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THE STORE IS DEAD. AN ANTIDOTE FOR DO ECONOMIES OF YOU DON’T NEED A


OR IS IT? SELFISH THINKING SCALE STILL MATTER? DIGITAL STRATEGY
PAGE 59 PAGE 96 PAGE 67 PAGE 14

sloanreview.mit.edu

MIT Slo
SPRING 2018 • VOL. 59 • NO. 3

Management Review

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UNLOCKING POTENTIAL
The Boston Consulting Group (BCG) is a global management
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FROM THE EDITOR

The Trouble With Tweets


That’s a glorious thing. As an editor, there most people with the wrong impression.
is little I love more than a robust argument Social media lesson learned.
about ideas. So the goal of this column is twofold:
The column was also a hit on social first, to reach anyone who only read the
media, especially Twitter. Here is the tweet misleading tweet (hopefully we succeeded
we generated that got the most traction — in getting more of you here) and, second,
and it’s still making the rounds today: to affirm and add to my original thesis.
I believe more than ever that most
“During my work life, I have been historical approaches to corporate culture
lifted by strong corporate cultures will soon outlive their usefulness. Yes,
and nearly drowned by weak ones.” culture matters — but it can’t be con-
— @pmichelman trolled or programmed; it can’t be driven
by repetition, slogan, and patterned be-

A
n interesting thing happens While the initial tweet also included a havior. Our new, flexible, continually
to ideas when they are link to the column, the number of people transforming work environments render
rightsized for Twitter. The who simply retweeted far exceeded the such tactics anachronistic.
tweet takes over — and number of people who clicked through to More than ever, culture comes down
becomes a substitute for — read it. Hardly a breakthrough insight, but to the choices organizations make about
the larger idea it is meant to introduce. In here lies the rub: In its pithiness, the tweet people. If you hire for talent and for atti-
a way, the headline becomes the story. focused on only half of my point — and tude; if you take the time to make deeply
This phenomenon is particularly evi- sadly, the wrong half. Whereas the tweet considered decisions about who you want
dent when the idea behind the tweet is in reads like a strong endorsement of the in your organization — and whose devel-
any way nuanced or controversial. In the importance of corporate culture, it was opment you want to invest in — and you
world of management ideas, questioning excerpted from a paragraph with a differ- do so by considering the full picture of
the value of corporate culture meets both ent intended meaning: who they are, you will have already ad-
of these criteria. dressed 90% of your culture.
I wrote a column for MIT SMR in the “During my work life, I have been We can discuss the remaining 10% an-
summer 2017 issue called “The End of lifted by strong corporate cultures other day. Right now, I need to work on a
Corporate Culture as We Know It.” My and nearly drowned by weak ones. new tweet.
basic argument was that the traditional, I have no doubt of culture’s power
monolithic,“the way we do things around to align an organization and enliven Paul Michelman // @pmichelman
Editor in Chief
here” version of corporate culture was on its workforce. But that’s history
MIT Sloan Management Review
its way to extinction. speaking.”
The column provoked lively and smart
conversation. Many readers disagreed with The phrase “But that’s history speak-
my view — either in part or in whole. ing” didn’t make it into the tweet, leaving

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SPRING 2018 • VOLUME 59 • NUMBER 3

MITSloan Management Review


COVER STORY

STRATEGIC AGILITY

24 Turn Strategy Into Results


How can leaders translate the complexity of strategy into guidelines
that are simple and flexible enough to executive? Rather than trying
to boil down the strategy to a pithy statement, it’s better to develop
33 WHY SUSTAINABLE THINKING
MATTERS MORE THAN EVER
a small set of priorities that everyone gets behind to produce results.
SUSTAINABLE THINKING: STRATEGY
BY DONALD SULL, STEFANO TURCONI, CHARLES SULL, AND JAMES YODER

34 Stop Focusing on
FEATURES What Other Businesses Do
A business strategy based solely on the world as it exists today
INNOVATION
is bound to fail.
BY ANDREW WINSTON
52 The Hybrid Trap: Why Most Efforts
to Bridge Old and New Technology SUSTAINABLE THINKING: STAKEHOLDER MANAGEMENT

Miss the Mark 36 Share Your Long-Term Thinking


Mature companies often lack the vision and resolve to fully commit Companies need to be more forthcoming about their strategies for
to new technologies — even when consumers are ready for them. long-term value creation when they communicate with investors —
This leads companies to develop watered-down products with lim- especially about environmental, social, and governance issues.
ited capabilities and leaves them exposed to upstart competitors. BY TIM YOUMANS AND BRIAN TOMLINSON
BY FERNANDO F. SUAREZ, JAMES UTTERBACK, PAUL VON GRUBEN,
AND HYE YOUNG KANG
SUSTAINABLE THINKING: TRANSPORTATION

RETAILING
39 The Personalized Future of
59 The Store Is Dead — Urban Transportation
Long Live the Store The transportation industry faces fundamental disruptions as vehicle
Legacy offline stores and next-generation online retailers are each find- ownership yields to as-needed mobility.
ing their way to a new kind of shopping experience: the showroom. BY VENKAT SUMANTRAN, CHARLES FINE, AND DAVID GONSALVEZ
BY DAVID R. BELL, SANTIAGO GALLINO, AND ANTONIO MORENO
SUSTAINABLE THINKING: GOVERNMENT
STRATEGY
46 Business Needs a Safety Net
67 The End of Scale Government’s long-ignored role in creating and sustaining market
New technology-driven business models are undercutting the conditions should take center stage as climate events become both
traditional advantages of economies of scale. But large companies more common and more destructive.
still have strengths to exploit — if they move quickly. BY DAVID KIRON AND GREGORY UNRUH
BY HEMANT TANEJA WITH KEVIN MANEY

PRODUCT INNOVATION SUSTAINABLE THINKING: FINANCIAL REPORTING

73 Finding Applications for 49 Why Companies Should Report


Technologies Beyond the Core Business Financial Risks From Climate Change
Only a small number of companies systematically seek opportunities How hard will it be for companies to meet the recommendations
to apply their technology outside their core markets. As a result, many of the Task Force on Climate-related Financial Disclosures? Not as
miss out on potential profits and avenues for growth and renewal. hard as many might think.
BY ERWIN DANNEELS AND FEDERICO FRATTINI BY ROBERT G. ECCLES AND MICHAEL P. KRZUS

2 MIT SLOAN MANAGEMENT REVIEW SPRING 2018 COVER ILLUSTRATION: MICHAEL AUSTIN/THEISPOT.COM
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85

FRONTIERS
EXPLORING THE DIGITAL FUTURE OF MANAGEMENT

7 HOW EMOTION-SENSING TECHNOLOGY


COLUMNS CAN RESHAPE THE WORKPLACE
New emotion-sensing technologies can help employees make
better decisions, improve concentration, and adopt healthier
CORPORATE GOVERNANCE ORGANIZATIONAL BEHAVIOR and more productive work styles. But companies must address
important privacy issues.
79 WHY THE INFLUENCE 85 WHY BEST PRACTICES BY EOIN WHELAN, DANIEL MCDUFF, ROB GLEASURE,
OF WOMEN ON BOARDS OFTEN FALL SHORT AND JAN VOM BROCKE
STILL LAGS For many leaders, the allure of
The representation of women best practices is strong and
on corporate boards has risen their expectations for results 10 THE SECRET TO SUCCESSFUL
substantially over the past are unrealistic. KNOWLEDGE SEEDING
decade, but the growth rate is BY JÉRÔME BARTHÉLEMY A sophisticated online user community will relieve companies
slowing. Meanwhile women’s of huge support burdens. Building such a network begins with
power on the boards on which ETHICS a smart approach to seeding it with expert knowledge.
BY PENG HUANG, ALI TAFTI, AND SUNIL MITHAS
they sit is often limited. 88 WHICH RULES ARE
BY KIMBERLY A. WHITLER WORTH BREAKING?
AND DEBORAH A. HENRETTA
Disruption of an established
business model requires compa-
14 YOUR COMPANY DOESN’T
LEADERSHIP NEED A DIGITAL STRATEGY
nies to disregard the “rules” of Leaders who give outsized focus to applying new technologies
83 FIVE STEPS LEADERS the status quo. But there must risk steering their companies into dangerous waters.
MUST TAKE IN THE AGE
OF UNCERTAINTY be limits. BY GEORGE WESTERMAN
BY R. EDWARD FREEMAN AND
Corporate executives need to BIDHAN (BOBBY) PARMAR
move beyond managing only
their own company and become LEADERSHIP
16 CAPTURING VALUE FROM FREE DIGITAL GOODS
Companies can improve productivity by tapping into the
active influencers within broader
systems.
96 PUTTING AN END TO market of free digital goods, such as open source software,
LEADERS’ SELF-SERVING and by paying their own employees to contribute.
BY MARTIN REEVES, SIMON BEHAVIOR
LEVIN, JOHANN D. HARNOSS, BY FRANK NAGLE
AND DAICHI UEDA New studies demonstrate
that many executives act with
a sense of entitlement and 18 CIOS AND THE FUTURE OF IT
suggest strategies to mitigate It’s time for CIOs to take charge of both back office and busi-
selfish thinking. ness technology, leading with a customer-driven mindset.
BY MORELA HERNANDEZ BY GEORGE F. COLONY

IN EVERY ISSUE Creating a “digital strategy” can focus the


organization in ways that don’t capture the
true value of digital transformation.
91 Executive Briefings — GEORGE WESTERMAN, PAGE 14
For detailed summaries of articles in this issue.

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[ELSEWHERE]
Lifting the Veil of Secrecy
You can’t blame job seekers for wanting to know as much
as possible about what a company is like before they ac-
cept a job offer. How do employees like working there?
What do they say about the culture? What is the CEO like
as a leader? In the old days, job candidates had to sniff out information
on their own. Today, many people looking for jobs consult Yelp-like
reviews on the website Glassdoor.com.
In a recent article in The New Yorker, writer Lizzie Widdicombe ex-
plores the genesis of Glassdoor Inc., from its early days focusing mostly
on tech startups and consulting firms to today (when it reportedly has
more than 33 million reviews of more than 700,000 companies). The
benefits for job hunters and employees are clear: Among other things,
Glassdoor Inc. has a “know your worth” feature, which furnishes salary
data for comparable positions. There’s a quid pro quo. Before users can
view information, they are required to contribute anonymous reviews Sketching Out the City of Tomorrow
of a current or recent job or share salary information. As companies look for smarter and better ways
For employers, there can be pluses and minuses. Transparency to develop products and meet the needs of cus-
cuts both ways. Good reviews can help attract top talent. But, as tomers, a parallel effort is underway in cities to put the
Widdicombe notes, “a bad culture, left unattended, can become an powers of technology to work to improve the lives of
existential threat.” residents. On the drawing board in Toronto is a plan to
Reviews must con- turn a 12-acre waterfront parcel into an urban neighbor-
form to Glassdoor’s hood with state-of-the-art housing, energy, mobility,
“community stan- social services, and public spaces. The scope of this
dards,” which experiment, known as Quayside, is described in a de-
prohibit profanity, tailed report posted online by the designated developer,
personal attacks, Sidewalk Labs LLC (a subsidiary of Alphabet Inc.,
disclosure of trade Google’s parent), and in a recent article in The Atlantic
secrets, and the nam- titled “If Google Were Mayor,” by Laura Bliss.
Quayside features many elements that have been
ing of people below
discussed for years (for example, modular eco-friendly
C-level executives on
buildings, a self-contained energy grid, and low-impact
the site. Still, they can
transportation like shuttles and bicycles). Beyond these,
be harsh. Although
however, the planners say there are opportunities to
Glassdoor is up-front create “a single unified source of information” to monitor
about accepting fees a wide range of scenarios, including when common trash
from clients who want their pages to look better from a visual stand- bins need emptying, park bench usage, and whether a
point, the company insists that no employer gets special treatment resident’s dishwasher needs servicing.
in terms of the content, according to Widdicombe. When employees Yet to be determined are basic questions about who
post comments that executives don’t like or feel are unfair or false would get to live in the area, the balance between public
(which Glassdoor says is a regular occurrence), she notes, a team and private interests, how data would be managed and
reviews the comments for violations. Some companies address protected — and even if the project, as conceived, will
criticism by posting their own comments on the site. get the green light to move forward.
Read The New Yorker article: Read The Atlantic article:
www.newyorker.com/magazine/2018/01/22/improving-workplace-culture- www.theatlantic.com/business/archive/2018/01/
one-review-at-a-time google-toronto-smart-city-quayside/550127

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FRONTIERS
EXPLORING THE DIGITAL FUTURE OF MANAGEMENT

The Secret to Your Company Capturing Value CIOs and


Successful Doesn’t Need a From Free Digital the Future
Knowledge Digital Strategy Goods of IT
Seeding 14 16 18
10

[ORGANIZATIONAL BEHAVIOR ]

How Emotion-Sensing Technology


Can Reshape the Workplace
New emotion-sensing technologies can help employees make better decisions,
improve concentration, and adopt healthier and more productive work styles.
But companies must address important privacy issues.
BY EOIN WHELAN, DANIEL MCDUFF, ROB GLEASURE,
AND JAN VOM BROCKE

A
s companies search for new ways to improve perfor-
mance, some executives have begun paying attention to
developments in emotion-sensing technologies (ESTs)
and software fueled by artificial emotional intelligence. Although
we are still in the early days, research shows that these technolo-
gies, which read such things as eye movements, facial expressions,
and skin conductance, can help employees make better decisions,
improve concentration, and alleviate stress. While important pri-
vacy issues need to be addressed, the opportunities are significant.
Consider the technology developed by Koninklijke Philips
Electronics N.V. and ABN AMRO Bank N.V., both based in
Amsterdam, to reduce trading risk in financial markets. Research
has shown that traders in heightened emotional states will overpay
for assets and downplay risk, a condition known as “auction fever”
or “bidding frenzy.” To address this problem, the companies jointly
developed a tool called the Rationalizer that has two components:
a bracelet attached to the trader’s wrist that measures emotions
via electrodermal activity (similar to the way a lie detector works)
and a display showing the strength of the person’s emotions using
light patterns and colors. Researchers have found that when users

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FRONTIERS

How Emotion-Sensing Technology Can Reshape the Workplace (Continued from page 7)
become aware of their height- technological investment. For that data can be accessed Reducing Stress
ened emotional states, they are example, recent research has without compromising privacy and Burnout
more likely to rethink their de- found that slow or uneven or anonymity, managers will Although some types of stress
cisions. In addition to helping cursor movements can be an soon be able to watch for can help people focus, re-
individuals improve perfor- indication of distraction or signs of boredom in an under- search shows that too much
mance, the aggregated data negative emotions. Detection performing team and take stress is detrimental to pro-
from such settings can help doesn’t require installing ex- steps to counter it. Indeed, re- ductivity, creativity, and job
managers understand how pensive hardware, but rather searchers at Telefónica I+D in satisfaction, not to mention
internal and external environ- just some additional code or Barcelona have developed an psychological and physical
mental factors influence the software to computers or algorithm that analyzes smart- health. What’s more, stress
risks taken by groups. smartphones. phone activity for such signs. can reach harmful levels long
Individuals are also more Professional athletes have On the basis of a combination before people are aware of it.
prone to make mistakes when been early adopters of tools of data points — including In some organizations, human
they are not paying enough that can help people sharpen how often users check their resources departments try to
attention. Although multitask- their focus to gain a competi- email, whether they log in to monitor stress levels using
ing has become standard in tive edge. Major League Instagram, whether they are surveys. But surveys don’t
many jobs, there are some activ- Baseball All-Star Carlos adjusting their device settings, necessarily capture how
ities, such as air-traffic control Quentin, National Basketball and how much battery power employees actually feel, in part
and fast-paced buying and sell- Association All-Star Kyle they consume — the algorithm because people don’t always
ing, where maintaining one’s Korver, and Olympic gold correctly identifies user bore- know when their stress levels
undivided attention is critical. medal swimmer Eric Shanteau dom more than 80% of the are elevated. Having a tool
that provides a quantifiable,
objective measure of stress
In some organizations, HR departments try to monitor would be extremely helpful.
stress levels using surveys. But surveys don’t As with tools to improve
decision-making and focus,
necessarily capture how employees actually feel. numerous options are avail-
able, including smart watches
In a high-profile foul-up in are among those who have used time. It can tell when employ- and fitness trackers that detect
2005, a trader working for special headsets produced by ees use their phones to pass stress by measuring changes in
Mizuho Securities Co. in Tokyo San Francisco-based SenseLabs the time as opposed to pursu- heart rate and sweat (through
intended to sell a single share Inc. to monitor cognitive ing specific goals. what’s known as electrodermal
of a stock it owned for about performance and develop In light of such discoveries, activity). These measures can
610,000 yen (which was approx- customized training aimed at managers can seek to redesign identify small changes that
imately $5,000). By mistake, he shoring up their personal processes that induce boredom users themselves don’t notice.
placed an order to sell 610,000 weaknesses. Microsoft Corp. or alternate them with other And as with algorithms that
shares for one yen. The com- has also conducted research on activities that employees find monitor smartphone usage for
pany was unable to cancel the the use of wearable sensors in more engaging. ESTs, more- boredom or cursor activity for
sell order, leading to an esti- an effort to understand, among over, might help managers distraction, stress-related in-
mated loss of $224 million. other things, what work activi- figure out which work sched- formation can also be drawn
Although such egregious ties are associated with changes ules work best for particular from the hardware that people
blunders are rare, the story in emotion and when people teams: Employees in one group are accustomed to using every
speaks to how important it working on certain types of may be most productive in the day. For example, a study by
is to hold the attention of tasks should take breaks. early morning, while another MIT’s Affective Computing
employees involved in high- In settings where employee group may do better later in Lab found that computer users
stakes activities. ESTs can help engagement is critical, the abil- the day. Meeting schedules who were under stress pushed
people improve their focus, ity of managers to recognize could be organized to take harder on keyboard keys and
often with relatively minimal boredom is vital. Assuming advantage of this information. held the mouse more tightly.

