out of our comfort zone and our habit of associating mostly with those we already know. And it requires being strategic — in this person’s case, about whom he needed to meet and how he was going to meet them. Many people don’t want to interact with so many strangers and want their social relationships to be more “natural” rather than strategic, so they forego the opportunity to build power.

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The good news about these self-imposed barriers to obtaining power is that they are completely under our control. Although people can not necessarily be as powerful as they would ever want to be, they can often get farther than they thought. You just need to understand organizational dynamics and be willing to make the necessary trade-offs.

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Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Stanford Graduate School of Business, where he has taught since 1979. He has authored or co-authored 13 books on topics including power, managing people, evidence-based management, and The “knowing-doing gap.” He has lectured in 34 countries and has been a visiting professor at London Business School, Harvard Business School, Singapore Management University and IESE in Barcelona. Pfeffer has served on the board of directors of several human capital software companies as well as other public and nonprofit boards.

Meet the M-Prize winners—three case studies in management innovation honored by Gary Hamel’s Management Innovation eXchange.

Here is an excerpt from an article co-authored by Gary Hamel and Polly LaBarre for The McKinsey Quarterly, NOVEMBER 2010. It is part of the “Dispatches from the front lines of management innovation” series. To read the complete article and check out other outstanding resources, please click here.

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The Management Innovation eXchange (MIX) is a Web-based open-innovation project dedicated to catalyzing the creativity of thinkers and practitioners interested in reinventing management. That’s not an undertaking for any one individual or organization—it’s everybody’s problem, which is why the MIX is designed as a collaborative platform both to surface bold ideas and make progress on a set of make-or-break challenges.

Earlier this year, the MIX introduced the first-ever management-innovation contest, the M-Prize, around three such challenges: redefining the work of leadership, increasing trust, and taking the work out of work. MIXers from all over the world contributed hundreds of entries. Few of the submissions are world changing, some are half baked, and a couple are truly off the wall. But so many of them are bold and original, sometimes even audaciously imaginative, that they confirm our deeply held belief that everyone wins when everyone shares.

Judges for the M-Prize included CEOs and thought leaders such as Bill George, Terri Kelly, John Mackey, Tom Malone, and Leighton Reid. McKinsey is a knowledge partner of the MIX but was not involved with the judging. Here are three of the winning stories, which offer insights for management innovators everywhere. Readers interested in learning more about these stories or about other winning entries not described here should visit the M-Prize home page.

[Here is a brief description of the first of three M-prize-winning projects.]

Redefining leadership in public housing

Portsmouth is one of England’s largest and most densely populated urban areas—once home to Charles Dickens and Arnold Schwarzenegger and now to “17,000 blocked toilets and 100,000 dripping taps,” says John Seddon, an occupational psychologist and management thinker. Several years ago, he began working closely with Owen Buckwell, who as head of housing for the Portsmouth City Council manages those toilets and taps, as well as all of the upkeep for some 50,000 people living in government-built council homes.

In late 2006, Buckwell and Seddon began pursuing a single compelling purpose: “to carry out the right repair at the right time” for tenants. The lever of change was a new management system designed to respond quickly to demand, measure value created for tenants (rather than costs or government-mandated targets), and reflect actual work flows (rather than fitting work to rigid standards and protocols). Within just a few months, Buckwell and his team built a process in which tenants could call up for service, get a real human being on the first ring, and schedule service at exactly the time they desired (not a half-day window, a two-hour window, or even a 15-minute window). The tradesperson providing the service would show up equipped with all the correct parts required to do the job—and ask if anything else needed fixing.

Buckwell and his team accomplished this feat by shifting away from a paper-based daily printout of jobs for plumbers, glaziers, carpenters, and other craftsmen. A sophisticated visual system now matches the demands of customers (which ones want what jobs at what times) with the supply of tradespeople by highlighting when each is likely to come free from his or her current job. Large screens at headquarters provide transparency, and “the system works as a single piece flow, with each tradesman getting one job at a time” to avoid bottlenecks and delays.

The result: astonished customers, intense gratitude, hand-delivered flowers and chocolates, and a growing sense of trust between tenants and council. The story by the numbers is equally impressive: days to complete a repair dropped from 60 to 7, while the proportion of problems fixed on the first visit rose to 99 percent, from 45 percent. The proportion of calls from tenants complaining of failure shrunk to 13 percent, from 60 percent, and the tenant satisfaction rate rose dramatically to 9.93 out of 10—all while the cost per repair was slashed by more than half.

Finally, the housing council’s culture has shifted from one of “learned helplessness and cheating to meet targets” to one that encourages employees to show up with their initiative and imagination fully engaged; a new ethos that emphasizes action has taken hold. “Owen always had a sneaking suspicion that people go to work to do a good job,” says Seddon. “It turns out he was right.”

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Gary Hamel is Visiting Professor of Strategic and International Management at the London Business School and the innovation architect at the Management Innovation Exchange (MIX). His latest book is The Future if Management, written with Bill Bryson and published by Harvard Business Press. Polly LaBarre is a co-author with William Taylor of Mavericks at Work and the editorial director of the MIX.

What to Do Against Disruptive Business Models (When and How to Play Two Games at Once)

Here is an excerpt from article written by Constantinos C. Markides and Daniel Oyon for MIT Sloan Management Review. To read the complete article and check out other resources, please click here.

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Fighting against a disruptive business model by rolling out a second business model is one option for companies to consider. But to make that work, you need to avoid the trap of getting stuck in the middle.

Constantinos C. Markides

INCREASINGLY, ESTABLISHED COMPANIES in industries as diverse as airlines, media and banking are seeing their markets invaded by new and disruptive business models. The success of invaders such as easyJet, Netflix and ING Direct in capturing market share has encouraged established corporations to respond by adopting the new business models alongside their established ones. Yet, despite the best of intentions and the investment of significant resources, most companies are unsuccessful in their efforts to compete with two business models at once.

Daniel Oyon

According to Michael Porter and other strategy theorists, managing two different business models in the same industry at the same time is challenging because the two models (and their underlying value chains) can conflict with each other. 1 For example, airlines selling tickets through the Internet to fight back against their low-cost competitors risk alienating existing distributors (the travel agents). Similarly, established newspaper companies that offer “free” newspapers to respond to new entrants risk cannibalizing their existing customer base. By attempting to compete with themselves, Porter argued, companies risk paying a significant straddling cost: damaging their existing brands and diluting their organizations’ cultures for innovation and differentiation.2

THE LEADING QUESTION: Should companies adopt a second business model in their main market?

FINDINGS

1. Responding to a disruption by adopting a second business model in the same market can be an effective strategy.
2. Your second business model should be different from your existing one and different from that of the disrupter.
3. Keep the two separate enough to avoid conflicts, but leverage potential synergies.
4. His view was that a company could find itself “stuck in the middle” if it tried to compete with both low-cost and differentiation strategies.3

The Case for Separate Units

The primary solution proposed to solve this problem is to keep the two business models (and their underlying value chains) separate in two distinct organizations. That is the “innovator’s solution” that Clayton Christensen proposed and that has been supported by others.4 Even Porter has accepted this organizational solution.5 The rationale for this approach is straightforward: Managers at the established company who feel that the new business model is growing at their expense would want to constrain or even kill it. By keeping the two business models separate, you prevent the company’s existing processes and culture from suffocating the new business model. The new unit can develop its own strategy, culture and processes without interference from the parent company.

Sensible as this argument seems, the separation solution is not without problems and risks. Perhaps the biggest problem is that you can’t exploit the synergies between the established company and the separate unit.6 In recognition of the need to exploit the
synergies, some academics have suggested an alternative: the creation of separate business units that are linked by a number of integrating mechanisms. Several studies have now identified a number of integrating mechanisms that successful companies have put in place to exploit synergies (see “How to Integrate Separate Units”).7

Why Separation May Not Be Enough

Although the idea of creating separate business units has received a lot of attention, this approach by itself does not ensure success. In fact, there are many examples of companies that have pursued this strategy and failed (such as British Airways with its Go Fly subsidiary and KLM with its Buzz subsidiary) while other companies, such as Nintendo and Mercedes, have succeeded in playing two games without creating separate units.

We have also found that competing successfully with two different and conflicting business models involves more than creating a separate unit. Several years ago, we studied the experiences of 68 companies that faced the challenge of competing with dual business models. Our main finding was that only a handful of companies that created separate units were successful in playing two games. Many had created separate units and still failed, suggesting that separation in itself was not enough to ensure success.

If separation is not sufficient, what else should companies do? From 2007 to 2009, we studied 65 companies that attempted to compete with dual business models in their markets (see “About the Research”). By comparing the experiences of the businesses that did so successfully with those that failed, we have identified five key questions that companies need to consider if they are to improve the odds of success in competing with dual business models in the same industry.

[Here are the five questions.]