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Other research has found that IMPLEMENTATION BARRIERS FOR


it’s possible to detect stress- EMOTION-SENSING TECHNOLOGIES
Multiple measures are available to appraise stress, attention, and decision-making.
related surges in heart rates by Each presents different cost-, complexity-, and privacy-related barriers.
monitoring the changes in the
ORGANIZATION RELEVANT COST-RELATED COMPLEXITY- PRIVACY-
light reflected off users’ faces OPPORTUNITY MEASURES BARRIERS RELATED BARRIERS RELATED BARRIERS
with an ordinary webcam. Blood sugar Low-medium Low Medium
We have found that there Decision-making Electrodermal Medium Low Medium
can be important benefits to EEG High Medium High
monitoring stress at both the
Mouse/browser Low Medium Low-medium
individual level and across the tracking
organization. At the individual Attention
Facial coding Medium Low Medium
level, managers can learn when Eye tracking Medium-high Low Low-medium
people are under sustained Hormones Low Low Low-medium
pressure (and therefore more
Stress Heart rate Low-medium Medium Medium
susceptible to recklessness,
Electrodermal Medium Low Medium-high
burnout, or conflict with oth-
ers) and take steps to help
ameliorate such situations. privacy. (See “Implementation example, what happens if ESTs own devices to work. Under
At an organizational level, Barriers for Emotion-Sensing uncover medical issues that in- this scenario, individuals
measuring physiology (for Technologies.”) dividuals aren’t aware of or maintain a sense of ownership
example, heart rate or electro- The cost- and complexity- wish to keep private? over the deployment of
dermal activity) can help related barriers seem to be One can speculate that ESTs and the data they are
managers identify stress relatively straightforward — privacy concerns will become gathering.
“hot spots” among teams and both have been declining, less problematic when the 2. Develop data governance
functions. Using wristbands or and numerous low-cost/low- people being measured are agreements. Employees should
webcams, for example, manag- complexity options are already the beneficiaries and when have sole control over their
ers can pick up on problems available. Allaying the privacy disclosure is voluntary. But personal emotional data and
relating to excessive workload concerns, however, will be even then, there are dicey be able to stipulate what types
or interpersonal conflict and trickier. Many employees are issues, such as whether an of usage are permitted (for ex-
respond to them, often before highly skeptical of monitoring employee interprets feedback ample, data can be used only
employees are aware they exist. technology and uneasy about in an unexpected way or on an aggregate level, and no
Employees may be spinning how ESTs might be used. A overadjusts to correct behav- one can drill down into indi-
their wheels on frustrating, fundamental issue is who iors. With that in mind, vidual data signatures).
unproductive activities (for will get to see the data and managers can attempt both 3. Similarly, assure
example, arguing over who whether the data will be to maintain oversight and employees in written agree-
has responsibility for specific broken down individually to reduce employee concerns ments that emotional data
tasks). Having access to this or aggregated across groups. by doing the following: will be used only for specific
data might allow managers Such concerns are understand- 1. Be sensitive to em- business goals. For technolo-
to create a “heat map” indicat- able given that much of the ployee concerns. Prepare gies that rely on broad-stroke
ing where the problem is value will come from measur- your organization for using measures, such as webcam-
concentrated. ing and managing aspects ESTs through education and based emotion detection, data
of behavior that people are transparency. Explain how gathering and analysis should
Addressing unable (or perhaps unwilling) the tools can benefit employ- be directed toward highly
the Barriers to self-report. Even if all par- ees by reducing stress and specific and well-defined
As companies become inter- ties agree to common rules risks of burnout. One poten- outcomes.
ested in ESTs, they will need for consent, anonymity, and tially useful strategy, known As long as organizations
to address barriers related to personal well-being, there as BYOD, involves inviting operate responsibly, we believe
cost, complexity, and issues of are lingering issues. For employees to bring their employees will gradually

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FRONTIERS

How Emotion-Sensing
Technology Can Reshape
the Workplace
(Continued from page 9)
become comfortable with
the gathering and analysis of
physiological, behavioral, and
emotional data. Although this
won’t happen overnight,
several trends suggest that
trust can be built over time.
Millions of individuals already
use smart watches and fitness
devices like Apple Watches
and Fitbits, and many people
share their workout and nutri-
tion data openly on social
media. Social media itself has
conditioned us to accept and
even embrace new levels of
personal transparency. The
challenge will be to introduce
new devices and measures
into workplaces in a way that
empowers performance, miti-
gates privacy concerns, and [SOCIAL MEDIA ]
generally reassures employees
that the benefits are mutual. The Secret to Successful
Eoin Whelan (@eoin541) is a
lecturer in business informa-
Knowledge Seeding
tion systems at National
University of Ireland in Galway,
Ireland. Daniel McDuff
A sophisticated online user community will relieve companies
(@danmcduff) is an AI re- of huge support burdens. Building such a network begins with
searcher at Microsoft Corp.
in Redmond, Washington.
a smart approach to seeding it with expert knowledge.
Rob Gleasure (@robgleasure) BY PENG HUANG, ALI TAFTI, AND SUNIL MITHAS
is a lecturer in business infor-
mation systems at Cork
University Business School in
Cork, Ireland. Jan vom Brocke

O
(@janvombrocke) is the Hilti nline user communities can help harness the knowledge and collective wisdom of a
Endowed Chair of Business company’s customers and complementors around the globe. These networks can gather
Process Management and
input for new product development, reduce the cost of customer support, and facilitate
director of the University
of Liechtenstein’s Institute of the sharing of platform-related knowledge and practices. But how should companies best establish
Information Systems in Vaduz, and manage them?
Liechtenstein. Comment on
SAP SE, a leading enterprise software company with headquarters in Walldorf, Germany, was
this article at http://sloanreview
.mit.edu/x/59306. among the earliest companies to unlock the potential of social media to address the need for cus-
tomer engagement and support. Realizing that it could not keep up with the demand for customer
Reprint 59306. For ordering infor-
support through its traditional in-house channels, it established the SAP Community Network in
mation, see page 4. Copyright ©
Massachusetts Institute of Technology, 2003 to let partners, customers, and solution providers help one another. This virtual community
2018. All rights reserved. includes a network of well-defined online forums in which users can post questions on a wide range

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of topics related to the implementation, RELATED RESEARCH cumulative process that hinges on users’ do-
customization, and use of SAP’s software; . Huang, A. Tafti, and S. Mithas,
P main expertise and their ability to discover
“Platform Sponsor Investments
peer members can respond by providing and User Contributions in existing knowledge, recombine ideas shared
potential solutions. The network also Knowledge Communities: by peer members, conduct independent
The Role of Knowledge
offers expert blogs, a technical library, a Seeding,” MIS Quarterly 42, investigations and experiments, and find
no. 1 (March 2018): 213-240.
code-sharing gallery, e-learning catalogs, novel solutions. When the community
wikis, and other tools that support open sponsor makes knowledge investments to
communication between active members The Payoff From seed the community, users can relate that
of the community. Knowledge Seeding information to their own experiences and
Getting a peer-to-peer knowledge- SAP committed significant human recombine it with their existing knowledge
sharing platform off the ground is not resources to seeding knowledge in its to generate new ideas, increasing their
easy, however. Online support forums forums. More than 9,000 SAP employees capacity to make their own knowledge
have two distinct segments of community participated directly in forum discussions, contributions to the community.
members: those who seek product support and about 11% of all the resolved ques-
and those who provide it. Knowledge tions were answered by SAP employees. Returns on Knowledge
seekers are hesitant to ask questions if SAP’s knowledge-seeding strategy Seeding Vary Over Time
knowledge contributors are few and far be- worked well. We found a high correlation Knowledge seeding is valuable, but not all
tween, and knowledge contributors will not between its knowledge seeding and the such efforts are equally valuable. One key
sign up if there are not enough problems to growth of its community user base. More variable is timing. We find the amount of
solve. It is a classic chicken-or-egg challenge. importantly, we found that every question user knowledge contribution stimulated by
To address this, SAP adopted a strategy solved by SAP employees leads to an addi- knowledge seeding decreases as the com-
that involves what we call “knowledge tional 0.66 questions solved by community munity matures. (See “The Effect of
seeding” — in which a company asks users beyond their usual peer-to-peer Knowledge Seeding Over Time.”) The re-
employees to provide free technical sup- support activities. turns on the seeding of one SAP-solved
port by answering questions posted in We attribute these positive effects question fell dramatically from 1.32 user-
discussion forums. The high-quality of knowledge seeding to two factors. contributed solutions in 2004, the year the
content provided by SAP employees First, knowledge seeding helps to build community network was launched, to about
gave the forum the jump-start it needed, trust between community members and 0.68 in 2007, and to nearly zero by 2010.
attracting more users seeking solutions, the community sponsor, and therefore in- This suggests that platforms and other
which, in turn, enticed more knowledge creases community users’ inclination to companies are better off making large
contributors to get involved. contribute knowledge. By committing to investments up-front to kick-start the
Our study of SAP’s virtual community free technical support, the company community, and gradually reduce their in-
has helped to answer several critical ques- shows that it genuinely cares about the vestments as the community gains traction.
tions that almost all platform businesses well-being of its community
face. What is the payoff from the knowledge- members. For their part, THE EFFECT OF KNOWLEDGE
seeding strategy in terms of engaging community members view SEEDING OVER TIME
The amount of user knowledge contribution
ecosystem members and nurturing a this commitment as a signal
stimulated by knowledge seeding decreases
knowledge platform? More importantly, of the company’s integrity as the community matures.
how should companies allocate their limited and are therefore encouraged
Fraction of Questions Return on Seeding
seeding efforts over time and across geogra- to contribute knowledge to 100% 1.4
phies for optimal outcomes? Our analysis of the virtual community. Solved 1.2
80%
the history of the forum discussions in the Second, knowledge seeding by Users 1

SAP Community Network over a period of leads to an increase in commu- 60% 0.8

seven years generated several key insights. nity members’ capacity to 40% 0.6
Solved
(See “Related Research.”) While our research contribute knowledge. by SAP 0.4
20%
focused on platform ecosystems specifically, Generating new knowledge, 0.2

our findings are also applicable to online particularly in a community 0%


2004 2005 2006 2007 2008 2009 2010
0

user communities more broadly. context, is an incremental and Year

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FRONTIERS

The Secret to Successful Knowledge Seeding (Continued from page 11)


We attribute the variations in returns infrastructure, as measured by the num- virtual communities: Seed knowledge
over time to the role played by the lead ber of secure internet servers per million strategically, focus on lead users, and
users in the knowledge community. Lead people. (See “The Return on Knowledge consider IT infrastructure limitations.
users distinguish themselves in several re- Seeding Across Countries.”) Returns on 1. Seed content to ignite creativity
spects: They tend to be early adopters of a seeding varied dramatically, ranging from among users. Knowledge seeding is partic-
product or service; they are more likely to a low of 0.28 user-contributed solutions ularly effective when companies are
innovate; and they experience needs in countries with the lowest level of IT in- introducing new products or technologies
ahead of the mass market. They usually frastructure to 1.29 in countries with the that have significant learning curves. By pro-
have up-to-date knowledge related to the most sophisticated IT infrastructure. viding free early support, companies help
practice in question and thus are more We argue this geographic difference is users overcome learning hurdles and accel-
likely and able to contribute knowledge. driven by variations in IT-enabled absorptive erate community engagement in building a
In its early stages, a knowledge commu- capacity: the ability to identify, assimilate, knowledge repository. While we focused
nity attracts a disproportionately here on free technical support, other re-
large fraction of lead users. THE RETURN ON KNOWLEDGE sources are equally important, particularly
Knowledge seeding is thus likely to SEEDING ACROSS COUNTRIES when the underlying technology requires
Knowledge seeding yields higher returns in
stimulate stronger responses from high levels of customization and adaptation.
countries with higher levels of IT infrastructure.
them and generate a higher rate of For example, in the case of software plat-
Return on Seeding
return. However, when the com- 1.4 forms, providing detailed documentation
munity reaches a more mature 1.2 on the application programming interfaces
phase, it contains a smaller frac- 1 (APIs) in the form of tutorials or sharing
tion of lead users and a larger 0.8 source code of sample programs can
fraction of late adopters, who have 0.6 help ignite creativity among users. Such
0.4
lower contribution capacities. This knowledge seeding encourages the user
0.2
leads to reduced average user community to share its experience and
0
knowledge contribution in re- 1% 25% 50% 75% 99% knowledge by enhancing members’ willing-
sponse to knowledge seeding. The Percentile Ranking of Country IT Infrastructure ness and capacity to contribute knowledge.
value of knowledge seeding in the 2. Implement a contribution recogni-
mature phase may also be lower because transform, and apply external knowledge. A tion program to identify lead users.
many answers already have been provided country’s IT infrastructure is an important Companies should pay primary attention
in the earlier phases. determinant of the collective absorptive to lead users, who tend to have up-to-date
capacity of its community user population; knowledge about the products and are the
Returns on Knowledge the user population from a country with a most active contributors. Implementing a
Seeding Vary by Geography higher level of IT infrastructure is better at contribution recognition program can
Just as timing is a key factor in gaining the recognizing the value of new knowledge quantify community members’ knowledge
highest returns on knowledge seeding, so seeding by SAP employees and then assimi- contributions and help identify lead users.
is location: The value of knowledge seed- lating it and putting it to productive use. A company can then target lead users stra-
ing is not uniform across geographies. For Singapore’s IT infrastructure ranks above tegically by addressing their most pressing
example, although Singapore is a small 88%. The knowledge bases of countries questions and issues, and it can rely on
country that didn’t receive a huge amount with higher levels of IT infrastructure their support to help the larger commu-
of SAP attention in its knowledge seeding, grow at a faster rate when new knowledge nity. While SAP adopted a program that
users from Singapore contributed a great is injected, resulting in a higher knowledge rewards contributions with virtual points,
deal of knowledge themselves (Singapore contribution capacity of community users badges, and medals, other platforms have
ranked No. 9 among all the countries for from those countries. used monetary rewards: For example,
its user knowledge contribution). technology company Google Inc. used a
Upon further investigation, we found Managing Value Cocreation seeding strategy by giving $10 million in
that SAP’s knowledge seeding yielded Through Knowledge Seeding prizes to developers of the best apps in
higher returns in countries with higher Our research highlights at least three im- several categories in the early stages of its
levels of information technology (IT) portant lessons for companies developing Android platform.

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3. Consider IT infrastructure across


geographies. When expanding interna-
tionally, especially in less-developed
countries, companies should be aware of
IT infrastructure limitations that might
hinder the ability of user groups in some Research that matters
countries to absorb the related knowledge.
Companies should also realize that provid- WEATHERHEAD’S DOCTOR OF MANAGEMENT (DM) PROGRAMS
ing free technical support to users in these
countries is more costly because it stimu-
lates less user cocreated value. In some MY DOCTORAL RESEARCH JOURNEY AT
cases, there may be opportunities to work WEATHERHEAD WAS TRANSFORMATIVE.
with local policymakers to increase public-
sector investments in country-level IT THE REAL WORLD EXPERIENCE IN
infrastructure. This would enable better
INFORMATION SYSTEMS IMPLEMENTATION
capitalization on knowledge investments
by platforms, which in turn can produce AND RIGOROUS EMPIRICAL RESEARCH
positive spillover benefits in these econo-
mies. The launch of Google Station —
WAS SIMPLY ILLUMINATING. THAT, PAIRED
a project to develop free public Wi-Fi WITH THE COLLEGIAL INTERACTION WITH
hotspots in emerging markets such as
Indonesia through partnerships with
WORLD-CLASS FACULTY, WHO EMBRACE
local railway authorities — is an excellent THE NUANCES BETWEEN THE
example of such initiatives.
Details of particular initiatives aside, ACADEMIC AND PRACTITIONER
successful knowledge-seeding strategies SPACE, HAS BEEN IMPACTFUL
share several traits in common in spurring
the development of virtuous two-sided TO MY CAREER.
markets for problem-solving and cus-
tomer engagement. Companies are better
off making seeding investments aligned to >> AMOS MARK ALLIE
the launch of new products and services CONSULTING DIRECTOR
by focusing on lead users and — initially — KERRY GROUP INNOVATION
RESEARCH
by focusing on geographies with better
INDIANAPOLIS, IN
IT infrastructures.

Peng Huang (@umdhuang) is an assistant


professor at the Robert H. Smith School
of Business at the University of Maryland,
College Park. Ali Tafti (@atafti) is an associ- Learn how working professionals
ate professor at the College of Business have the opportunity to earn the
at the University of Illinois at Chicago. DM or PhD doctorate degree.
Sunil Mithas (@DrSunilMithas) is the
Ralph J. Tyser Professor of Information
Systems at the Robert H. Smith School of
Business at the University of Maryland,
College Park. Comment on this article at
http://sloanreview.mit.edu/x/59324.

Reprint 59324. For ordering information, see page 4. weatherhead.case.edu/DM


Copyright © Massachusetts Institute of Technology,
2018. All rights reserved.

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FRONTIERS

You don’t need a digital strategy. You need


a better strategy, enabled by digital.

Better Strategy, Enabled by


Digital: Real-World Examples
This idea of focusing on transformation
instead of technology extends to indus-
tries ranging from food to mining. Here
are some examples of what I mean:
• In the paint industry, Asian Paints
Ltd. transformed itself from a maker of
coatings in 13 regions of India to a pro-
vider of coatings, painting services, design
services, and home renovations in 17
countries. The technology the company’s
leaders used wasn’t rocket science. The or-
ganization’s transformation was powered
by Enterprise Resource Planning (ERP)
software, call centers, mobile phones and
tablets, analytics, and some machine
learning and autonomous manufacturing.
[STRATEGY ] More important was strong leadership

Your Company Doesn’t that regularly reimagined how the com-


pany should work and continuously drove

Need a Digital Strategy for new business opportunities.


• In the banking industry, many compa-
nies are using chatbots — software that is
Leaders who give outsized focus to applying capable of engaging in routine text-based
new technologies risk steering their companies conversation — to make customer service
more efficient. Executives at DBS Bank Ltd.
into dangerous waters.
took it a step further. After improving the
BY GEORGE WESTERMAN
company’s processes, profitability, and cus-
tomer satisfaction in high-cost Singapore,

I
t seems that the whole business world technology makes it possible. E-commerce is these leaders turned their focus to low-cost
is talking about digital transformation not about the internet — it’s about selling markets. Building on its existing knowledge
these days — and it’s pretty clear that differently. Analytics is not about databases and systems, plus chatbots and other tech-
most are missing the point. and machine learning techniques — it’s nologies, DBS has now entered India with a
As sexy as it is to speculate about new about understanding customers better, mobile-phone-based banking model that re-
technologies such as AI, robots, and the or optimizing maintenance processes, or quires no human intervention. This model
internet of things (IoT), the focus on helping doctors diagnose cancer more can make money from small accounts that
technology can steer the conversation in accurately. IoT is not about RFID tags — other banks would never find profitable
a dangerous direction, because when it it’s about radically synchronizing enough to accept. While thinking about chat-
comes to digital transformation, digital operations or changing business models. bots led many bankers to focus on reducing
is not the answer. Transformation is. In the digital world, a strategic focus costs in existing channels, DBS’s focus on de-
Technology doesn’t provide value to a on digital sends the wrong message. veloping a model for low-cost new markets
business. It never has (except for technol- Creating a “digital strategy” can focus the made chatbots, along with other technologies
ogy in products). Instead, technology’s value organization in ways that don’t capture and significant organizational rethinking,
comes from doing business differently because the true value of digital transformation. into a much greater opportunity.

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• In the shipbuilding industry, while Focusing on the technology can direct aspi- leaders think of digital transformation
many companies use virtual reality (VR) rations toward what technology can do, not as a project but as a capability. They
technology to help designers envision rather than what a transformed business create a transformative vision, engage
complex product designs, leaders at should look like. A mobile strategy often their people in that vision, and then gov-
Newport News Shipbuilding, a division of ends with the mobile app; it can fail to con- ern strongly to chart a course across a
Huntington Ingalls Industries Inc., used sider changes that are not enabled by mobile. whole portfolio of digital transformation
the technology in other strategic ways. In The result is incremental thinking that efforts — some planned and some yet to
an effort to speed the development of large misses much bigger opportunities across be discovered. The benefit of focusing
U.S. Navy aircraft carriers, the Virginia- silos. The most valuable transformations, on transformation instead of digital is that
based manufacturer had invested in digital instead, come from changing the business it highlights the fundamental role of lead-
design tools and new product designs. But through a range of technologies and man- ership and organizational capabilities in
coordinating and motivating thousands of agement interventions. A customer intimacy creating the real business value from tech-
workers remained a challenge. It was tough strategy, for instance, uses mobile along with nological innovations.
for employees to understand how their other digital technologies to constantly in- As an engineer turned manager turned
work fit into the broader story of building crease personalization, engagement, and management researcher, I love technol-
a giant aircraft carrier or to recognize how satisfaction. It finds uses for technologies ogy. I’ve spent my life making, using, and
their work interacted with that of others. well beyond mobile and can include emerg- studying some of the greatest innovations
VR became a useful tool in the company’s ing technologies as they arise. of the past few decades. I have studied
broader effort to transform the work pro- Don’t push the envelope too far, too digital transformation for the past seven
cess: Now workers can don VR glasses to fast. Before adopting self-driving cars and years, starting before it was even a thing.
see what is behind a wall they are drilling trucks, or robotized call centers, companies I would never tell a company to avoid
or how a new bracket should look when can still find a tremendous amount of new technologies, and I would never tell
mounted. They get warnings when a part value in transforming business processes managers to ignore fast-emerging digital
is too heavy to lift without special equip- through data-informed decisions, mobile innovations. But I will continue to warn
ment, and instructions on the correct collaboration, and even ERP. Looking too managers when I see a digital transfor-
sequence for installing components. And far forward toward advanced digital inno- mation conversation going in the wrong
they can always see where their part of the vations can make these more mundane direction.
work fits into the bigger project that they technologies less palatable. While transfor- Technology helps you do business
are collectively building. VR by itself is an mational long-term vision is essential, differently, but the right strategy is not
interesting digital tool. VR as part of a business leaders will leave easy money on technology-focused. It incorporates the
broader work transformation strategy is the table if they ignore near-term improve- right technologies for the right jobs. It
much more powerful. ments in the quest for risky opportunities uses high tech where those capabilities
that may not be ready to pay off yet. are important and low tech where a simple
How to Keep the Focus Don’t ask your tech leaders to drive solution can do the job. And when technol-
on Transformation, transformation alone. “It’s technology, so it ogy is done right, it can help a company
Not Technology must be the job of the CIO/IT manager.” This launch wave after wave of business innova-
In industries ranging from hospitality to kind of thinking — abdicating the task of tion — innovation that becomes possible
chainsaw manufacturing, great leaders are transforming the company through tech- as new technologies become real.
transforming their businesses through nology — is ill-conceived. Even the best IT
technology. They focus on strategic trans- leaders won’t be able to transform a busi- George Westerman is a principal research
scientist with the MIT Initiative on the Digital
formation, not technology adoption, and ness, or parts of the business, if they don’t Economy and coauthor of the award-winning
they get more powerful results. They keep run that part of the business. While I’ve seen book Leading Digital: Turning Technology
Into Business Transformation, published by
four things in mind to avoid common many successful digital transformations led
Harvard Business Review Press in 2014.
pitfalls that often come from taking a by great tech leaders, the transformation He tweets @gwesterman. Comment on this
technology focus: comes from business leaders working with article at http://sloanreview.mit.edu/x/59319.
Get away from silo thinking. The mobile them, not asking them to do it alone. Reprint 59319. For ordering information, see page 4.
strategy. The big data strategy. The VR Build essential leadership capabilities, Copyright © Massachusetts Institute of Technology,
strategy. These are silo ways of thinking. not just technical ones. The top digital 2018. All rights reserved.