1. Should I enter the market space created by the new business model?

2. If I do enter the new market space, can I do it with my existing business model or will I need a new one?

3. If I need a new business model to exploit the new market, should I simply adopt the invading business model that’s disrupting my market?

4. If I develop a new business model, how separate should it be organizationally from the existing business model?

5. Once I create a separate unit, what are the unique challenges of pursuing two business models at once?

Markides and Oyon respond to each of these questions, offering both insights and suggestions that can help leaders make appropriate decisions. To read the complete article, check out the notes, and obtain information about a subscription, please click here.

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Constantinos C. Markides is the Robert P. Bauman Professor of Strategic Leadership at London Business School. He is the author or co-author of several books, notably Game-Changing Strategies, All the Right Moves, and The Future of the Multi-national Company.

Daniel Oyon is a professor of management at HEC, Université de Lausanne, in Switzerland.

Constantinos C. Markides and Daniel Oyon on how to integrate separate business units

In larger organizations, their leaders frequently face a dilemma that is usually not easily resolved: Keep business units separate or integrate them? Many companies prefer to keep operating units separate and (in effect) autonomous to stimulate innovation and support differentiation. However, there are companies operating with two business models that use a variety of integrating mechanisms to exploit synergies between the models.

Constantinos C. Markides

Based on their rigorous and extensive research on companies throughout the world, Constantinos C. Markides and Daniel Oyon observe, “Despite popular perception, the markets that get created by new business models are not necessarily more attractive than existing markets. Nor are the new customers who are attracted to the new business models the kinds of customers that established corporations should necessarily pursue. For example, consider the huge market that Internet brokerage created in the United States. There’s no question that it’s a big and growing market. But is it a market that all established brokers ought to go after? Probably not.”

How to integrate separate business units? Here is what Markides and Oyon recommend:

• Appoint a common general manager overseeing both the established and the new business
• Allow different cultures to emerge but unite the parent with the separate unit by a strong shared vision
• Put in place targeted but limited integrating mechanisms
• Nurture strongly shared values that unite the people in the two businesses
• Appoint an active and credible integrator
• Emphasize “soft” levers such as a strong sense of direction, strong values and a feeling of “we are in this together”
• Develop incentives that encourage cooperation between the two units
• Integrate the activities that cannot be done well if they become independent
• Allow the unit to borrow brand name, physical assets, expertise and useful processes
• Let an independent executive from outside the business unit secure an internal champion to manage the unit and provide oversight
• Give the unit operational autonomy but exercise strong central strategic control
• Allow the unit to differentiate itself by adopting a few of its own value chain activities but exploit synergies by ensuring that some value chain activities are shared with the parent

Daniel Oyon

With regard to much smaller organizations such as family-owned franchises, they usually have two business models: one suggested by corporate or established by the given industry, the other to accommodate the local community. Instead of separate business units, they have separate business functions (sales, customer service, production or product and/or provision of service, distribution) and at least a few people have more than one function. In my opinion, most of what Markides and Oyon suggest (after appropriate modification) is also relevant to these companies.

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Constantinos C. Markides is the Robert P. Bauman Professor of Strategic Leadership at London Business School. He is the author or co-author of several books, notably Game-Changing Strategies, All the Right Moves, and The Future of the Multinational Company. Daniel Oyon is a professor of management at HEC, Université de Lausanne, in Switzerland.

Interview: Jeffrey Pfeffer

Jeffrey Pfeffer

Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University where he has taught since 1979. He is the author or co-author of thirteen books including The Human Equation: Building Profits by Putting People First, Managing with Power: Politics and Influence in Organizations, The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action, Hidden Value: How Great Companies Achieve Extraordinary Results with Ordinary People, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management, and What Were They Thinking? Unconventional Wisdom About Management, a collection of 27 essays about management topics, as well as more than 120 articles and book chapters. His latest book, Power: Why Some People Have It — and Others Don’t, was published by HarperCollins  (September, 2010).

Pfeffer received his B.S. and M.S. degrees from Carnegie-Mellon University and his Ph.D. from Stanford. He began his career at the business school at the University of Illinois and then taught at the University of California, Berkeley. Pfeffer has been a visiting professor at the Harvard Business School, Singapore Management University, London Business School, and a frequent visitor at IESE in Barcelona. Pfeffer has presented seminars in 34 countries throughout the world as well as doing consulting and providing executive education for numerous companies, associations, and universities in the United States. Moreover, he has won the Richard I. Irwin Award presented by the Academy of Management for scholarly contributions to management and numerous awards for articles and books.