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FRONTIERS

[INFORMATION TECHNOLOGY ]

Capturing Value From Free Digital Goods


Companies can improve productivity by tapping into the market of free digital goods,
such as open source software, and by paying their own employees to contribute.
BY FRANK NAGLE

S
cientists refer to por- Management Science titled
tions of the universe “Open Source Software and
that they know exist Firm Productivity,” I measured
but can’t easily measure as the productivity impact of
“dark matter.” As direct mea- managers’ decisions to use free
surement is difficult, they study and open source software by
the indirect gravitational effects examining data on technology
or galaxy rotation speeds to usage from 2000 to 2009 at
understand the phenomenon. more than 1,500 U.S. compa-
Similarly, in the digital econ- nies in industries such as
omy a broad range of “dark” manufacturing, technology,
elements are free and essentially and retail.
limitless, and traditional tools The results showed an im-
can’t measure them. portant dichotomy: Companies
One of the best-known that were heavy IT users or in
examples of this phenomenon daunting. Managers worry played an increasingly impor- IT-producing industries (such
is Wikipedia. People use about the quality and availability tant role at companies. More as computer manufacturing,
Wikipedia at no charge, and the of product support, and about than 60% of web servers run software publishing, and data
content is created primarily by security and intellectual prop- OSS, and many of the technol- processing) saw an immediate
contributions from volunteers. erty issues. And there are serious ogies used for big data analytics positive impact on productiv-
Because no money changes questions about who’s responsi- are open source. In recent ity; other companies showed
hands (except for donations to ble if or when something goes studies, I have found that using no productivity increases in
help pay for technical infra- wrong. However, in my research OSS and contributing to its the year of adoption and only
structure and office staff), I’ve found that companies have creation allows companies to small increases later. For IT
Wikipedia has almost no direct opportunities to capture sub- capture value more efficiently. producers, an increase in the
impact on gross domestic stantial value by using digital amount of free OSS used at
product (GDP). Moreover, be- goods created by external com- Effects on Productivity There the company led to a moder-
cause Wikipedia has replaced munities and even greater value has been a long-running debate ate, but significant, increase in
physical and digital encyclope- by paying their employees to about whether OSS truly saves value-added productivity. The
dias that people paid for, it has give back and help build such companies money. Although results were similar for heavy
likely had a negative impact on goods, even if competitors are the software is free, it has limited IT users. The positive impact
GDP. Nevertheless, Wikipedia able to use them for free. official support and can re- on productivity from using
provides significant value for Consider open source soft- quire specialized technical OSS was larger for smaller
consumers, even if its economic ware (OSS), which is produced knowledge to implement. companies, for which capital
worth is difficult to measure. through crowdsourcing, is gen- However, until this point, the availability was apt to be an
For companies, tapping erally free, and is critical to the productivity impact indepen- issue. In the paper, I argue that
into a faceless crowd for con- digital economy. Over the past dent of any cost savings has these benefits arise from both
tributions to their innovation decade, OSS, long considered gone unexplored. For my the cost savings associated
or production process can be the purview of geeks, has forthcoming article in with OSS and the ability of

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the company to tap into the might seem counterintuitive, New from University
collective wisdom of the crowd. evidence suggests that contrib- of Toronto Press
uting to public goods teaches
Learning by Contributing In companies how to capture value
addition to being consumers of by using them more effectively
The Internet Trap
Five Costs of Living Online
OSS, some companies support than those competitors that
by Ashesh Mukherjee
its creation — even paying em- don’t contribute. This is espe-
The Internet Trap provides a
ployees to contribute to it. In cially likely with regard to OSS, new perspective on the dark
another forthcoming article (in where contributors receive feed- side of the internet, and gives
readers the tools to become
Organization Science) titled back from the crowd, much of it
smart users of the internet.
“Learning by Contributing: from people who have expertise
Gaining Competitive Advantage in that piece of OSS.
Through Contribution to To explore how this works,
Crowdsourced Public Goods,” I paired the technology usage
I look at the impact of this type data from a subset of companies
of support in practice. Although in the Management Science study
it has long been argued (by with data from the Linux Working in a
Michael Porter, Jay Barney, and Foundation on code contribu- Multicultural World
A Guide to Developing
others) that a company’s com- tions to Linux, the world’s largest
Intercultural Competence
petitive advantage is tied to its OSS project. The results show
by Luciara Nardon
unique resources or capabilities, that contributing companies
In Working in a Multicultural
as the economy becomes more were able to capture up to 100% World, Nardon offers a
information-based, companies more value from usage of OSS comprehensive framework for
need to take greater advantage than their noncontributing understanding intercultural
interactions and developing
of free digital goods. Given that peers, and that higher levels of skills for successful intercultural
such goods are available to employee contribution led to situations.
anyone, it’s incumbent upon greater productivity. The bene-
companies to find ways to use fits came primarily from content
them strategically as inputs contributions, where contribu- New in paperback
into their innovation and tors wrote the code, as opposed
The Last Mile
production processes. to editorial contributions, where Creating Social and Economic
Although paying one’s em- contributors approved code Value from Behavioral Insights
ployees to create a good that written by others. This seems by Dilip Soman
competitors can use for free logical: Editorial contributions The Last Mile takes a deep dive
tend to come from more-senior into the psychology of choice,
money, and time and presents
members who already have a
practical advice on how
RELATED great deal of experience and have behavioral science lessons can
RESEARCH be applied to business, retail,
less to learn than newcomers.

F. Nagle, “Open and government.
Source Software and These findings have impor-
Firm Productivity,”
Management Sci- tant implications for managers
ence, forthcoming. making technology-related de-

F. Nagle, “Learning
by Contributing,”
cisions within their enterprises.
Organization Sci- It’s likely that companies in
ence, forthcoming.
IT-producing industries and

S. Greenstein and
F. Nagle, “Digital companies that are heavy IT
Dark Matter and the
Economic Contribu- users already have assets, such as
tion of Apache,” an IT labor force and IT infra- utorontopress.com
Research Policy 43,
No. 4 (2014): 623-631. structure, that will allow them to

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FRONTIERS

Capturing Value From Free Digital


Goods (Continued from page 17)

realize productive value from


implementing OSS. Other
companies may benefit as well,
but their productivity boost
will depend on how quickly
they can develop the ability
to extract value. Given that
small companies appear to
derive bigger benefits from
using OSS, large companies
may want to evaluate the
potential benefits carefully
before changing existing IT
infrastructure.
The advantages of contribut-
ing to the creation of OSS are
clear. Odd as it may seem to pay
employees to create software
that competitors can use for
free, doing so enables companies
to add to their technological [OPINION ]
capabilities and gain an advan-
tage. Companies that support
crowdsourcing activities are
CIOs and the Future of IT
likely to benefit from using It’s time for CIOs to take charge of both back office and
crowdsourcing communities to business technology, leading with a customer-driven mindset.
promote innovative ideas that BY GEORGE F. COLONY
feed into the production pro-
cess, potentially leading to

T
further competitive advantage here’s an alarming digital divide within many companies. Marketers are developing nimble
over their rivals. In addition, software to give customers an engaging, personalized experience, while information tech-
supporting crowdsourcing nology (IT) departments remain focused on the legacy infrastructure. The front and back
activities also contributes to ends aren’t working together, resulting in appealing websites and apps that don’t quite deliver.
societal welfare and helps soci- We’ve arrived at this misalignment for understandable reasons. Previously, most chief infor-
ety progress to the next stage mation officers (CIOs) were hired to digitize and bring order to companies’ internal systems
of the digital revolution. and processes. They saw websites as marketing channels and were happy to let chief marketing
officers (CMOs) oversee that province of technology. They had, and still have, plenty to do just
Frank Nagle (@frank_nagle) to keep internal operations running smoothly. Marketers soon got into the habit of developing
is an assistant professor of
strategy at the University not just content, but also software programs to better reach and interact with customers. But
of Southern California’s now that websites and apps are becoming cornerstones of the business, the stakes are too high
Marshall School of Business.
to allow this division to continue. The two sides of IT need to come together, driven by cus-
Comment on this article
at http://sloanreview.mit tomer needs.
.edu/x/59320. It’s time to integrate. CIOs need to oversee all of IT — in close collaboration with marketers
and the business units. Only then can companies deliver digital experiences that win, serve, and
Reprint 59320. For ordering infor-
retain increasingly demanding customers.
mation, see page 4. Copyright ©
Massachusetts Institute of Technology, It won’t be easy to connect back-office infrastructure with customer-facing programs. Each area
2018. All rights reserved. calls for different habits and skill sets. But the good news is that we’ve found many CIOs who’ve

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risen to the occasion. By overseeing both agendas, with a customer- These rising expectations are also erasing the line between BT and
oriented mindset, they can ensure that these systems evolve together back office. Satisfying and even delighting customers has become such
to support the corporate strategy. That’s the only way for companies an imperative that leaders are rethinking everything their companies
to thrive in the emerging “age of the customer.” do. Even the most operational areas, such as warehouse management
and human resource systems, are starting to optimize less toward effi-
Back Office vs. Business Technology ciency and more toward customer experience and revenue. Eventually
The two kinds of software systems — call them “back office” most back-office systems will have to reorient to serve as the staging
and “business technology” — have very different implications. platform for BT. But that can’t happen as long as separate executives,
Back office involves big, complicated, expensive combinations of with these different mindsets, manage the two areas.
hardware and software, epitomized by the enterprise resource
planning systems that integrate control and accounting functions. Why CIOs Should Oversee BT
The goal here has always been reliability and affordability, sup- Many companies are aware of that general problem. And because
ported by careful planning. It doesn’t need to be flashy; it just has they worry that CIOs will be hindered by their back-office mindset,
to work all the time and not bust your budget. And since the only many of them have looked elsewhere for an integration leader.
users are captive employees, usability is secondary and boring is They rely on the CMO, or people in newer roles, such as the chief
fine. So we’ve bred a generation of control-minded CIOs who data or digital officer (CDO), or even the chief of marketing tech-
excel at stability and efficiency — and have a limited sense of the nology. These assignments can be useful in jump-starting an IT
company’s customers or strategy. organization that’s slow to embrace BT, but they’re a dangerous
Business technology (BT), on the other hand, focuses on mar- long-term structural solution.
keting and selling to customers, which puts a premium on user If the CIO isn’t leading the integration, it’s a recipe for failure.
experience: Boring is dangerous. With customer expectations con- Dueling tech centers end up fighting over data, yielding incom-
tinually rising, BT’s goal is to be flexible and responsive. It aims for plete systems of engagement. The CMO builds a beautiful app,
a minimally viable product as it learns from the marketplace, and it but the CIO hasn’t made sure the underlying databases are con-
tolerates occasional service disruptions. BT improves not with figured to support it. Customers eventually give up and seek a
planning but with continual experimentation and discovery- better experience with competitors. After all, almost every cus-
driven innovation. Most important, it’s about generating revenue. tomer interaction must ultimately connect to the company’s
(See “How Back Office and Business Technology Differ.”) underlying processes and systems of record.
Back office says, “We will build it, and you (the employee) will Back office and BT must work closely together, led by the CIO.
use it.” BT says, “We will sense and, in some cases, anticipate what While a CDO may be in charge of the data generated by the com-
you (the customer) want, and we will build it.” pany’s systems, that’s just the end product. It’s the CIOs who
Forrester analysts estimate that back office still captures two-thirds build and control the databases of record and the contextual data
of the $3 trillion technology spending worldwide. But the growth is that is the raw material of customer experiences. Only they have
with BT at 8% annually, compared
with only 3% for back office.1 HOW BACK OFFICE AND BUSINESS TECHNOLOGY DIFFER
Meanwhile the back-office trend The two mindsets for managing technology play out quite differently across the
is to outsource, virtualize, and shift CIO’s responsibilities.

to the cloud, which will free up addi- BACK OFFICE BT


tional funding for BT. With Apple, Who Employees Customers
Amazon.com, and Google raising Policy coerces practice Value entices engagement
customer expectations, most com- What Business processes Customer patterns
panies — business to business (B2B) Defined by legal conventions Driven by customer data
as well as business to consumer Where End-to-end control Open connections
(B2C) — will have little choice An emphasis on security API-based services
but to sharpen their game in BT. How Risk reduction Value generation and speed
Consumers increasingly purchase Waterfall methods limit exposure Agile methods cocreate options

experiences, not products. User When Asset-based business model Services-oriented business model
Governance by fiat Governance by outcomes
experience will drive competitive
advantage. SOURCE: FORRESTER

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FRONTIERS

CIOs and the Future of IT (Continued from page 19)


the deep architectural knowledge and technical reach to bring 100 CIOs in the past year and studied hundreds more from a dis-
these systems together. To truly manage data for maximum tance. We’ve assessed their companies using Forrester’s Customer
commercial benefit, one needs authority over the foundational Experience Index (CX), a proxy for strong BT. If legacy CIOs
systems themselves — which only the CIO has. weren’t up to the job, then one would expect companies with high
That integration is especially important now, to prevent gaps CX scores to have shorter-serving CIOs than the lower-scoring
that compromise cybersecurity. Marketers want to make cus- companies. But on average, the opposite is true. Successful organi-
tomer interactions as easy and informative as possible, but that zations have pivoted their CIOs toward the BT agenda and given
leaves companies vulnerable to attacks. In the wake of massive them more power. It doesn’t require a housecleaning to construct
leaks that undermine customer trust, the CIO needs full authority successful and customer-pleasing technologies — many legacy
to ensure a tight interface. CIOs can make the transition.
Some companies have put the CIO in charge of both areas, Digging deeper into the CIO interviews and CX results, we
but without enough integration. In “bimodal IT,” the CIO over- found a few more imperatives for leaders:
sees two separate groups: one that builds up BT and another that Remember your external customers. It’s easy for legacy CIOs
maintains back-office systems on a limited budget. The idea to forget about the “end” customers. They get so caught up in
makes intuitive sense, but it creates a two-class system. The back- serving internal customers, ensuring reliability and efficiency,
office group feels marginalized and reduces cooperation with its that they forget the actual purpose of the business: creating and
BT counterparts. Infrastructure is gradually starved of invest- satisfying the paying customers outside.
ment and talent, and it fails to evolve with and support BT. And New performance metrics that reflect external service rather
because one is moving quickly and the other is plodding along, than technology speeds and feeds can help. Jeffrey Henderson,
it’s akin to trying to win a race on a bicycle with a round front executive vice president and CIO of high-scoring TD Bank
wheel and a square rear wheel. Group, says he’s learned to “measure technology outages not
The best approach is to keep BT and back office within the in terms of time but in terms of customer impact: How many
CIO’s purview, but with a new perspective. Instead of seeing them customers were affected and how?” He and his IT colleagues are
as separate areas, CIOs can look ahead to their convergence and joining with business unit leaders and the CMO in continuous
work on developing them together. The mindset of customer- discussions with live customers.
driven BT will eventually pervade back office, albeit tempered by From there, these newly enlightened CIOs can develop metrics
the practical demands of maintaining legacy information systems. that connect back office and BT directly to business success. Janet
Zelenka, until recently CIO (and now CFO) at Essendant Inc., a
A Road Map for Escaping Back-Office Gravity large wholesale office supplier based in Deerfield, Illinois, had her
The solution, therefore, is for CIOs to lead the integration, but teams listen to customer service calls and watch customers interact
with a BT mindset. This is not the first argument for combining with the company’s website and mobile apps. The goal was to build
the technologies equally under the CIO.2 their appreciation of customer journeys, reveal the pain points, and
But those calls ignore the mindset differences that prevent suggest where technology can create a more compelling experience.
proper integration. It isn’t enough to give CIOs a broad mandate. Embrace agile development. BT is not just a choice; it also re-
Nor is it about hiring the right person. CIOs need new kinds of quires skills. Especially important is agile development — building
organizational support. software quickly and collaboratively in response to the fast-moving
In order to escape what could be called “back-office gravity,” customer. CEOs can give “permission” here by de-emphasizing
companies may be inclined to instate a new leader without the bi- back-office perfection and by valuing speed. Leaders must accept
ases of a conventional CIO background. While understandable, in and welcome a modicum of chaos to achieve the agility required
most cases that would be a mistake. For one thing, digital manage- in the BT world.
rial talent is already too scarce to expect a new round of hiring. To take an extreme example, Capital One Financial Corp. sent
More important, the looming convergence of the two technol- CIO Rob Alexander to training in design thinking. A method for
ogy agendas means that joint management is not as daunting as it boosting creativity to meet the needs of end users, design thinking
sounds. Just think of how chief financial officers have increas- helped his group make better use of the bank’s data and analytics
ingly gone beyond budgeting and financial control and taken on on their customers. From there, they built Capital One Wallet, the
relations with activist investors. As long as they’re given expanded first banking app with Android tap-to-pay, in under nine months.
structural support, existing CIOs can make the leap. Engage in strategy discussions. Many CIOs, if they’re even
How do I know this? My colleagues and I have talked to over on the senior team, play a secondary role. They react to others’

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FRONTIERS

CIOs and the Future of IT (Continued from page 20)


proposals, defend their budget requests, and explain when and responsible for making everything work. Business units can pro-
why their systems go wrong. But already we’re finding many pose applications and even take the lead in developing them, but
companies, not just those with high CX scores, expecting more CIOs have to be closely involved to ensure proper integration and
from the CIO — particularly around strategy. strategic fit.
Henderson at TD Bank Group says that, in the past, he let others The buck stops with them, and that’s a powerful inducement
handle the “what” while he and the tech team focused on the to change. Mark Boxer, executive vice president and global CIO
“how.” He focused on new technologies and how these would af- of Cigna Corp., says, “My role is at an articulation point. The
fect IT operations. But lately, he’s been chartered to drive change customer is now at the center of all we do. We are no longer tech
throughout the company and help the senior team identify the managers; we are general managers. Think of us as the prime
future state of the customer experience. He’s also deciding contractor managing many subcontractors, with myself as the
whether certain investments are truly strategic and differentiat- chief integration officer. I do both agendas by giving the company
ing. IT is no longer just working for the business. Now Henderson what it needs at the right time: Sometimes it’s customers, some-
and his colleagues are working with the business.3 times infrastructure, and at all times with cybersecurity as a
Establish a tight partnership with the CMO. High-scoring primary consideration.”
companies also engender close collaboration between the CIO and Each of these steps by themselves may not free CIOs from
the CMO. That’s because CIOs rely on the customer knowledge the gravitational pull of back office. But together they will drive
in marketing and the operating units. Effective CIOs and CMOs CIOs to shift their mindset and embrace the future of corporate
often reside in the same office, and their average physical distance technology: BT.
was half of what we found in the low-scoring CIOs. They also
share one-third to one-half of their performance metrics. And The Existential Challenge
CMOs are willing to collaborate: A recent Forrester survey to Companies and CIOs
suggested that half of them see their relationship with the CIO CIOs have adeptly navigated a number of revolutions over the
as crucial, up from 30% five years ago.4 last 30 years, from mainframes to personal computers to the
In many companies, we observe a troika working together on cloud. The age of the customer represents a very different chal-
business technology: the CIO, the CMO, and the relevant business lenge, and for the first time requires substantial support from the
head. The more the CIO collaborates with colleagues outside the IT rest of the C-suite. And as they work to change their companies,
organization, the more likely he or she will develop a BT mindset. they must undertake their own digital journeys.
For General Electric Co. CIO Jim Fowler, that mindset has come This critical transformation is an extraordinary moment for
directly from his close ties with CMO Linda Boff. Their partner- current CIOs. As Zack Hicks, senior vice president and CIO of
ship has taught him to go beyond better user interfaces and to Toyota Motor North America Inc., observes: “There has never
work on helping customers become more profitable. His team is been a better opportunity to have a seat at the table.”
now busy developing digital solutions for improved service and
lower costs for buyers of GE’s products. They “start with customer George F. Colony is founder, chairman, and CEO of Forrester
(@forrester) in Cambridge, Massachusetts. He tweets @gcolony.
outcomes, not products,” he says, and work jointly to teach busi- Comment on this article at http://sloanreview.mit.edu/x/59215.
ness leaders the power that technology has to change their markets.
Create full oversight for all BT. Many companies have REFERENCES
“shadow IT” left over from when business leaders developed BT 1. A. Bartels, “Midyear Global Tech Market Outlook for 2017 to 2018,”
for their own units. These programs often connect poorly with Forrester Report, Sept. 25, 2017, www.forrester.com.
infrastructure and prevent the senior team from having a unified 2. “Who’s Really Responsible for Technology?” MIT Sloan CIO
Symposium, June 13, 2017, www.youtube.com.
view of all the company’s customers. It’s essential to move over-
sight of all digital technology to the CIO, including cloud-based 3. S. Schick, “TD Bank’s CIO Discusses His Approach to Transforming
the Customer Experience,” IT World Canada, Nov. 4, 2015,
applications. That doesn’t mean CIOs become the czars of BT, www.itworldcanada.com.
but it does ensure the best possible integration. 4. See also K. Whitler, D.E. Boyd, and N. Morgan, “The Power
This universal responsibility for BT by itself can prompt many Partnership: CMO & CIO,” Harvard Business Review 95, no. 4
CIOs to take it seriously. On a practical basis, that means gradually (July-August 2017): 55.

harmonizing the more innovative programs with corporate systems.


Reprint 59215. For ordering information, see page 4. Copyright ©
Unlike at Capital One, many high-scoring CIOs outsource Massachusetts Institute of Technology, 2018. All rights reserved. This article
much of the development of their BT. But they know they’re was originally published online. It has been adapted for print.

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C O V E R S T O R Y : S T R AT E G I C A G I L I T Y

Results
How can leaders translate the complexity of strategy into guidelines
that are simple and flexible enough to execute? Rather than trying to
boil down the strategy to a pithy statement, it’s better to develop a
small set of priorities that everyone gets behind to produce results.
BY DONALD SULL, STEFANO TURCONI, CHARLES SULL, AND JAMES YODER

STRATEGY, AT ITS HEART, is about choice. Few companies succeed by making a single THE LEADING
QUESTION
big bet. Most winning strategies are based on a bundle of choices about, among other things, the How do you
customers to serve, the scope of the business, product offerings, and capabilities that interact with translate
one another to help a company make money.1 Consider Trader Joe’s Co., the U.S. grocery retailer strategy for
based in Monrovia, California. It focuses on educated, health-conscious customers, which influ- effective
ences where it locates its stores, which products it stocks, and the type of employees it hires. The execution?
company’s choices reinforce one another to increase customers’ willingness to pay, reduce costs, FINDINGS
and thereby drive profitability. The dense interdependencies among the choices prevent rivals 
Resist the urge to
from imitating Trader Joe’s winning strategy. Piecemeal imitation of a few elements — for exam- distill strategy to
a single statement.
ple, the store format or the focus on private labels — wouldn’t work. Instead, a rival would need to Articulate a
replicate the full set of interconnected choices. few actions the
company must
Strategy is inherently complex. We see this in the thick reports and complex frameworks that take to execute its
strategy over the
companies use to describe their strategic choices and how these connect with one another. next three years.
Describing a strategy favors complexity, but executing it requires simplicity. To influence day-to- 
Focus on priorities
day activities, strategies need to be simple enough for leaders at every level of the organization to that are forward-
looking and
understand, communicate, and remember — a strategy that gathers dust on a shelf is nothing measurable.

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ILLUSTRATION BY DAN PAGE SPRING 2018 MIT SLOAN MANAGEMENT REVIEW 25


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C O V E R S T O R Y : S T R AT E G I C A G I L I T Y

more than an expensive bookend. A strategy for ex- the past at successful companies such as Southwest
ecution must provide concrete guidance while Airlines Co. or Ikea.
leaving managers with enough flexibility to seize We have learned, however, that this approach
novel opportunities, mitigate unexpected risks, works best with companies that have relatively
and adapt to local conditions. The act of codifying straightforward strategies to begin with. Part of our
past choices into an explicit strategy, moreover, re- research on strategy execution included a four-year
inforces historical commitments and locks a action research project in which we worked with top
company into inertia.2 Complex strategies, particu- management teams of eight to 12 companies per
larly those that include detailed plans, tend to be year in formulating strategies for execution.4 The
long on guidance but short on flexibility. teams used a framework that boiled down their
company’s strategy to three elements: target cus-
Strategy Made Simple tomers (who), the value proposition (what), and
How can leaders translate the complexity of strategy how the company would deliver, sell, and distribute
into something simple and flexible enough to exe- products or services (how).5 The approach worked
cute? Your first instinct might be to boil down a well for a subset of the companies, including a low-
complex set of choices to a handful that matter the cost regional airline, a single-format retailer, a
most. Indeed, a series of strategy experts have ar- restaurant chain, and a producer of steel girders.
gued that managers should do just that by distilling Although operating in different industries, the
their strategy to a concise statement (fewer than companies shared three characteristics: They fo-
35 words) summarizing a few core choices.3 The cused on a single business, they offered a standard
strategy distillation approach hinges on a few fun- value proposition to a clearly identified customer
damental strategic categories — such as the choice segment, and their strategy was stable over time.
of target customer or core competencies — that can Executives in companies that didn’t fit this mold,
summarize the heart of any company’s strategy. The by contrast, struggled to boil down their strategy to a
authors illustrate this approach with strategies they few key choices. An online job site in Eastern Europe,
have inferred from observing what has worked in for example, could not identify just one target

ABOUT THE on the mid-term (in the range that did not fit into the initial topic through a structured process to ar-
RESEARCH of three years) as opposed to classes, and in the end, there ticulate their strategy and convert
The data on prevalence of quarterly or annual targets. were 43 topics (including an it into a set of mid-term priorities
strategic priorities among large We then classified the strate- “other” category for nine strategic to guide execution. For more
corporations draws on an analysis gic priorities by topic. To create priorities that could not be other- details, see chapter 5 in Simple
of how large, publicly traded our initial topics, we focused on wise classified). For more details, Rules: How to Thrive in a Complex
companies described their four approaches to strategy: see our online companion piece World (New York: Houghton
strategy in public documents. dominant logic, market position- “How to Recognize a Strategic Mifflin Harcourt, 2015).
Our sample consisted of 494 ing, resources and capabilities, Priority When You See One.” The survey data cited in the arti-
companies included in the 2014 and stakeholder theory. We re- Our discussion of simplifying cle is from a survey designed to
Standard & Poor’s 500 Index viewed the relevant literature to strategy is drawn from an action measure an organization’s ability to
(S&P 500) that were still publicly identify concepts commonly research project done in conjunc- execute its strategy, developed by
traded at the end of 2015. We associated with each approach tion with the Young Presidents’ Donald Sull and Rebecca Homkes.
examined each company’s filings to strategy, such as customer Organization (YPO). Between Between 2012 and 2017, the
with the U.S. Securities and intimacy and operational excel- 2011 and 2014, four cohorts of survey was administered to
Exchange Commission and lence (dominant logic), low price 10 member companies from the 11,017 managers in 423 organiza-
other formal communications and differentiation (market posi- YPO participated in a program to tions. The online survey consists of
to investors, and used a five- tioning), brand and intellectual help them translate their broad 69 questions designed to assess
pronged test to identify strategic property (resource-based view of vision or mission into a strategy how well strategic priorities are
priorities: They were presented strategy), and regulatory compli- and concrete priorities, and then understood throughout the organiza-
as an explicit set; they were ance (stakeholder theory). We develop simple rules to ensure tion, the strength of corporate
prioritized; they were expressed independently hand-coded 500 these guidelines shaped important values and norms, and how well
as actions; they described how strategic priorities selected at ran- activities and decisions within management practices such as
a company planned to execute dom, adding new categories to their company. The CEO and top resource allocation and incentives
its strategy; they focused accommodate strategic priorities team of each company went support strategy execution.

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customer because it served job seekers, employers, COMMON NAMES FOR STRATEGIC PRIORITIES
advertisers, and partners that listed jobs in multiple AMONG S&P 500 COMPANIES
S&P 500 companies used a variety of terms to describe the handful of
countries. Leaders elsewhere found it difficult to key actions designed to implement their strategy.
combine corporate and business unit strategies into a
Strategies 96
single formula. One company ran an online high
Strategic priorities 35
school and a separate division that developed digital
Strategic initiatives 14
content, which it sold to other educational institu-
Strategic objectives 10
tions (including other high schools). The two
Key elements of strategy 9
divisions were deeply interwoven, but the leadership
Key priorities 8
team never managed to articulate a single strategy that
Strategic focus 8
worked for both parts of the business.
Strategic pillars 8
Strategies in transition posed another challenge.
Strategic imperatives 8
Combining choices that drove historical success
Areas of focus 6
with those required to win in the future resulted in
Source: Analysis of 494 S&P 500 companies operating in 2014 and 2015. We identiied strategic priorities
convoluted statements that left employees baffled for 351 (71%) of the 494 companies.

as to where they should focus. Simple strategies, we


found, don’t work for companies that compete in
multiple businesses, serve multiple customers, or Many complex organizations that compete
are in the midst of a strategic transition. across multiple industries, product lines, and cus-
Distilling a strategy into a few core choices sounds tomer segments rely on strategic priorities to
great in theory but often derails in practice. You advance strategy. In the materials we examined from
might think the issue was the specific framework we S&P 500 companies (see “About the Research”), for
chose, but the roots of the problem go much deeper. example, more than two-thirds of the companies
To differentiate a company from rivals, the strategy published explicit mid-term objectives intended to
should be specific to the company’s history and con- help implement their strategy.
text, which implies the list of potentially strategic What companies call their corporate objectives
choices is long. Any short list of essential factors is doesn’t matter; S&P 500 companies use a variety of
likely to exclude choices that are critical to some labels, ranging from the mundane (strategic priori-
companies.6 To be clear, this critique is not meant to ties, areas of focus, strategic objectives) to the exotic
devalue the work of the strategy scholars who cre- (Microsoft Corp. referred to “interconnected ambi-
ated these frameworks but rather to underscore the tions” and retailer Kohl’s Corp. talked about “greatness
difficulty of reducing the inherent complexity of agenda pillars”). (See “Common Names for Strategic
strategy into simple statements. Many companies Priorities Among S&P 500 Companies.”)
simply cannot cram 10 pounds of strategic complex- Whatever terminology companies use, their ob-
ity into a 3-pound bag. jectives share a few characteristics. They typically
If boiling down a complex bundle of choices to a extend three to five years — shorter than that is too
few key elements doesn’t create a strategy for execu- tactical, longer too visionary. They are limited to a
tion, what does? handful — of S&P 500 companies publicizing their
objectives, 78% listed a total of three to five. (See
Strategic Priorities “Strategic Priorities Among S&P 500 Companies,”
Instead of trying to summarize their strategy in a p. 28.) And they are strategic in the sense that they
pithy statement, managers should translate it into a describe specific actions that will help the company
handful of actions the company must take to exe- execute its strategy, as opposed to achieving
cute that strategy over the medium term. Strategic financial targets or acting on corporate values.
priorities should be forward-looking and action- Many executives tell us that they use strategic
oriented and focus attention on the handful of priorities but report that the approach isn’t work-
choices that matter most to the organization’s suc- ing as well as they had hoped. To set the strategic
cess over the next few years. agenda and drive implementation effectively, we

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have found that strategic priorities need to balance single strategic priority: “to manage risk and pre-
guidance with flexibility, counterbalance the iner- serve value.” This was a worthy goal, to be sure, but
tia of business as usual, and unify disparate parts of one that was far too abstract to provide useful guid-
the business. Crafting strategic priorities that do all ance to employees. A single priority in isolation is
of these things — and do them well — is a tall order. rarely enough to drive a strategy that requires mul-
The remainder of this article will describe the seven tiple initiatives to work together.
characteristics of effective strategic priorities, ex- 2. Focus on mid-term objectives. Strategic
plain why they matter, and suggest practical priorities act as a bridge between long-term aspira-
diagnostics managers can use to assess their com- tions — embodied in a vision or mission — and
pany’s strategic priorities. The exhibit “How annual or quarterly objectives. The types of initia-
Effective Are Your Strategic Priorities?” summa- tives that have the biggest impact (for example,
rizes the seven factors. building data analytics capabilities, integrating on-
1. Limit the number of priorities to a hand- line and physical stores, or entering a new market)
ful. Restricting the number of strategic priorities to typically take a few years. Of course, there are ex-
three to five has several advantages. Most obviously, ceptions: A financial turnaround, for example,
a small number of them will be easier to understand, would require an immediate focus on short-term
communicate throughout the organization, and re- cash generation and debt reduction. But in general,
member.7 Rather than overwhelming employees with we’ve found a good rule of thumb is “three to five in
the full set of all choices and interdependencies that three to five” — three to five strategic priorities that
make up a company’s strategy, communicating a few can be accomplished in three to five years.
strategic priorities can focus attention, effort, and re- Once you’ve set mid-term priorities, it’s important
sources on the things that matter most now. The best to stick to them. When a team announces five-year
priorities serve as strategic guardrails. If they know the priorities and changes them a year later, employees
parameters they must work within, managers and dismiss those objectives (and their successors) as the
employees can fill in the blanks based on their local “flavor of the month” that they can safely ignore.
knowledge and circumstances. British fashion retailer Burberry Group plc offers a
Having too many priorities is a mistake, but good example of staying the course.8 When Angela
having too few can be a problem as well. One Ahrendts joined Burberry as CEO in 2006, she
wholesale energy company we studied declared a announced five strategic priorities (including intensi-
fying non-apparel sales, accelerating retail-led growth,
and investing in underpenetrated markets) and se-
lected quantitative metrics for each. Ahrendts stuck
STRATEGIC PRIORITIES AMONG
S&P 500 COMPANIES with the priorities for seven years, updating employ-
Among S&P 500 companies, 71% published strategic priorities, ees and investors regularly on progress toward each
and most listed between three and five priorities.
goal, which reinforced the message and the company’s
143 commitment to achieving those objectives. During
this period, Burberry’s share price handily outper-
formed competitors’ and the broader market.
103
91
3. Pull toward the future. Strategy should guide
80 how a company will create and capture value going
forward, rather than codifying how it made money in
the past. In dynamic markets, ongoing success typi-
39 cally requires innovation and change. The things that
17
position a company for the future — for example,
4 4 6 4 3
entering unfamiliar markets, building innovative
0 1 2 3 4 5 6 7 8 9 10+ business models, or developing new capabilities —
Number of Strategic Priorities Published differ from business as usual. Both are critical, but
Source: Analysis of 494 S&P 500 companies operating in 2014 and 2015. they often pull in opposite directions.

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Maintaining a healthy balance between the status HOW EFFECTIVE ARE YOUR STRATEGIC PRIORITIES?
quo and innovation is hard work. Well-oiled capabili- The checklist below can help managers assess whether their strategic priorities
will be effective in setting a shared strategic agenda for their organization and
ties, established resources, organizational structure,
driving implementation of that agenda.
metrics, and rewards favor a company’s legacy busi-
ness, and employees will naturally default to activities Characteristics of effective strategic priorities
that are familiar and straightforward and produce Limit objectives Limiting strategic priorities focuses on what matters most and
to a handful can serve as a forcing mechanism to drive difficult trade-offs
predictable results.9 Keeping the trains running in the among conflicting objectives.
core business is necessary for success, but these rou- Focus on the Strategic priorities typically require three to five years to
tine activities will usually take care of themselves mid-term accomplish. Annual goals are too tactical, and longer-term goals
too abstract to provide concrete guidance.
without having to be prioritized at the corporate level.
Pull toward Strategic priorities should focus on initiatives that position the
Innovation and change, by contrast, require the future company to succeed in the future, not reinforce business models
or strategies that worked in the past.
ongoing attention. New activities are difficult,
Make the Strategy is about choice, and strategic priorities should tackle
frustrating, and uncertain, and they require sus- hard calls head-on the most consequential and difficult trade-offs facing
the company.
tained effort and monitoring to be successful. This is
Address critical Strategic priorities should address the elements of the strategy
where strategic prioritization can help. Prioritizing vulnerabilities that are most important for success and most likely to fail in
forward-looking initiatives can tip the scales in favor execution.

of the activities that can ensure future vitality but are Provide concrete Guidance should be concrete enough that leaders throughout the
guidance organization could use the strategic priorities to decide what to
most likely to fail without sustained effort. focus on, what not to do, and what to stop doing. Metrics matter.

Striking the right balance between sustaining a Align the Strategic priorities should provide a framework for how the
top team company as a whole will succeed. To do so, they must be
legacy business and building for the future requires agreed upon by all members of the top leadership team.
judgment — there is no cookie-cutter template for
getting it right. To gauge whether things are in bal-
ance, we suggest leaders look at the mix of priorities orities. The discipline of whittling down priorities
in terms of those that support and refine the current to a handful can force a leadership team to surface,
business model (for example, cost reduction, discuss, and ultimately make a call on the most con-
operational excellence, serving current customers, sequential trade-offs the company faces in the next
extending existing products) versus the objectives few years. When executives make the hard calls and
that take the company in a new direction (for exam- communicate them through the ranks, they provide
ple, entering new markets, building digital capability, clear guidance on the contentious issues likely to arise
undertaking non-incremental innovation). Leaders when executing strategy. But making trade-offs
can also ask how different the business would look in among competing priorities is difficult — they are
three to five years if they were to achieve all their ob- dubbed “tough calls” for a reason. Prioritizing differ-
jectives. No mix of priorities is right for every ent objectives results in “winners” and “losers” in
company, but we have found that leadership teams terms of visibility, resources, and corporate support.
that don’t examine their strategic priorities tend to Many leadership teams go to great lengths to avoid
overvalue business as usual. conflict and, as a result, end up producing toothless
4. Make the hard calls. Apple Inc. CEO Steve strategic priorities.
Jobs often stood at a whiteboard during strategy re- A common way to avoid conflict is to designate
treats and personally led discussions among the everything as “strategic” — one S&P 500 company, for
company’s top 100 leaders to set strategic priori- example, listed a dozen strategic objectives. Another
ties.10 The assembled team would generate a long way leadership teams resist making difficult calls is by
list of possibilities, and after much wrangling and combining multiple objectives into a single strategic
discussion, they would whittle them down to a priority. A large retailer, for example, listed six key busi-
rank-ordered list of 10, at which point Jobs would ness priorities. So far, so good, but when you dug into
strike out the bottom seven to ensure the company the so-called priorities — “focus on the fundamentals
focused on the most critical priorities. of the business,” for example — the apparent discipline
In organizations of any size, there will be dozens proved illusory. “Focus on the fundamentals” in-
or hundreds of competing and often conflicting pri- cluded, among other items, inventory management,