Morris: Before discussing a few of your earlier books and then your latest, Power, a few general questions. First, so much has happened in the global business world during the last 3-5 years. In your opinion, what has been the single most significant change? How so?

Pfeffer: The single most significant change has been the globalization of labor markets.  Product markets–trade in goods–have been globalizing for years.  But now, with the reduction in communication expenses and the building of all sorts of IT infrastructure, essentially any job can be done almost anywhere.  One of the fastest growing sectors in the Indian outsourcing industry is the outsourcing of (at the moment routine) legal work.  Newswriting, the reading of digital X-rays and other digital diagnostic tests, research and development, clinical trials for pharmaceuticals–all have been increasingly placed in a global marketplace in which people are, and have to, competing with talented, and lower wage, individuals from all over the world.

The effect of this has been to seriously erode working conditions for many people in the advanced industrialized countries, particularly in the United States.  As many people know, our job market problems began long before the latest recession.  We have faced literally decades with no substantive increase in median wages, and job growth, except in health and government jobs such as education, has been stagnant for a while.  People are now expected to travel more and to work at odd hours to coordinate with people all over the world.  Simply put, companies have prospered, but for the most part, people have not.

Morris: As you know, even the most prestigious business schools such as Stanford, Harvard, Kellogg at Northwestern, Ross at Michigan, and Wharton at Pennsylvania have been severely attacked in recent years. In your opinion, which single area does there seem to be the greatest need for improvement and what specifically do you recommend?

Pfeffer: As Harvard Business School professor Rakesh Khurana has so persuasively argued [click here], there needs to be a “professionalization” project in management.  Professionals are committed to evidence-based practice, continuous learning and education, and working in the best interests of their clients and not being overly aggressive in their pursuit of self-interest.  This is not what we tend to see in business schools.  The degree is an “entry ticket” and the amount of critical thinking and mastery of the material that occurs is, in general, too low.  As one student once told me, “this isn’t medicine.  No one is going to die if we screw up.”  But of course that isn’t completely true–the evidence is quite clear that layoffs, the result of mismanagement in some cases, actually do kill people.

Business school graduates from the best schools earn large salaries and frequently rise to positions of great power.  It would be nice if they used that power to truly make the world a better place–which entails more than just maximizing their own organization’s profits and their own economic well-being.

There is a movement to have people sign ethical “oaths” which is well-intentioned but not likely to do much.  We need to reexamine and reassess the purpose of the corporation, and go back to the idea that senior leadership has responsibilities not just to shareholders but also to customers and employees.  In this regard, the Aspen Institute’s values surveys are instructive and informative.

How to make this change is beyond my “pay grade.”  The issue is in part a collective action problem–it would be tough for one school, on its own, to chart a completely different course.

Morris: Here’s a hypothetical situation. You have been invited to spend a weekend at Camp David meeting one-on-one with President Obama. Just the two of you. He has asked you to come prepared to evaluate his performance thus far and then share whatever recommendations you may have with regard to what should be his highest priorities as a leader and manager, going forward. What would be your response?

Pfeffer: I would give Obama a “C.”  He gets an “A” for understanding this country’s profound problems in education, health care, infrastructure, and economic competitiveness, and for surrounding himself with extremely skilled and knowledgeable people who know what to do.  He probably gets an “F,” ironically, in his ability to sell these ideas to the American public and to be angry enough, conniving enough, and frankly mean enough to get them implemented and understood.

We now live in an era of the permanent campaign–all marketing and messaging all the time.  We clearly live in an era where the “truth” doesn’t matter much–people tell lies about things ranging from the likelihood of “death panels” to the effects of the stimulus on saving this economy from a true calamity.  In such a context, Obama himself needs to be “selling” all the time, as does his team, and also be more forceful in advocating their views.  He needs to project that he and his ideas will win.  And I don’t think he has yet done that.

Morris: Here’s a question I have been wanting to ask you for years. When I began to read your earliest book, Managing with Power (1992), my initial reaction was that your insights and assertions are counterintuitive. Then it dawned on me that, instead, you were challenging convention wisdom. And I think you have continued to do that in every other book you have written since then. Is that an accurate assessment?

Pfeffer: Yes.  That’s because conventional wisdom is often wrong.  And that’s because few people bother to actually consult the social science research that actually helps us understand human behavior.  To paraphrase the late management thinker and writer, Peter Drucker, thinking is hard work, which is why so few people (including actually senior managers) do it.  Once there is some “conventional,” seemingly-reasonable story, people just accept it and don’t ask, “is this actually true?  Is it consistent with the data?”  And this extends to the highest reaches of organizational life.