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C O V E R S T O R Y : S T R AT E G I C A G I L I T Y

cost cutting, customers, product categories, in-store the field of operations as a complex system of ene-
experience, execution, speed, agility, lead-time reduc- mies, allies, infrastructure, popular support, and
tions, and developing and retaining staff. If leaders other features that collectively influence who wins
dodge the hard trade-offs, their priorities provide little and who loses a war. They then home in on the so-
useful guidance to the troops. called “centers of gravity” — the parts of the system
Leadership teams also avoid prioritization by that are both critical to the enemy’s success and
burying their strategic priorities among competing most vulnerable to attack.12
mandates and guidelines. The CEO of a large Business leaders can deploy a similar approach by
European bank (not one of the S&P 500), for example, identifying “critical vulnerabilities” — the elements
of their own strategy that are most important for
success and most likely to fail in execution. In
VAGUE VERSUS CONCRETE STRATEGIC PRIORITIES
for-profit organizations, pinpointing the most im-
Strategic priorities must provide concrete guidance to the troops. American Airlines’
Five Imperatives for 2014 were so vague that they could have applied to any industry. portant actions means thinking through — and,
By contrast, Southwest Airlines’ Strategic Initiatives were concrete enough to guide ideally, quantifying — how the objective would help
action and investments. create and capture economic value. How much
American Airlines Southwest Airlines would a potential priority increase customers’ will-
Five Imperatives Strategic Initiatives ingness to pay? How much would it decrease costs to
1 Focus on customers’ needs and 1 Integration of Southwest’s and AirTran’s serve target customers? How much would a priority
wants. network and operations deter new entrants or competitors by building a
2 Be an industry leader. 2 Fleet modernization moat around the fortress? What new revenue
3 Engage our team members. 3 Continued incorporation of the larger streams would a proposed objective open up?
Boeing 737-800 aircraft into the Southwest
4 Provide a return for our investors. fleet Some elements of a company’s strategy — for
5 Look to the future. 4 International capabilities and new example, a well-known brand or well-honed capa-
reservation system
5 Continued growth of Southwest’s Rapid
bilities — will be critical to success but may not
Rewards frequent flyer program require sustained attention or investment. While
important, these may not be priorities. Instead,
companies should prioritize initiatives or activities
was pleased when his team agreed on four strategic that are at the greatest risk of failure without the
priorities during their strategy retreat. That was the sustained focus and investment support that strate-
good news. The bad news was that the team tacked gic priorities can provide. When identifying critical
them onto what the bank was already attempting to vulnerabilities, it’s important to look at both the
do, using three transformation initiatives, a four- elements of strategy that are at risk due to external
part declaration of principles, four customer service factors (such as shifting customer preferences, dis-
priorities, five core beliefs, eight rules of conduct, ruptive technologies, or new entrants) and internal
nine corporate values, 20 promises to stakeholders, challenges (need for culture change, organizational
and 120 key performance indicators. Baffled em- complexity, or need to build new competencies).
ployees ignored the latest directive and carried on 6. Provide concrete guidance. A company’s
with what they were already doing. strategic objectives should be tangible enough that
5. Address critical vulnerabilities. Even when leaders and employees throughout the organization
you recognize the importance of making the hard can use them to prioritize their activities and invest-
calls, it’s often difficult to know where to focus. ments (and also to help them decide what to stop
Strategy is inherently complex, and the sheer num- doing). Unfortunately, many leadership teams agree
ber of possible objectives can overwhelm teams. So on vague abstractions that everyone can get on board
how can executives move from a complex strategy with, confident that the resulting platitudes will not
to a handful of strategic priorities? constrain their options. American Airlines, for exam-
A key insight comes from military strategists, ple, listed strategic imperatives including “focus on
who have long acknowledged the complexity of our customers’ needs and wants,” “be an industry
armed conflict.11 Military planners often visualize leader,” and “look to the future.” Clearly, a company’s

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strategic priorities are too vague when you can’t guess The reality is actually worse than the survey re-
the company (or even the industry) by reading them. sults suggest. In addition to asking senior executives
(See “Vague Versus Concrete Strategic Priorities,” if they agree on the company’s priorities, we asked
which contrasts the vague strategic priorities of them to list their company’s key priorities over the
American Airlines with the concrete priorities of next few years. In the typical company, barely half
Southwest Airlines.) of the executives voiced the same company-wide
Many associate concrete guidance with financial priorities.14 Indeed, in terms of shared strategic
targets. Revenue and profitability goals are indeed priorities, we found that two-thirds of the top
specific, but they quantify where management executives were on the same page in just 27% of the
wants to end up without providing direction on companies we studied — hardly a recipe for
how the company should get there. Using financial successful execution among the rest. (See “Most
targets as strategic priorities, then, is the business Top Teams Disagree on Priorities.”)
equivalent of a coach telling the team what the final Executing strategy often requires different parts of
score should be without explaining how to beat the company to work together in new ways (such as
their opponents. when a company moves from selling stand-alone
Rather than relying solely on financial targets, products to integrated solutions, or when a retailer
leaders should start with the key actions required to blends online and in-store sales). Strategic priorities
execute their strategy, and translate these into met- should reinforce one another to ensure the different
rics that provide concrete guidance on what success parts of the company are moving in tandem. At a
would look like. By tracking progress against met- minimum, the priorities shouldn’t conflict with one
rics, leaders can maintain a sense of urgency over another or pull the organization in opposing direc-
the months or years required to achieve the goal, tions. The best strategic priorities hang together and
identify what’s not working to make midcourse tell a coherent story about how the company as a
corrections, and communicate progress along the whole will create value in the future. They should also
way — even before financial results are in — to provide guidance on how to adjudicate the conflicts
keep key stakeholders on board. that will inevitably arise as different parts of the orga-
Top executives can quickly assess whether their nization try to execute the strategy in the trenches.
strategic priorities are sufficiently concrete by ask-
ing middle managers what they would stop doing
based on the priorities. The answers will quickly MOST TOP TEAMS DISAGREE ON PRIORITIES
We asked the top teams of 124 companies to list their key priorities over the
expose fuzzy objectives. Leaders can also test con- next few years and then analyzed the overlap in their responses. In the chart
creteness by taking each strategic priority, stripping below, the ranges at the bottom indicate the amount of overlap in executives’
it of flowery prose and buzzwords, and seeing agreement on top priorities. The figures above the bars indicate the number of
what’s left. For example, once you remove the mar- companies that fell into each range.

keting spin and buzzwords from a statement like 21 21 21

“We put muscle behind innovation, making a step


change in the pace of commercialization,” there’s 16

not much substance left. 13


14

7. Align the top team. Unfortunately, lack of 11


agreement on company objectives is fairly com-
mon among top teams. As part of our research on
strategy execution, we surveyed more than 10,000 4
managers across more than 400 organizations. 2
1
When asked how closely members of their compa-
ny’s top executive team agreed on key priorities, 0-1
0% 20% 30% 40% 50% 60% 70% 80% 90% 100
%
11- 21- 31- 41- 51- 61- 71- 81- 91-
nearly one-third said senior executives focused on
their own agendas or that there were clear factions Sample of 124 companies at which four or more top team members listed strategic priorities. Histogram of
companies by percentage of top executives who can list three of their company’s top ive strategic
within the top team.13 priorities. Companies have a median of 4,843 and a mean of 33,390 employees.

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ead more from


R Strategic priorities should lay out what matters Business Review 79, no. 5 (May 2001): 72-79; and
our series on for the company as a whole to win and reflect the C. Markides, “Six Principles of Breakthrough Strategy,”
Strategic Agility at Business Strategy Review 10, no. 2 (1999): 1-10.
sloanreview.mit.edu/ interdependencies among the choices. If senior
4. For a description of this research, see D. Sull and K.M.
strategic-agility. executives pursue goals that aren’t aligned with Eisenhardt, “Simple Rules: How to Thrive in a Complex
one another, the disagreements will filter down World” (New York: Houghton Mifflin Harcourt, 2015),
the silos, and the various teams will work at chap. 5.

cross-purposes. 5. The who/what/how framework was initially formulated


by D.F. Abell in “Defining the Business: The Starting Point
Management teams sometimes diverge because of Strategic Planning” (Englewood Cliffs, New Jersey:
each function wants to promote its own pet objec- Prentice Hall, 1980) and refined and elaborated by
tive. Human resources might want to say something Markides, “Six Principles of Breakthrough Strategy.”

about “world-class talent,” for example, while fi- 6. The strategy simplification approach deals with this
problem by cramming many choices into a few overarch-
nance might want to highlight how the company ing categories or omitting choices that will be crucial for
delivers “industry-leading shareholder returns.” some companies. A company’s scope — one of three
Rarely is anyone considering the trade-offs among factors in the Collis and Rukstad (2008) framework —
includes choices about target customers, product offer-
these objectives, their interdependencies, or ing, geographic markets, and vertical integration.
whether meeting unit-level objectives will affect 7. N. Cowan, “The Magical Number 4 in Short-Term
the company’s ability to succeed. These priorities Memory: A Reconsideration of Mental Storage Capacity,”
can reinforce, rather than break down, organiza- Behavioral and Brain Sciences 24, no. 1 (February 2001):
87-114.
tional silos.
8. D. Sull, S. Turconi, and S. Zanjani, “Burberry’s
Executives rightly focus on how to craft a great Digital Strategy,” London Business School case
strategy but often pay less attention to how their study CS-15-007, 2016.
strategy can be implemented throughout a com- 9. For a review of literature on factors contributing to
plex organization. To steer activity in the right corporate inertia, see Sull, “Why Good Companies Go
Bad and How Great Managers Remake Them.”
direction, a strategy should be translated into a few
10. W. Isaacson, “Steve Jobs” (New York: Simon &
guardrails that provide basic guidance while leav- Schuster, 2011), 378.
ing scope for adaptation as circumstances change. 11. For an early discussion, see C. von Clausewitz, “On
Strategic priorities are a common tool to drive exe- War,” M.E. Howard and P. Paret, eds. and trans. (Prince-
cution, but in many cases, these objectives are not ton, New Jersey: Princeton University Press, 1989), 623.
For a recent and insightful discussion of complexity in bat-
as effective as they could be. By following a few tle, see U.S. Marine Corps, “Warfighting” (Washington,
guidelines, executives can articulate a strategy that D.C.: U.S. Government Printing Office, 1997).
can be communicated, understood, and executed. 12. C. Perez, Jr., ed., “Addressing the Fog of COG:
Perspectives on the Center of Gravity in U.S. Military
Donald Sull, who tweets @simple_rules, is a senior Doctrine” (Fort Leavenworth, Kansas: Combat Studies
lecturer at the MIT Sloan School of Management. Institute Press, 2012).
Stefano Turconi is a teaching fellow at the London 13. Sample of 363 organizations that took the execution
Business School. Charles Sull is a partner and survey between 2012 and 2017.
James Yoder is former chief data scientist at Charles
Thames Strategy Partners LLC. Comment on this 14. To measure agreement on strategic priorities, we
article at http://sloanreview.mit.edu/x/59209. asked top team members to list their company’s top
three to five priorities over the next few years. We then
grouped their free-text responses into categories of
REFERENCES
strategic priorities to create a matrix in which each row
1. M.E. Porter, “What Is Strategy?” Harvard Business represents a manager and each column a strategic
Review 74, no. 6 (November-December 1996): 61-78. priority. We then calculated the five most frequently
listed priorities, and calculated how many of the top
2. D. Sull, “Why Good Companies Go Bad and How Great
team members list at least three of the top five strategic
Managers Remake Them,” rev. ed. (Boston: Harvard
priorities. For a fuller discussion of our methodology and
Business School Press, 2005).
robustness tests, see “How to Recognize a Strategic
3. See D.J. Collis and M.G. Rukstad, “Can You Say What Priority When You See One” online.
Your Strategy Is?” Harvard Business Review 86, no. 4
(April 2008): 82-90; E. Van den Steen, “Formulating Strat- Reprint 59209. For ordering information, see page 4.
egy,” Harvard Business School Teaching Note 714-485, Copyright © Massachusetts Institute of Technology, 2018.
March 2014; O. Gadiesh and J.L. Gilbert, “Transforming All rights reserved. This article was originally published online.
Corner-Office Strategy Into Frontline Action,” Harvard It has been adapted for print.

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S U S TA I N A B L E T H I N K I N G

Why Sustainable
34
Stop Focusing
on What Other
Businesses Do

Thinking Matters 36
Share Your
Long-Term

More Than Ever


Thinking
39
The Personalized
Future of Urban
IN JANUARY 2018, Larry Fink, who heads BlackRock Inc. — one of the world’s largest investors, with
Transportation
$1.7 trillion in assets under active management — included a novel request in his annual letter to the
CEOs of companies in BlackRock’s portfolio: He asked them to explain how their companies make posi- 46
tive contributions to society beyond profits. Shifting expectations — among investors, consumers, and Business
governments — are putting pressure on leaders to think more expansively about their companies’ respon- Needs a
sibilities to society. Our special section on sustainable thinking offers a fresh perspective on the purpose of Safety Net
today’s corporation. Economist Milton Friedman’s well-known claim that a company’s sole social respon-
sibility is “to increase profits” is under siege. How should companies respond? These articles offer practical 49
steps: Identify your company’s corporate purpose, develop and disclose long-term plans, identify financial Why Companies
risks from climate change, and collaborate with governments to build resilient communities. One indus- Should Report
try where norms are changing is the transportation sector: Consumers are demanding new forms of Financial Risks
mobility as urban environments grow increasingly congested. We hope these ideas will inspire you to lead From Climate
in a way that best serves both your customers and the broader community. Change

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S U S T A I N A B L E T H I N K I N G : S T R AT E G Y

Stop Focusing on What


Other Businesses Do
A business strategy based solely on the world as it exists today is bound to fail.
BY ANDREW WINSTON

making cars that have only an internal combustion


engine — that is, every Volvo will be electric or hy-
brid, with both a battery and a smaller engine. So
the fossil-fuel sector is waging a losing battle.
But the billboard got me thinking about a more
general point for business: It’s not smart to base any
part of your strategy on what you see in the rear-
view mirror. And that’s particularly true when you
develop strategies for navigating modern, thorny
environmental and social challenges. If you run a
business (or a government) as if the future will look
exactly like the past, you will become irrelevant.
Consider the sheer fact that there were points in
I WAS DRIVING through rural Pennsylvania human history, not that long ago, when:
recently and saw a fascinating billboard. Sponsored • 90% of lighting came from candles and oil (from
by an organization that promotes coal and natural whales, not from oil rigs);
gas, the sign declared,“The truth is that 90% of our • 90% of transportation relied on horsepower —
energy comes from fossil fuels.” Technically, that’s from actual horses;
true(ish), but it’s also meaningless. • 90% of written communication existed on paper,
On the surface, the facts are a bit exaggerated — not email;
fossil fuels provided more like 80% of our energy in • 90% of new music came on vinyl ... and then
the United States in 2016. But even if the billboard 8-track or cassette ... and then CDs;
is roughly correct, who cares? The future belongs to • 90% of photographs needed to be“developed”; and
renewable energy and clean technology. • 90% of movies rented or bought came on some-
The majority of the new energy capacity put on the thing physical (VHS or DVD).
electrical grid — both globally and in the United States The list goes on and on. Many of the companies in
— now comes from renewables. In 2017, wind and those industries ignored the “dead man walking” as-
solar energy accounted for nearly 95% of the net new pect of their business, especially when they held
volume of electricity-generating capacity in the U.S. dominant market shares. But their downfalls became
(that is, new builds, minus power plant retirements). As classic cautionary tales — think film company
for our transportation systems, a growing list of coun- EastmanKodakCo.andvideorentalchainBlockbuster
tries, including France, Norway, the U.K., India, and LLC. The history of technology adoption is pretty
China, have announced either future bans on selling clear, and it’s speeding up. Try to imagine some past
diesel and gas cars or official targets for electric car sales. billboard announcing (proudly!) that 90% of TVs are
Automakers are also moving quickly: Volvo, for black and white, or that 90% of food preservation is
instance, has said that in just two years, it will stop from salt, not this newfangled “fridge” thing.

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Now make the small leap to think beyond shifts North Carolina passed a bill that mandated which
in what’s normal in technology or in the energy sec- bathrooms transgender people could use, dozens of
tors. Social change also comes to the world — and to large company CEOs wrote an open letter to the
business — fast and furious. At distinct moments in state’s governor saying that the legislation is “not a
the history of the developed world, more than 90% bill that reflects the values of our companies.” What
of elite college students (before women’s or histori- percentage of large companies would’ve spoken out
cally black colleges) were white males, and 90% of on something so socially sensitive five years ago?
large companies would not even think of having So what’s coming next? In technology, as always,
policies that covered domestic partners or protected plenty. For example, I’m sure that 90% of compa-
LGBT workers. In Saudi Arabia, men have always nies do not have artificial intelligence deeply
driven about 100% of the car miles … until this June, embedded in their operations today. But how long
when the ban on women drivers will be lifted. do you want to bet it will be until Siri, Alexa, and
Watson get together to change that statistic?
Expectations Are Moving Fast Technology is always changing, so that’s nothing
My larger point is that change is coming to busi- new. A far deeper change is brewing. Business faces
ness — and executives need to adjust. The norms rising expectations from society, and that shift is
and expectations about how companies manage changing the nature of strategy and competition.
environmental and social issues are shifting fast. On all megatrends, but particularly sustainabil-
In 2011, only 20% of the S&P 500 compa- ity, look beyond what the 90% are doing right now.
nies produced sustainability reports. By 2016, 82% Even with all the talk about carbon footprint and
did, providing public, detailed looks at their envi- renewable energy, the vast majority of companies
ronmental and social actions and performance. A have not made climate action or sustainability a top
growing number have integrated these sustainabil- priority. Based on my experience with multination-
ity reports into their annual financial reports. als, I’m confident that 90% of large company
My company keeps a public database of the sus- C-suite execs still believe that their primary (and
tainability goals set by multinational businesses. often only) goal is maximizing shareholder value.
These commitments include goals such as “reduce But leading companies are now expanding their
greenhouse gas emissions by 50% by 2025” and “en- definition of corporate success. They’re listening,
sure women make up 40% of management roles.” in part, to the shocking 86% of millennials who
More than 90% of the 200 largest companies in the agreed in 2017 that “the success of a business
world now have public targets on social or environ- should be measured in terms of more than just its
mental performance — and it’s nearly 100% if we financial performance.”
exclude Chinese government-owned enterprises, It’s a new world for business, and expectations
which don’t often set individual targets separate keep rising. Looking at yesterday’s norms will make
from government planning. More than 130 of the your business outdated and irrelevant. So, look for-
world’s largest companies have now committed to ward to being part of — or better yet helping to
100% renewable energy. Ten years ago, the number create — a thriving future.
of large companies with renewable energy goals, or
any sustainability targets, was negligible. Andrew Winston is founder of Winston Eco-Strategies
and an adviser to multinational companies on how
We’re in the early stages of shifts in how compa- they can navigate humanity’s biggest challenges and
nies do business more sustainably, with more profit from solving them. He has written multiple
bestsellers on sustainability and strategy, including
attention to their role in society. Most companies
The Big Pivot and Green to Gold (coauthor). He
are aggressively reducing their own operational tweets @andrewwinston. Comment on this article
footprints. But that’s arguably just table stakes. A at http://sloanreview.mit.edu/x/59311.
growing number of companies are engaging with
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the broader world in ways that were rare until quite Copyright © Massachusetts Institute of Technology, 2018.
recently. U.S. CEOs are taking public stands on issues All rights reserved. This article was originally published online.
from LGBT rights to immigration. After the state of It has been adapted for print.

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Share Your Long-Term


Thinking
Companies need to be more forthcoming about their strategies for long-term
value creation when they communicate with investors — especially about
environmental, social, and governance issues.
BY TIM YOUMANS AND BRIAN TOMLINSON

OVER THE LAST FIVE YEARS, CEOs have faced mounting pressure to produce short-term profits,
increasing the likelihood of management practices that reduce long-term value, such as scaling back research
and development (R&D). Corporations and investors tend to blame each other for this situation. CEOs com-
plain that investors don’t ask about the long term, and investors respond that corporate disclosures discourage
engagement on long-term metrics, with quarterly calls exclusively focused on recent past performance.
But CEOs and their management teams do think about the long term. In fact, all CEOs have long-term
plans, which are often detailed, extensive, and at the core of senior management’s work. To date, such plans
tend to be closely held secrets, as many executives worry that competitive advantage may be undermined by
detailed disclosure. Concerns around releasing forward-looking information prior to it meeting the stan-
dards required for securities filings have also given pause. As a result, corporate strategy and practice are
inadequately captured in corporate-shareholder communications.
At the same time, elevated expectations about corporate contributions to society have become more com-
mon. Material sustainability issues are now broadly acknowledged as relevant to financial and operating
performance. Investors have become more assertive in considering environmental, social, and governance (ESG)
factors, identifying them as a potential source of long-term corporate performance.
If a subset of a corporation’s strategic long-term plans can be disclosed, CEOs may rightly ask two ques-
tions: “Why should I disclose our long-term plans?” and “How should I disclose our long-term plans?”
We offer six reasons to disclose and several suggestions about how to do it.

Why Disclose Long-Term Thinking?

1
To demonstrate that there is a long-term strategy. Organizations oriented toward long-term
value creation that better manage material sustainability issues have been shown to outperform
competitors, demonstrating both enhanced resilience and ability to innovate. The investor-facing
presentation of a long-term plan provides an opportunity for a meaningful conversation about
continuing corporate performance involving two key elements: a long-term value-creation story
(about the past) and a long-term value-creation plan (about the future).
Spending more time talking about the future corporate context does not mean less specific or meaning-
ful disclosure. CECP — The CEO Force for Good, a coalition of more than 200 CEOs of some of the largest
corporations, has launched the Strategic Investor Initiative, bringing CEOs together with large, long-term
investors. These partner investors want to review long-term plans that look five years forward and set out
appropriate metrics (such as those developed by FCLT Global and the McKinsey Global Institute), includ-
ing the rate of investment, earnings quality, margin growth, and earnings growth.

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To show that the company can antici- company will balance its long-term uses of strategic
pate and capitalize on megatrends. A capital (such as acquisitions and divestments, debt
corporation is exposed to a variety of paydown, reinvestment, and return of capital to
megatrends, the relevance of which will shareholders) is valuable information for major
be industry-dependent. A CEO’s long- shareholders with long-term investment horizons.
term plan provides an opportunity to outline how
the corporation is responding to business-critical To help investors understand ESG
trends such as the transition to the low-carbon issues “through the eyes of manage-
economy, technological disruption, and an aging ment.” Responding to sustainability
society, and offers leaders an opportunity to iden- considerations is increasingly forming a
tify how they intend to manage the risks and core part of business strategies across
leverage the opportunities these trends present. sectors. A majority of investors see ESG factors as
The strategy to capitalize on megatrends neces- financially material and expect sound management
sarily involves the company’s long-term capital of material ESG factors to deliver better perfor-
allocation plan. This plan should include appropri- mance over the long term. Investors also express
ate in-year metrics and will enable a corporation to frustration at the inadequacy of corporate disclosure
differentiate its long-term stance from its short- of ESG factors. As BP’s Deepwater Horizon and the
term-focused peers. A clear explanation of how the Volkswagen diesel emissions scandals demonstrate,

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mismanagement of material ESG factors can de- an inspiring vision of the organization’s purpose and
stroy value and confidence across time horizons. the corporate future.
A long-term plan provides a corporation with
an opportunity to identify its financially material To foster leadership in corporate-
sustainability issues and gives management an op- shareholder communicat ions.
portunity to demonstrate how it thinks about and Communicating about the long term
manages these business-critical issues. Frameworks doesn’t require reducing the frequency
such as the Sustainability Accounting Standards of periodic corporate-investor com-
Board’s can provide management with a template munication. Rather, it requires the existing schedule
through which to begin such thinking. By telling to be reoriented to address a longer-term perspec-
“war stories” about how ESG issues are incorporated tive, offering more valuable opportunities for
into strategy, executives can help their investors conversations between corporations and investors.
view the corporation’s approach to ESG issues To enable this, organizations can join a small
through the eyes of management. but growing cohort of corporations that deliver
annual long-term plans (in the customary format
To encourage the C-suite to reflect on for corporate-investor communications), setting
the corporate ecosystem. A corpora- out certain strategic goals and appropriate long-term
tion’s business model has many metrics. The quarterly call can then be partially
dependencies and affects a large uni- adapted to serve as a forum in which investors ask
verse of stakeholders through its the company to account for milestones toward the
activities. It is important for a corporation to objectives set out in its long-term plan.
account to its stakeholders, including — but not
limited to — investors, though not all stakeholders A New Platform
are critical to its success. Several major corporations have begun to present such
Disclosing its long-term plan can also demonstrate plans. Corporate leaders from Aetna, Allstate, BD, CA
that its future business benefits are aligned with the in- Technologies, Delphi, Humana, IBM, Nielsen, PG&E,
terests of long-term-oriented shareholders and other Prudential, Telia, Voya, and Welltower (an aggregate
stakeholders. To do this, a corporation can identify its market capitalization of $500 billion) have presented
few “mission critical” stakeholders (beyond share- plans for long-term value creation to investors rep-
holders) and ensure that their interests are considered resenting $20 trillion in assets under management,
in the long-term strategy presented. Tools such as a including CalSTRS, Goldman Sachs, Hermes
one-page “Statement of Significant Audiences and Investment Management, New York State Common
Materiality” can enable companies, at the board Retirement Fund, State Street, and Vanguard.
level, to identify such stakeholders strategically. The long-term plan is a new tool in the regular
sequence of periodic corporate-shareholder

5
To help inspire — and retain — both em- communications and represents an unprecedented op-
ployees and investors. Communication of portunity for leading companies and investors together
long-term purpose yields many collateral to drive sustainable value creation and help clarify the
benefits for a corporation. One is the social role of the corporation in a sustainable society.
construction of loyalty. Corporations that
focus on communicating long-term plans are able to Tim Youmans is engagement director for Hermes
attract more long-term-oriented investors — what EY Equity Ownership Services, and Brian Tomlinson is
research director for the Strategic Investor Initiative at
has called “investor allies” — to support a long-term CECP. Comment on this article at http://sloanreview
management perspective. Where a company embraces .mit.edu/x/59310.
an authentic, sustainable purpose, it seems better able
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to attract, motivate, and retain personnel — all vital Copyright © Massachusetts Institute of Technology, 2018.
activities in the knowledge economy. The long-term All rights reserved. This article was originally published online.
plan provides an opportunity for a CEO to set out It has been adapted for print.

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The Personalized THE LEADING


QUESTION
How will an
urbanized

Future of Urban world manage


its growing
demand for
mobility?

Transportation FINDINGS

Future urban
mobility will
depend on the
building blocks
of connectivity,
The transportation industry faces fundamental disruptions heterogeneity,
intelligent systems,
as vehicle ownership yields to as-needed mobility. and personalization.
BY VENKAT SUMANTRAN, CHARLES FINE, AND DAVID GONSALVEZ 
Urban planners and
city administrators
will play a crucial
role.

MOBILITY HAS BEEN the lifeblood of mod-


ern civilization. Throughout the 20th century,
autos and the auto industry propelled human
development, bringing unrivaled utility and flexi-
bility to the way people move. Yet the industry
now faces fundamental disruption.
Relentless urbanization has left many cities
with crippling congestion and unhealthy air pollu-
tion, and cars are wearing out their welcome in
most. Modern urbanites, weaned on omnipresent
connectivity, have also altered their patterns of
living: Vehicle ownership is yielding to mobility
accessibility as expectations and aspirations
change. These trends have led a growing number
of thought leaders to assert that radical transfor-
mation is imminent. Nissan Europe’s chairman,
Paul Willcox, worries that automakers are facing “a
decade of disruption.”1
We postulate that urban mobility is transforming
to a connected, heterogeneous, intelligent, and per-
sonalized architecture (CHIP). A CHIP mobility
architecture makes room for automakers, technolo-
gists, city planners, and entrepreneurs to innovate
and proliferate new travel modes and solutions, en-
hancing variety, options, and utility for users. CHIP
mobility leverages the power of networked systems
based on connections linking physical infrastructure
with digital tools to reduce travel cost, time, and ef-
fort. Intelligent systems that can access data on user
preferences, traffic congestion, prices, and weather,

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for example, will help promote efficiency and fundamental building blocks of a sustainable city —
deliver personalized user experiences. Mobility can safe pedestrian walkways with improved connectivity
be delivered as a service — available on tap to suit to efficient mass transit — instead of building more
the consumer’s need at the time. Nations and cities and more roads, flyovers, and highways.
can shape their unique architectures through invest- Fortunately, a growing number of communities
ments, policies, incentives, and fees, aligning their across the globe, such as Singapore, Barcelona, and
mobility portfolios to societal objectives. New York City, are investing in “smart cities” in
which information and communication technology
The Winds of Change: infrastructures dovetail well with future mobility
An Urban Century architectures. Compact urban forms, with mixed-
At the dawn of the 20th century,one in every six people use pedestrian- and bicycle-friendly neighborhoods
lived in an urban location. By the end of that century, supported by efficient public transit, dotted with
one of every two was an urbanite. And by 2050, it’s green spaces, conform to new urbanism principles
projected that as many people will live in urban areas and support efficient, connected, and eco-friendly
as there were people on the planet in 2015.2 mobility. New York City, with many of these ele-
Cities are emerging as economic powerhouses ments, has a lower per capita ecological footprint
and pushing their own social and environmental than San Francisco, in spite of New York’s higher in-
agendas. By 2015, urban dwellers, estimated at comes and colder climate.8 Los Angeles, on the other
about 55% of the global population, contributed hand, with an auto-dependent, highway-intensive
85% of global GDP.3 Reflecting this economic clout urban sprawl that spans 4,850 square miles, heads
and impatience with slow-moving national initia- the list of U.S. cities with the worst traffic congestion
tives, Michael Bloomberg, the former mayor of and air pollution. Cities that are embarking on
New York City, says, “[Mayors] don’t have to wait “smart city” investments have a timely opportunity
for national governments or a new global climate to steer their trajectory toward more livable commu-
agreement to act. They can take action today — nities and more sustainable mobility.
and increasingly, they are.”4
Although urban form and mobility architectures Cleaner Air to Breathe
usually have a symbiotic relationship, rising popula- Transportation accounts for almost two-thirds of all
tion density has rendered most current urban crude oil consumed.9 Based on current trends, global
mobility architectures dysfunctional. Congestion transportation energy demand will grow by almost
is estimated to cost local economies from about 50% by 2040 compared with 2012.10 In 2016, the
1.5% of GDP in London to as much as 15% in World Meteorological Organization warned that
Beijing.5 While a high-population-density city such 92% of the global population is exposed to un-
as Tokyo allocates about 15% of urban land to roads, healthy air. 11 Just the adverse consequences of
typical U.S. cities allocate 30% to 40%.6 Cities such unhealthy air quality, impact to the environment,
as Los Angeles and Beijing are discovering that congestion, traffic fatalities, and fuel subsidies to
building new roads and increasing highway capacity support motorization are estimated to account for
just attract more vehicles and are not solutions to 6% to 10% of global GDP.12 Furthermore, the pro-
eliminating congestion. jections of climate-change impacts from burning
Enrique Peñalosa, a former mayor of Bogotá, more and more oil to power the needs of our econo-
Colombia, cautions that “urban mobility is peculiar mies suggest ecosystem tragedy on an unprecedented
and is different from other urban challenges like global scale over the next century.
education or housing — it tends to get worse as soci- For over four decades, automakers, pushed by
eties become richer.” 7 In many regions, rising regulatory bodies, have been addressing the dual is-
affluence and aspirations, coupled with delayed sues of fuel efficiency and vehicular emissions. Yet
spending on transit infrastructure, result in rapid in- the rapidly growing car population has over-
creases in the population of personal vehicles. The whelmed these advances. By 2016, there were more
mandate must be to invest more aggressively in the than 1.1 billion cars on the planet. Even though

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California has the toughest emission standards in mobility. The auto industry accounts for annual
the United States, Los Angeles is plagued with the revenues of more than $3.5 trillion — if the auto
worst air quality among large U.S. cities. Similarly, industry were a nation, it would rank fourth in
France has some of the toughest standards in GDP.16 The extended industry offers employment
Europe, yet Paris is obliged to impose restrictions to more than 50 million people.17 But to thrive in
on vehicle use in city center areas to mitigate air the new environment, it will need to radically
pollution. transform its raison d’être.
Invention and adaptation are key to human evo-
Changing Attitudes to Mobility lution. Therefore, it is no surprise that innovation,
Since the new millennium, society’s love affair with entrepreneurship, and enlightened public adminis-
automobiles has shown signs of weariness. Even as tration underpin our proposal for CHIP mobility
emerging economies are rushing headlong toward systems.
motorization, the fraction of the population that are
registered drivers is shrinking in most industrialized Heterogeneity: A Smorgasbord
nations, and levels of car ownership are declining.13 of Modes and Solutions
These trends are fueled by several factors. Cars used to be the quickest and most convenient
Between 1950 and 2014, the cost of the median au- mode of travel. In many cities, this is no longer true.
tomobile in the United States climbed from 45% to City administrators are increasingly seeing value in
60% of a family’s annual income. Yet, the average car, the growing variety of modes that can be rendered
retailing in the United States for about $33,000, is typ- attractive and efficient for users. When these modes
ically used for less than 4% of its lifetime.14 The idling are effectively connected and networked, their util-
of such an expensive asset makes poor economic ity is further magnified.
sense. Costs for registering and operating a car have The Chinese philosopher Laozi, a contemporary
also climbed. In Japan, where many cities manage of Confucius, observed that “a journey of a thousand
high population densities and car ownership is noto- miles starts with a single step.” Indeed, residents of
riously expensive, travel by personal car declined by London, Tokyo, and New York may undertake a jour-
almostaquarterbetween1990and2010.15 Meanwhile, ney to the opposite hemisphere with a short walk to
in many communities, smartphones — not personal the nearest subway. Cities like Seoul, South Korea,
vehicles — have become the “must-have” device and and Boulder, Colorado, are building attractive pedes-
serve as the primary gateway to mobility and human trian walkways out of disused railway corridors,
interaction. Many urbanites now prefer to be a user of turning once-neglected areas into vibrant places for
services rather than an owner of assets. human activity. A fifth of all commuters in London
“Mobility as a service” represents a paradigm shift. and almost a fourth of Tokyo commuters prefer to
Thanks to entrepreneurship, smartphone apps, and walk.18 Fitbits and other wearables, as well as pedes-
ubiquitous connectivity, the sharing economy has trian-oriented navigation apps like Walc, further
blossomed, delivering a world where one can share a promote interest in walking and a healthier lifestyle.
weekend villa through Airbnb, rent an evening dress Furthermore, a safe, convenient walking infrastruc-
from Rentez-Vous, and, yes, borrow a car from Turo. ture promotes use of public transit when pedestrian
A variety of solutions including UberPOOL and connectivity is designed into the system.
BlaBlaCar promote ride sharing, helping to save The term “Copenhagenize” is used to denote a
money and carbon emissions. Car sharing through community that has effectively inducted bicycles into
short-term rentals is offered by Zipcar, car2go, its mobility architecture. Over 45% of Copenhagen’s
DriveNow, and their peers. Smartphone-equipped commuters bike to their destinations. The Danish
netizens in emerging economies like China and India capital has adopted a goal of carbon neutrality by
are climbing aboard this platform almost as quickly as 2025 and estimates that the city saves 23 cents for
those in car-saturated economies. every bike kilometer and loses 16 cents for every car
These trends are rapidly converging into a dis- kilometer.19 In Europe, over 50% of trips are less than
ruptive storm poised to transform traditional 5 kilometers. Consequently, in the short time since the

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introduction of bike-sharing services, bicycle use in from 30% to 25%.23 Helsinki and Singapore have
London has doubled,20 while in Paris they have con- begun to deploy driverless eight- to 10-seater shut-
tributed to a drop in vehicle use by residents. tles, opening the door to another dimension of
Travel over longer distances demands other solu- innovation, utility, and efficiency.24
tions.In London,Paris,and Rome,a growing number Higher-density corridors may employ light rail
of motorcycles and motor scooters are used not only systems. Zurich, Switzerland, has an effective system
by students and young adults but also by a range of of light rail and buses that helps limit the level of
professionals. Traveling between gridlocked lanes personal car use to less than 30% for local trips. In
and exploiting authorized use of restricted bus lanes contrast, Coventry in the U.K., with a similar popu-
earn them faster commutes — and they enjoy more lation, lacks an equivalent mass transit system,
flexible parking options. Anticipating customer de- resulting in personal car use for 75% of local trips.25
sires for smaller vehicle footprints, some automakers For cities that must manage very-high-density cor-
are experimenting with two-seater microcars, such as ridors for movement of people, few solutions
Renault’s Twizy and Toyota Motor Corp.’s i-Road in match the space and energy efficiency of metros or
some European cities. Typically, these vehicles are subways. Hong Kong’s metro system is often bench-
electric-powered and zero-emission and employ marked for scale, efficiency, and profitability. The
most of the modern e-connectivity features used in systems in Tokyo, London, Singapore, and New
traditional cars. Autonomous microcar concepts York are highly utilized and effective. In 2015,
such as the LUTZ Pathfinder, developed by the U.K. China announced that it was doubling the length of
government and U.K.-based RDM Group, and the metros in 23 cities. India is similarly constructing
EN-V, developed by General Motors Corp. and metros in 12 major cities.
Segway Inc., are being evaluated to serve shared fleets
for cities of the future. A Connected Mobility Network
While shrinking a vehicle’s footprint can lower the CHIP mobility architectures, like the internet, depend
impact of personal mobility, an alternative is to share on a network for connectivity. Connectivity may be
vehicles among users. Globally, almost 80% of all provided by physical infrastructure, such as the numer-
transit commuters use a bus.21 Yet buses are typically ous routes from origin to destination, combined with
not “sexy” and have been poorly leveraged. Modern transit hubs that allow the user to switch modes, such
renditions employ advanced vehicular technologies, as a bike-share station located at a subway station.
including zero-emission propulsion, semi-autono- Complementing physical connectivity, digital
mous driving, and Wi-Fi connectivity. Bus systems connectivity enables travelers to employ apps to
are being reimagined with Bus Rapid Transit (BRT) assess and choose among various travel routes and
corridors mimicking metros, offering restricted- modes. For such users, “mobility on tap” is the expec-
access lanes with priority right of way at traffic lights, tation. Even more impressive changes are possible
stations with turnstiles and contactless card-based when the benefits of connectivity are extended to the
fare payment, and facilities designed for rapid ingress whole mobility system. A digitally connected traveler,
and egress. Compared with metros, buses can serve as for example, can plan a journey and then hail and pay
a much lower investment option with improved flex- for an Uber car with a single smartphone app. Car2go
ibility. Curitiba, the capital of Brazil’s Paraná state, allows travelers to pick up a car in the vicinity and
has successfully deployed BRT transit and has seen drop it off at their destination, not necessarily at a
vehicular traffic on its streets decline by 30% since designated drop-off point. Turo’s peer-to-peer busi-
1975, even as its population has doubled.22 U.S. cities ness model offers a renter the use of a fellow member’s
like Boston, Los Angeles, Cleveland, and Seattle car when that member has no use for the car.
have benefited from investments in BRT corridors. UberPOOL and BlaBlaCar use the power of smart-
In Seattle, bus ridership has grown at twice the rate phone apps and connectivity to allow two or more
of the population since 2002, and, through contin- people to share a ride across town or even for week-
ued improvements, the city aims to reduce the end trips. Chariot Transit Inc. in San Francisco uses
percentage of single-occupant vehicles on streets 10- to 15-seat vans that complement public transit

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with crowdsourced stops and routes determined by THE CHIP MOBILITY FRAMEWORK
users. Mobility Mixx B.V. in the Netherlands offers a The CHIP mobility architecture depends on the connectedness of a heteroge-
neous set of travel modes comprising both physical and digital infrastructure.
mobility card that bundles a range of mobility modes,
The system operates in an environment orchestrated by society’s interests and
from bicycles to public transport, taxis, and personal priorities. Intelligent tools allow travelers to undertake journeys that are crafted
cars. The user has the option to use public transit for to their personal and contextual preferences.
the daily commute, borrow a limousine for an im- • Land use
Societal • Economics
portant client meeting, and use a sporty convertible imperatives • Affordability
• Environment
for a weekend escape to the beach.
These companies rely on (1) improving asset • Incentives
Governance • Vehicle use restrictions
utilization; (2) sharing a journey among multiple • Parking capacity
• Emissions mandate
users; and (3) promoting the use of the appropriate Heterogeneous Intelligent
modes applications
tool for the task. Much like a sculptor chips away
extraneous material to the final form, these options

Co S Cos
En ven eed
n p t
vir ien
Modal Connectivity
seek to chip away wasted assets and resources.

on ce
m
characteristics

en
Origin Destination
Physical and digital connectivity both play im-

t
Automobile Convenience optimized
portant roles in generating efficiencies — they allow Taxi Time optimized
Bus Cost optimized
a traveler to link individual segments of a journey Train
Motorcycle Personalized
rather than undertaking the journey with a single Bicycle
compromise solution. However, travelers will be Pedestrian Environment optimized
motivated to choose a journey with multiple con-
nections only when the effort, cost, and time needed
to make the connections are low. Hence, investments Personalization

in both physical infrastructure connectivity and dig-


• Trip specifics
ital connectivity are vital. User • Comfort and convenience
preferences • Speed
• Cost
Intelligent Personalization
A mobility system enhanced with heterogeneity of expectations and preferences for each journey. A
innovative transport modes, networked with physi- Monday morning commute may call for different pri-
cal and digital connectivity, generates a bewildering orities than a weekend camping trip. Each user seeks
array of options for a user. Furthermore, each jour- to balance and optimize the associated rewards and
ney may involve one or more modes with connections costs. By 2016, several apps such as Citymapper and
along the route. The important task is to sort through Daimler AG’s moovel were becoming available in
the large volume of data of the various modes and Europe and the United States to offer some of this
their profiles and match them, in real time, with the capability. They are as easy to use as the modern map-
user’s preferences. Artificial intelligence systems are ping tools we have become dependent upon, and
ideally suited to tackle this. These “robo-advisers” can they’re growing in utility each year.
recommend a few relevant options from the universe
of mobility solutions that are available, seeking to CHIP Mobility: Characteristics
maximize what John Hagel, co-chairman of Deloitte’s We have positioned CHIP mobility as an architecture
Center for the Edge, calls “return on mobility.”26 The and not as a particular solution. (See “The CHIP
return-on-mobility approach recognizes that any Mobility Framework.”) Given the diversity of cities
journey contributes value to the traveler, not only in and individuals, there can be no single “winning so-
getting to the destination but also in the experience lution.” Rather, the architectural concept is pragmatic
along the way. and flexible — it can be molded to suit various geog-
Each journey and each mode has its own unique raphies and budgets, emphasizing those modes and
signature of expense, stress, duration, level of conve- technologies that offer local advantage. The sprawl of
nience, ambience, degree of privacy, carbon emissions, Los Angeles will require solutions different from
and so on. Similarly, the traveler may have unique those of compact Hong Kong. Singapore can deploy

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new systems more quickly than New York, which may century.”27 Some automakers are already working
need more time and effort to attract and mobilize on the larger canvas. BMW, Daimler, and Ford, for
popular support. Mumbai commuters may ill-afford example, have started making investments well be-
solutions that make sense in London. yond the core of the auto industry. They have
For any society, mobility needs to be inclusive — acquired stakes in businesses related to short-term
accessible to all segments of the population. The wide rentals like car2go, app-hailed car services like Ride
variety of modes embraced by CHIP mobility Now, app-hailed van pools like Chariot, peer-to-
ensures that low-cost modes coexist with more ex- peer car sharing such as Getaround, intercity bus
pensive ones. Mobility architectures make extensive services like FlixBus, apps for navigation and map
use of public spaces and assets and have economic data such as Here We Go, apps that assist drivers
and environmental consequences that affect entire with parking such as JustPark, and even mobility
communities. Hence local CHIP implementations robo-advisers such as moovel.
must be guided by a combination of locally devel- Traditional automakers now face competition
oped policies, regulations, investments, fees, and from a formidable quarter — tech giants such as
incentives to ensure appropriate alignment with soci- Google, Apple, Microsoft, Tencent, and Baidu. The
etal goals. Accomplishing these goals will require convergence of technologies within consumer elec-
engagement of public and private capital and will ne- tronics and cars has driven both business sectors to
cessitate a blurring of the divide between public, covet preferential access to today’s digitally con-
shared, and private modes. Even as freedom of choice nected consumers. Google’s and Apple’s interests in
is preserved with variety, a combination of incentives autonomous driving and ride sharing are evidence
and fees should ensure that each user pays a fair share of how they see their future role in mobility. As
of the cost of his or her chosen mobility solution. with smartphones, tech companies would presum-
The CHIP architecture is also dynamic. Like the ably be delighted with a future scenario in which
internet, the architecture relies on redundant routes automakers provide low-value-added hardware
and modes and encourages entrepreneurship to platforms, leaving the tech giants the lion’s share of
conjure new solutions. The redundancies will also profits from services and value created by data and
ensure that ineffective modes and solutions may be analytics. Automakers would likely prefer a differ-
replaced as necessary. In each setting, the CHIP ar- ent allocation of the profit pie.
chitecture must evolve through fluid adaptations, Governments around the world have been
fostering innovation and experimentation. actively involved in creating new highway infrastruc-
The CHIP architecture promotes greener mo- ture to increase productivity and economic growth.
bility through fair pricing modes based on impact As urbanization increases, city administrations are
to air quality, as well as use of energy, space, and called upon to develop and operate a broader set of
public assets. It depends on policies to steer how levers including investments, policies, fiscal incen-
people choose and use mobility. Fiscal penalties, tives, and levies to steer a sustainable and beneficial
such as the congestion fees imposed in London, or course for intracity commutes. Automakers that
nonfiscal incentives, such as the privileged use of have traditionally been wary of inviting government
high-occupancy lanes for zero-emission vehicles, involvement in transportation have come to recog-
illustrate possible productive interplay between a nize the contributions cities can make. According to
physical mobility architecture and appropriate Carlos Ghosn, chairman of the Renault-Nissan-
governing policies. Mitsubishi alliance: “The biggest transformations
will not take place inside our vehicles, or even inside
CHIP Architecture: Call for Action our companies. Rather, they will take place on the
The CHIP mobility architecture will require the stage of the world’s cities. Cities are facing challenges
auto industry to transform itself. Ian Robertson, a that could be solved, in part, by mobility solutions.
senior BMW leader, agrees that “the next 10 years To align technology, policy, and planning, automak-
are probably going to involve more change and ers and cities must work as partners.”28
more dynamics than we have seen in the last As city administrations formulate sound policies

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to steer the trajectory of mobility along paths aligned 11. World Health Organization, WHO Releases Country
to societal priorities, they will find that the CHIP ar- Estimates on Air Pollution Exposure and Health Impact,
news release, Sept. 27, 2016, www.who.int.
chitecture weaves the concepts of connectivity,
12. United Nations Division for Sustainable Development,
heterogeneity, intelligence, and personalization into “Creating Universal Access to Safe, Clean, and Affordable
a tapestry to deliver mobility that is faster, smarter, Transport: Partnership on Sustainable Low Carbon Trans-
port, 2013,” June 20, 2013, http://sustainabledevelopment
and greener.
.un.org.
13. T. Dutzig and P. Baxandall, “A New Direction: Our
Venkat Sumantran (@sumantran) is chairman of Changing Relationship With Driving and the Implications
Celeris Technologies. Charles Fine is Chrysler LGO for America’s Future,” May 14, 2013, www.uspirg.org;
Professor at MIT Sloan School of Management and P. Brasor and M. Tsubuku, “Japan Is Losing Its Drive to Get
the founding president of the Asia School of Busi- Behind the Wheel,” Feb. 13, 2016, www.japantimes.co.jp.
ness, Kuala Lumpur, Malaysia. David Gonsalvez
is CEO and rector at MIT’s Malaysia Institute for 14. Morgan Stanley Research, “Rent-a-Car Meets
Supply Chain Innovation. Comment on this article Tech: Head-On Collision” (New York: Morgan Stanley,
at http://sloanreview.mit.edu/x/59208. Sept. 4, 2014).
15. “The Future of Driving: Seeing the Back of the Car,”
The Economist, Sept. 22, 2012.
REFERENCES
16. “Automotive Revolution: Perspective Towards 2030,”
1. N. Gibbs, “Automakers Outline How They Will Thrive January 2016, www.mckinsey.com; and “Gross Domestic
in a Digitally Driven Future,” June 5, 2016, http://europe Product 2016,” World Bank, April 17, 2017, http://world
.autonews.com. bank.org.
2. United Nations Department of Economic and Social Af- 17. “Economic Contributions,” 2017, www.oica.net.
fairs, Population Division, “World Urbanization Prospects: 18. M. Colville-Andersen, “The 20 Most Bike-Friendly
The 2014 Revision” (New York: United Nations, 2015). Cities on the Planet,” Wired, March 22, 2016.
3. A. Gouldson, S. Colenbrander, A. Sudmant, N. Godfrey, 19. P. Rode, C. Hoffmann, J. Kandt, D. Smith, and A. Graff,
J. Millward-Hopkins, W. Fang, and X. Zhao, “Accelerating “Towards New Urban Mobility: The Case of London and
Low-Carbon Development in the World’s Cities,” working Berlin,” LSE Cities at the London School of Economics and
paper, New Climate Economy, London and Washington, Political Science and the Innovation Centre for Mobility and
DC, 2015; World Health Organization, “Urban Population Societal Change, London, 2015; and C.C. Choi and N. Loh,
Growth,” 2014, http://www.who.int; and R. Dobbs, S. Smit, “Transport Policies and Patterns: A Comparison of Five
J. Remes, J. Manyika, C. Roxburgh, and A. Restrepo, Asian Cities,” Journeys (September 2013): 69-78.
“Urban World: Mapping the Economic Power of Cities,”
March 2011, www.mckinsey.com. 20. “Travel in London: Report 8,” 2015, http://tfl.gov.uk.

4. M. Bloomberg, Keynote Speech, U.N. Economic and 21. U. Guida, “Increasing Bus Attractiveness Through
Social Council 2014 Integration Segment, New York City, Efficiency,” Oct. 2, 2013, http://civitas.eu.
May 27, 2014. 22. “How to Design Cities Around People, Not Cars,”
5. “Traffic Congestion to Cost the U.K. Economy More June 10, 2011, http://allianz.com.
Than £300 Billion Over the Next 16 Years,” press release, 23. N. Balwit, “A Growing Seattle Goes All In on Transit,”
Oct. 14, 2015, http://inrix.com; and F. Creutzig and D. He, Jan. 5, 2017, www.citylab.com.
“Climate Change Mitigation and Co-Benefits of Feasible 24. S. Gibbs. “Self-Driving Buses Take to Roads Alongside
Transport Demand Policies in Beijing,” Transportation Commuter Traffic in Helsinki,” The Guardian, Aug. 18, 2016.
Research Part D: Transport and Environment 14, no. 2
(March 2009): 120-131. 25. FICCI, “Modern Trams (Light Rail Transit) for Cities in
India” (New Delhi: Institute of Urban Transport [India],
6. R. Petersen and C. Schäfer, “Land Use Planning and September 2013), http://ficci.in/spdocument/20301/
Urban Transport” (Berlin: German Ministry for Economic light-rail-transit-white-paper.pdf.
Cooperation and Development, 2004); and “We Are
the 25%: Looking at Street Area Percentages and 26. J. Hagel, “Navigating a Shifting Landscape: Capturing
Surface Parking,” Old Urbanist (blog), Dec. 12, 2011, Value in the Evolving Mobility Ecosystem,” Jan. 7, 2016,
http://oldurbanist.blogspot.in. http://deloitte.com.

7. E. Peñalosa, “Politics, Power, Cities,” Jan. 11, 2015, 27. C. Hetzner, “BMW’s Robertson Warns Industry to
www.youtube.com. Brace for Change,” June 8, 2016, www.autonews.com.

8. D. Moore, “Ecological Footprint Analysis: San Francisco, 28. Nissan Partners With 100RC to Prepare Cities for
Oakland, Fremont, CA Metropolitan Statistical Area,” Autonomous Vehicles, Electric Cars, Future Mobility,
June 30, 2011, www.footprintnetwork.org. news release, Jan. 6, 2017, www.100resilientcities.org.

9. International Energy Agency, “2015 Key World Energy Reprint 59208. For ordering information, see page 4.
Statistics,” 2015, www.iea.org. Copyright © Massachusetts Institute of Technology, 2018.
10. U.S. Energy Information Administration, “International All rights reserved. This article was originally published online.
Energy Outlook 2016,” May 11, 2016, www.eia.gov. It has been adapted for print.

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S U S TA I N A B L E T H I N K I N G : G O V E R N M E N T

Business Needs a
Safety Net
Government’s long-ignored role in creating and sustaining market conditions should
take center stage as climate events become both more common and more destructive.
BY DAVID KIRON AND GREGORY UNRUH

IT IS STANDARD FARE for large companies to talk about their contributions to society, but 2017 has
provided new evidence that business may need to rethink its purpose in society. In just one month —
September — the United States and Mexico were hit by three Category 4-plus hurricanes and two major
earthquakes that devastated entire communities. Over 400 people died in two powerful quakes occurring
11 days apart in Mexico, while Puerto Rico faced the prospect of being without power and clean water for
months in the aftermath of Hurricanes Irma and Maria (even as the mainland U.S. was cleaning up after
Hurricane Harvey, which hit Houston less than a week before Irma struck).
The following month, three more major events hit: Wildfires in California yielded a predicted $85 bil-
lion in losses to the U.S. economy, while Spain and Portugal similarly saw devastating blazes. Hurricane
Ophelia left three Ireland residents dead, with hundreds of thousands lacking power.
As these catastrophic events increase in the coming years, business and government will need to work
together — more than they have — to ensure that markets and communities are as resilient as possible.

Gray-haired execs might recoil at this thought, on broken streets. Uninsured costs from these cata-
pointing to economist and American Nobel Laureate strophic natural events are skyrocketing, placing a
Milton Friedman’s oft-repeated claim that “the one growing burden on households (only about 20% and
and only one social responsibility of business …[is] 14% of households in Texas and Florida, respectively,
to increase its profits.” But these managers ignore had flood insurance when hurricanes Harvey and
Friedman’s less well-known caveat later in that sen- Irma hit) and on local and federal governments to
tence, “so long as [the company] stays within the help people get back on their feet.
rules of the game.” As Friedman remarked in The idea that government’s central role in market
Capitalism and Freedom (University of Chicago activity is to determine, interpret, and enforce rules
Press, 1962), “Government is essential both as a ignores a glaring truth. Government ensures the ex-
forum for determining the ‘rules of the game’ and as istence of markets in the first place, as well as the
an umpire to interpret and enforce the decided-on social infrastructures that allow markets to thrive.
rules. What the market does is to reduce greatly the It was the U.S. government’s investment in road
range of issues that must be decided through politi- networks that enabled the rise of the automotive
cal means, and thereby minimize the extent to which industry, which accounts for 3% to 3.5% of the U.S.
government need participate directly in the game.” gross domestic product. Its investment in a satellite
This strong distinction between rule makers and system enabled the emergence of Google. The
game players is difficult to maintain when a changing Bayh-Dole Act of 1980 enabled many companies to
natural environment becomes a destructive economic develop and exploit patents, based in part on gov-
force that regularly puts populations of broken people ernment-funded research, for private commercial

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ends. The list of companies whose success owes a attitude toward government as an enabler of, rather
debt to government is long. As cognitive linguist than a constraint on, their respective corporate
George Lakoff noted in 2010: purposes. Government has, and will continue to
have, an important role in ensuring that markets
The moral missions of government include are resilient. Business needs a strong and effective
the protection and empowerment of citizens. government to provide a safety net for markets.
Protection includes health care, social security, safe
food, consumer protection, environmental protec- Ecological Events Increase the
tion, job protection, etc. Empowerment is what Costs of Maintaining Markets
makes a decent life possible — roads and infra- Many indicators point to the looming effects of a
structure, communication and energy systems, changing natural environment on the economy.
education, etc. No business can function without The reinsurance industry has been tracking natu-
them. This has not been discussed adequately. rally occurring events that cause large economic
Government serving those moral missions is what losses — including hurricanes, earthquakes, floods,
makes freedom, fairness, and prosperity possible. and droughts — for the past four decades. The rate
and intensity of these events have increased over this
As the effects of climate change become more period, driven in part by increases in the economic
prominent in daily life and in the economy more value that exists in a given location but also from the
broadly, business needs to grapple with its own violent character of the events themselves.

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As the incidence of economic loss events has behavior among consumers to improving their ef-
multiplied, so too have insured losses. But unin- fect on the environment.
sured losses have increased faster. Indeed, annual Aetna’s CEO and chairman, Mark Bertolini, for
global uninsured losses from these events have example, spoke passionately about what his com-
soared beyond the $150 billion mark. In the United pany was doing to address the opioid epidemic. His
States today, uninsured losses from natural catas- presentation coincided with market uncertainty
trophes may reach $100 billion, a number that is over the fate of the Graham-Cassidy health care
sure to grow in the coming years. reform bill in the U.S. Senate, which was deciding
In Mumbai, researchers surveyed businesses whether to vote on it. During his talk, he pulled out
and individuals following a severe weather event in his phone to note that his company had dropped
an effort to understand the impact of catastrophic several points per share that day, representing hun-
loss events on the uninsured and concluded: dreds of millions of dollars in market capitalization.
Government uncertainty about supporting the
Our results indicate that the uninsured private safety net was bad for his business. Clearly, aligning
losses suffered by individuals and small businesses business and government is no easy task.
significantly exceed the damage to public infra- The conference pointed to a giant gap in most of
structure. In the absence of insurance or these companies’ long-term plans. Despite the ob-
government assistance, these costs represent ... vious connections, working with governments to
significant out-of-pocket expenses for the house- build resilient markets in a natural environment
holds and businesses. These findings have that doles out increasing levels of damage made no
significant policy implications in terms of appearance on the long-term agenda of these com-
highlighting the vulnerability of the informal panies. This is a blind spot among even the more
sector to extreme weather events in cities of the progressive companies on sustainability issues.
developing world. Companies face a choice when considering
their long-term contributions to society, their
The problem is just as relevant for developed overall purpose: They can either work directly
countries, like the United States or Switzerland. with governments and other organizations to plan
Karin Reiter, former corporate responsibility man- for responses to natural loss events or do nothing
ager at Switzerland-based Zurich Insurance Group and let the government reestablish market condi-
AG, points out that “a prosperous business depends tions however (or if ) it chooses. Whatever is
on a prosperous community. You need people who chosen, what’s clear is that a more destructive phys-
are able to buy your goods and procure your ser- ical environment recommends a more nuanced
vices. You need to have access to skilled local talent. business relationship with government, specifically
So you want to make sure that the communities as a partner in enabling and supporting markets
continue on their development path.” rather than as a regulator that needs to be managed.
The future of demand may depend on what path
Reimagining Business’s Purpose business decides to take.
At CECP — The CEO Force for Good’s Strategic
Investor Initiative forum on Sept. 19, 2017, in New David Kiron is the executive editor of MIT Sloan
Management Review. He tweets @davidkiron1.
York City, CEOs from several Fortune 1,000 compa- Gregory Unruh is the Arison Professor of Values
nies (Allstate, Aetna, Prudential, Delphi Automotive, Leadership at George Mason University in Fairfax,
Virginia, and MIT Sloan Management Review’s
and Telia) discussed their company’s long-term
guest editor for the Sustainability Big Ideas Initia-
objectives, specifically in the context of their com- tive. He tweets @gregoryunruh. Comment on this
pany’s overall purpose. Most telling was the extent article at http:/sloanreview.mit.edu/x/59309.
to which this group of executives connected their
Reprint 59309. For ordering information, see page 4.
corporate purpose to stabilizing the market envi-
Copyright © Massachusetts Institute of Technology, 2018.
ronments in which they operate — from improving All rights reserved. This article was originally published online.
trust in corporations to improving healthy It has been adapted for print.

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S U S TA I N A B L E T H I N K I N G : F I N A N C I A L R E P O R T I N G

Why Companies Should


Report Financial Risks
From Climate Change
How hard will it be for companies to meet the recommendations of the Task Force
on Climate-related Financial Disclosures? Not as hard as many might think.
BY ROBERT G. ECCLES AND MICHAEL P. KRZUS

INVESTORS AND THE REST of the world are watching to see how companies will respond to the final
recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) commissioned by
Mark Carney, governor of the Bank of England and chair of the G20’s Financial Stability Board. Simply put, the
TCFD is asking companies to report on their response to the risks and opportunities created by climate change.
The TCFD emphasizes that these disclosures can be done in existing reporting formats (such as 10-Ks).
Despite the voluntary nature of the TCFD’s recommendations,
companies have several reasons to start implementing them. First
is investor pressure: Investors need this information and are mobi-
lizing to ensure companies take the recommendations seriously.
For example, ShareAction, a U.K.-based nongovernmental organi-
zation (NGO), and Boston Common Asset Management LLC
have organized a campaign (representing more than $1.5 trillion
in assets under management) to implement these recommenda-
tions at 60 of the world’s largest banks. It is likely that many more
shareholders will be clamoring for a response at upcoming 2018
annual general meetings.
Second, investors may be less inclined to invest in companies
that do not implement the recommendations.
Third is self-interest: Companies that comply with the recom-
mendations will have better strategies for adapting to climate change
and will be able to explain these to the investment community.
Fourth, the recommendations will most likely lead to regulation;
laggards will find themselves playing catch-up, perhaps under time
pressure and at great expense, if they’ve done nothing to lay the
groundwork for following the TCFD’s recommendations. The stakes
are high for investors, companies, and the world.
How hard will it be for companies to implement the TCFD’s rec-
ommendations? Consider an industry that is among the most
severely challenged by climate change: oil and gas. We examined the
disclosures from 2016 for 15 of the largest oil and gas companies
by market cap listed on the New York Stock Exchange (NYSE):

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Anadarko, BP, Chevron, CNOOC, ConocoPhillips, Statoil provided the most robust disclosures. The dis-
Eni, EOG Resources, ExxonMobil, Occidental closures made by the other companies were more
Petroleum, Petrobras, PetroChina, Shell, Sinopec, limited and, in some cases, perfunctory. Eni addressed
Statoil, and Total. We reviewed each company’s 2016 each of the four high-level disclosure recommenda-
SEC Form 10-K (used by U.S. domiciled listed com- tions to some degree. While it was the only company
panies) or Form 20-F (used by companies based to do so, this shows that the TCFD’s recommenda-
outside the United States that have listed equity shares tions can be met. The disclosures of these three
on U.S. exchanges) and their sustainability reports. companies taken together provide a good road map
This makes for a good test.How much more disclo- for all oil and gas companies.
sure is being recommended by the TCFD than already Strategy disclosures in both SEC filings and sus-
exists today? While there is work to be done,oil and gas tainability reports were generally well done. Most
companies won’t be starting with a blank sheet of companies provided information that indicated a
paper. A few have even made good progress already in focus on their long-term strategy even where cli-
adhering to the TCFD’s recommendations. While we mate risk was not specifically mentioned. Forecasts
don’t want to underemphasize the challenges, we also for energy usage 20 or 30 years from now often
want to make it clear that the TCFD is not making rec- accompanied details related to development of bio-
ommendations that are impossible to meet. fuels, carbon capture and storage, natural gas fields,
and investments in wind, solar, and fuel cells.
TCFD’s Four Recommendations However, few companies disclosed information
The TCFD report has four broad recommenda- about scenario analysis, including a “2 degrees or
tions with the suggestion that companies provide lower” scenario — one in which companies are
these disclosures in their annual financial filings: mandated to work toward maintaining the rise in
• Governance: “the organization’s governance global temperature to no more than 2 degrees
around climate-related risks and opportunities” Celsius above preindustrial temperatures.
• Strategy: “the actual and potential impacts of Disclosures were weaker for governance, risk
climate-related risks and opportunities on the management, and metrics and targets. The deficien-
organization’s businesses, strategy, and financial cies were related to the 11 specific disclosure
planning” where such information is material recommendations: failure to describe board over-
• Risk management: “the processes used by the sight and management’s role in assessing climate
organization to identify, assess, and manage risks; processes to manage and mitigate climate-
climate-related risks” related risks; and metrics to assess climate risks. For
• Metrics and targets:“the metrics and targets used to example, while companies described board compo-
assess and manage relevant climate-related risks and sition and expertise, only one provided details about
opportunities”where such information is material board committee meetings to address climate risk.
We explored three questions in our analysis: Companies discussed climate-related risks in the
1. To what extent were oil and gas companies al- risk factors section of their SEC filing, but these dis-
ready following the TCFD’s recommendations closures lacked detail. With respect to metrics and
using existing guidance from the Securities and targets, many of the companies disclosed their
Exchange Commission (SEC), Global Reporting greenhouse gas emissions in terms of performance
Initiative (GRI), and Sustainability Accounting and future goals, but very few discussed how the tar-
Standards Board (SASB)? gets related to business model and strategy.
2. If most (all) companies show a large gap in com- Both Eni and Statoil disclosed the sustainability
plying with the TCFD’s recommendations, targets for CEO incentive compensation. Eni also
would closing this gap result in increased legal disclosed that its Sustainability and Scenarios
liabilities from disclosure? Committee discussed energy scenarios and renew-
3. What needs to be done to facilitate adoption of able energies at six of its 10 meetings. Statoil described
the TCFD’s recommendations? a board and executive climate risk assessment pro-
Three companies stood out. Eni, ExxonMobil, and cess, though not at the recommended level of detail.

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Eni, Statoil, and ExxonMobil provided performance information is included in an official financial filing.
information and targets for greenhouse gas emis- Information there gets greater scrutiny, is subject to
sions, carbon intensity, and efforts to reduce flaring better internal controls and procedures, in reality
and methane emissions. This affirms that the TCFD’s poses no legal risk, and is more credible to investors.
objectives can be met within existing financial filings. We suggest the following three-step process for oil
and gas companies, and companies in general, to com-
The Legality of Implementation ply with the spirit of the TCFD’s recommendations.
In general, we found more information relevant to First, the board of directors should direct executive
the TCFD’s recommendations in voluntary sustain- management to adopt the TCFD’s recommendations.
ability reports than in official financial filings. Thus, This can be done as part of a Statement of Significant
companies are already disclosing information they Audiences and Materiality. The board should evalu-
are not required to. Why don’t more companies re- ate and take a position on climate risk by stating
port climate risk information in their official filings? whether society as a whole is a significant audience
One possible reason, litigation risk, is a red herring. and how it will evaluate the company’s short-,
As explained by Russell Picot, a special adviser to the medium-, and long-term efforts to mitigate risks
TCFD, “…companies and lawyers have expressed and leverage opportunities.
concerns that scenario analysis could be interpreted Second, management should develop a plan for
as a forecast, and if proved inaccurate could lead to meeting the recommendations, starting with the
being sued by investors.” Picot explained that the four categories and then drilling down to the specific
TCFD is not asking for a “financial forecast,” only for recommendations in each one. Recognizing the lia-
companies to explain how their businesses might be bility concerns, the focus in the early stages should
affected under different scenarios. be on what goes into the sustainability report.
Two companies in our study appear to share Third, executive management should develop a
Picot’s views on scenario analysis and legal risk. Eni plan for shifting the emphasis of its TCFD-related
described how the company assessed recoverability reporting from the sustainability report to its offi-
of the carrying value of assets using the International cial and mandated financial filing. This will
Energy Agency (IEA) 450 Scenario (a 2 degrees sce- improve the quality of the information, as well as
nario) in the risk factors section of its Form 20-F. make clear how these disclosures are related to
Statoil’s Form 20-F described the sensitivity analysis present and future financial performance.
of the company’s project portfolio using the IEA 450 Do companies have to do this? Not yet and not
Scenario, but not in great detail. now. Will regulators require it? Probably not soon
Similarly, in the Management Discussion and in most jurisdictions. But will investors be putting
Analysis section of ExxonMobil’s Form 10-K, the pressure on companies to do so? Yes, they will, and
company disclosed information about its processes to they already are. This pressure will only increase as
evaluate impairment of assets or project viability evidence mounts that how a company deals with
under a wide range of fact patterns. Even though climate change will determine its ability to deliver
ExxonMobil did not specifically address 2 degrees value for its investors — and the world at large.
scenarios, the fact that both Eni and ExxonMobil
disclosed information about circumstances that Robert G. Eccles is a visiting professor of management
practice at Saïd Business School at the University of
might affect the value of assets and viability of proj- Oxford and a board member of the Mistra Center for
ects in their SEC filings suggests that scenario Sustainable Markets at the Stockholm School of
Economics. Michael P. Krzus is an independent
analysis of asset impairment due to climate change is
consultant and researcher and senior adviser to
a first step that companies can take. BrownFlynn and Sustainserv. Comment on this
General counsels at many companies may advise article at http://sloanreview.mit.edu/x/59312.
their companies to follow the recommendations of
Reprint 59312. For ordering information, see page 4.
the TCFD in their voluntary sustainability report. Copyright © Massachusetts Institute of Technology, 2018.
Our view is that the TCFD’s recommendations will All rights reserved. This article was originally published online.
have their full impact only when the bulk of the It has been adapted for print.

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I N N O VAT I O N

THE HYBRID TRAP:


Why Most Efforts to Bridge
Old and New Technology
Miss the Mark
Mature companies often lack the vision and resolve to fully commit
to new technologies — even when consumers are ready for them.
This leads companies to develop watered-down products with limited
capabilities and leaves them exposed to upstart competitors.
BY FERNANDO F. SUAREZ, JAMES UTTERBACK, PAUL VON GRUBEN, AND HYE YOUNG KANG

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T
ECHNOLOGICAL TRANSITIONS ARE challenging,
particularly for companies in mature industries. Incumbents
are frequently blindsided by new technologies, fully missing
opportunities to enter emerging markets early. While some es-
tablished companies do possess the awareness and dexterity to
become early adopters of new technologies, they typically lack the
vision and the commitment to become leaders. Too often, they cling to
the familiar, developing hybrid products that combine elements of the old and the new.
The trouble is, hybrid strategies put even the best incumbent companies in a weak posi-
tion when the market finally embraces the new technology. We call this the “hybrid trap.”
The transition from internal combustion engines take when faced with industry transformations,
to electric vehicles (EVs) demonstrates the dangers of with lessons that apply to other industries that face
hesitating to embrace the new. Several internal com- similar transitions.
bustion engine makers, such as General Motors Co.,
and Honda Motor Co. Ltd., entered the EV market Conviction vs. Opportunism
early, but they backed away from these projects in New markets are often enabled by technological
favor of continued emphasis on established technol- change and exploited by minds that can envision fu-
ogy. Gradually, most of the automakers focused on tures that are far different from the status quo. More
hybrid cars that combined old and new technologies. so, they are convinced that such a future must hap-
This opened the door to new competitors that pur- pen. Amazon.com Inc. founder Jeff Bezos didn’t
sued solely the EV technology, most notably Tesla Inc. invest in Blue Origin LLC, the rocket company he
It wasn’t until established players saw the market’s in- founded for space transportation, based on short-
terest in Tesla that they began to question their hybrid term financial calculations or because he likes to
strategies and realized that electric cars had the poten- invest in wild ideas. Bezos made the investment be-
tial for broad market appeal. By cause he truly believes mankind
mid-2017, nearly every old-line THE LEADING needs to conquer space to survive
engine producer was playing QUESTION and prosper. Steve Jobs led Apple
catchup on EV technology, work- How can Computer Inc. to enter the com-
ing to release new electric models
established puter industry in the 1980s and
companies
in the next two to five years. the mobile phone industry in the
respond
Meanwhile, Tesla, having es- to major 2000s with the belief that comput-
tablished a strong brand in EV, technological ers and phones needed to be not
continues its move down market transitions? only fast and precise, but also easy
as a more direct threat to incum- to use and aesthetically pleasing.
FINDINGS
bent automakers. 
Incumbents tend
Like other innovators who have
Tesla’s first mass-market car, to focus on hybrid changed their companies and in-
products when
the Model 3, was announced in facing technology dustries over the years, Bezos and
March 2016, and by summer transitions. Jobs had clear visions that they be-

Focusing on hybrids
2017, it had a waiting list of more puts incumbents in lieved in and thought would one
than 455,000 units. Although it is weak positions be- day become reality. Their convic-
cause it keeps them
too early to know if Tesla will be tied to the old tions drove them to attempt what
technology.
successful in the long run, its clear many would have considered wild

As companies cling
leadership in EVs has exposed a to old technology, or even insane.
fundamental weakness in the ap- upstarts get time It’s interesting to contrast the
to build market
proach incumbents commonly positions. bold visions of Bezos and Jobs

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I N N O VAT I O N

with the hesitant approaches taken by GM, Ford, technology. However, with the exception of Nissan’s
Toyota, Nissan, BMW, Daimler-Benz, and other es- Leaf, production volumes of EVs were low. The
tablished automakers in the emerging EV market in mainstream was still hedging.
the 1990s. Although some of these companies had Indeed, most of the industry pursued a path typi-
ABOUT THE done exploratory EV research for some time and fied by GM. Seeing the Tesla Roadster at the Detroit
RESEARCH even entered the market early, none of them had the Auto Show in 2006, then GM vice chairman Robert
This article is part of our on- vision and conviction to push forward as leaders in Lutz reportedly challenged his company to produce
going research project about
the emerging market. Rather, they all settled back on an all-electric vehicle.2, 3 “All the geniuses here at
incumbents’ and new en-
trants’ strategies during a hybrid product strategy. (See “About the Research.”) General Motors kept saying lithium-ion technology is
periods of technological 10 years away, and Toyota agrees with us — and,
transitions. We place partic- The Market Creators boom, along comes Tesla. So, I said, ‘How come some
ular emphasis on the role
In the eyes of many people, the credit for the emer- teeny little California startup run by guys who know
that hybrid products (prod-
ucts that mix elements of
gence of electric cars is closely associated with Tesla nothing about the car business can do this and we
the old and new technolo- and Elon Musk. However, there were other visionar- can’t?’”4 But Lutz was in the minority; other GM ex-
gies) play during those ies who also tried to open up the market, including ecutives argued that the technology was not there yet
transitions. While we have Shai Agassi, who developed plans for Better Place for an affordable electric car. They suggested that GM
collected anecdotal evi-
around the same time Musk was planning Tesla’s move forward on a “transitional car,” a hybrid vehicle
dence of technological
transitions and respective first car. Agassi’s venture proposed a battery-swap that had a small battery pack with an all-electric range
hybrid products in many in- technology that would be licensed to existing auto- of 38 miles and a small gasoline-powered engine
dustries, our study is based makers. Despite raising more than $1 billion, acting as a generator to extend the range. GM’s transi-
on a large-scale longitudinal
ultimately, he could not get enough traction in the tional car, the Chevrolet Volt, was introduced in
data collection in the U.S. au-
tomotive industry. Our data industry, and the venture failed.1 December 2010. Its battery-engine configuration was
covers the entire period of Musk chose a different route: Tesla would make designed to overcome the limitations of prior EVs.
technological transition from its own cars, without having to depend on legacy GM’s obsession with the past kept it from seeing the
the mid-1990s, when the players. The Tesla Roadster, announced in 2006 and future — even with Tesla directly in its line of sight.
first electric vehicles and the
first hybrid cars emerged, to
released in 2008, was the first EV to use lithium-ion
2015, when the industry battery cells and have a 200-plus-mile range. In addi- Wasting Precious Time
began decisively moving to- tion to being stylish (it was built on a Lotus chassis), GM’s Volt is a good example of what incumbents in
ward electric vehicles. We it was fun to drive; it could reach 60 miles per hour in many industries do during times of technological
collected detailed technical
less than four seconds. The hype around being an transition: design and produce products that bring
and market data on every
model introduced by each environmentally friendly, premium sports car was the old and new technologies together in a single
of the companies competing immense, attracting celebrity buyers such as George product. Companies may tell themselves that this is
in the U.S. market and Clooney, Steven Spielberg, Demi Moore, and David the approach their customers will be most comfort-
conducted semistructured
Letterman, who added to the brand’s sex appeal. In able with, but more often, it is simply the only strategy
interviews with leading
industry participants and
2012, Tesla released a luxury sedan, the Model S, the company itself has the collective nerve to execute.
industry experts. We have with a 300-mile range. In 2015, the company started It is a repeating pattern. In the 1960s, U.S. elec-
produced detailed histories selling its crossover luxury SUV, the Model X. tronics companies responded to the introduction of
and case analyses of the The fanfare around Tesla’s products triggered Japanese transistor radios by developing products
strategies followed by major
reactions from existing automakers. Nissan, for ex- that blended transistor technology with traditional
auto manufacturers and
traced how their strategies ample, launched an all-electric car, the Leaf, in vacuum tubes.5 In the early 1990s, Kodak tried to sell
have fared in the market. 2010, aimed at the mass market. In 2007, BMW un- a “film-based digital imaging” product, which
veiled a new strategy labeled Project I, centered on merged film photography and digital technology.6
alternative mobility concepts and new materials. Its And a decade ago, BlackBerry tried to respond to the
first product was the experimental Mini E, an elec- challenge of the iPhone by releasing a phone that
tric version of the popular Mini Cooper that was had both a touchscreen display (like the iPhone) and
first made available to 500 U.S. customers in 2009. a traditional keyboard (like earlier BlackBerry
For its part, Daimler-Benz produced test quantities phones). At Verizon’s insistence, BlackBerry later
of its Smart car, the Smart ED, in 2011, using Tesla came out with the Storm, which featured a specially

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designed touchscreen that still maintained the lighter than the U.S. hybrids. Since transistors re-
sounds and sensation of pushing buttons that quired less power than vacuum tubes, they were able
BlackBerry users were accustomed to.7 to reduce the dimensions of tuning capacitors, speak-
These hybrid efforts, however common, have ers, battery supplies, and other elements.10 Another
ultimately underperformed in the market. Why? example is Kodak’s Photo CD, which was bulky, ex-
For one thing, our research found, they give estab- pensive, and difficult to use, and soon superseded by
lished companies a false sense of safety. In addition, advances in digital photography. Early versions of
they typically deliver suboptimal performance. the Chevy Volt suffered from similar limitations —
it was relatively heavy and had a small battery.
False Sense of Safety Hybrids allow incumbents to While hybrids might succeed in attracting cus-
claim they are investing in the new technology when, tomers and providing a reasonable value proposition
in reality, this is only partly true. By definition, hybrids for a period of time, they distract incumbents from
require companies to acquire some knowledge about developing the new technology. Incumbents that
the new technology. However, companies approach focus on hybrids waste precious time they could use
the new technology from the perspective of the old to develop a real competitive advantage based on the
one. Also, in the face of uncertainty, established orga- new technology. It is no coincidence that the most
nizations fall back on learned patterns, further successful companies producing and selling hybrid
slowing the development of the new technology. This products tend to be the slowest ones to move to the
is why most hybrid products developed by incum- new technology. As late as 2017, Toyota didn’t offer
bents, particularly the earliest ones, are weighted an EV, and it does not plan to begin mass producing
toward the old technology. Toyota’s first Prius, for ex- EVs until 2019.11 Moreover, by focusing on hybrids,
ample, was primarily an internal combustion vehicle; incumbents hand the new entrants a valuable
it only used battery power at low speeds and recharged advantage: sufficient time to not only gain techno-
through the traditional engine, with no plug-in capa- logical leadership and market visibility, but also to
bility. Until the mid-2010s, most other hybrid autos build or acquire the assets they require to be success-
operated in this manner. Indeed, although a hybrid ful in the long run.
strategy might seem to be a reasonable “bridge”
strategy when the technological transitions take a The Role of Complementary Assets
long time to unfold, the reality is that hybrids never According to a classical framework in innovation
capture a significant portion of the market. (Hybrid management, innovators often don’t profit from
cars represent only about 2% of total U.S. auto sales being early in complex markets because they lack
today.8) More important, they end up exposing in- the “complementary assets” needed to scale the
cumbents to inroads from other actors who are fully innovation into a sustainable business.12 The expe-
committed to the new technology. rience of EMI Group, the British company that
invented the CAT scanner and was the first entrant
Suboptimal Performance The second problem in the emergent market for CAT scanning machines
with hybrids is that they typically don’t optimize or in 1973, offers a good example. After introducing
excel in either the old technology or the new one. its early products, EMI wasn’t able to fend off the
What’s more, they cost more and tend to be larger and fast moves of competitors in the medical equip-
clunkier, since they have to be designed to host subsys- ment business, such as General Electric Co. and
tems and components for both technologies. When Technicare, which within two to three years had
Japanese companies began selling portable transistor competing products in the market. 13 The estab-
radios in the 1960s, U.S. manufacturers produced hy- lished companies already had large, strong
brid radios that used both transistors and older manufacturing capabilities, international distribu-
vacuum-tube technology, making them twice as tion, recognized brands, equipment support, and
heavy as the Japanese portable transistor radios.9 training and service capabilities. Within a few years,
Starting from scratch on product design, the Japanese GE and other companies developed CAT scanners
companies produced radios that were smaller and that were more advanced than EMI’s, and they used

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I N N O VAT I O N

their resources and complementary assets to take saw the writing on the wall: They had to either em-
control of the market. brace the new technology or be left behind quickly.
It’s interesting to compare what happened with In the case of Tesla, slow incumbent reaction
EMI in the early years to Tesla’s experience. In many gave Tesla time to build its production capacity,
respects, Tesla and EMI were in similar positions. brand reputation, and distribution capabilities. It
Tesla was new to the auto industry, and it had no also gave Tesla time to create other complementary
dealership network, no manufacturing capabilities, assets that were specific to the new technology,
and no brand name. It was totally lacking the com- which helped the company fend off the late-entering
plementary assets presumably required to compete. competition. (See “Tesla’s Growth in the U.S.
However, in contrast to the medical equipment in- Electric Vehicle Market.”)
cumbents that reacted quickly to EMI’s product, the Chief among these assets is a network of fast and
auto industry incumbents didn’t treat Tesla as a seri- dependable electric charging stations. As of July
ous threat. Why? Perhaps because the auto industry 2017, Tesla had more fast-charging outlets in the
incumbents did not immediately see a big perfor- United States than other providers.14 In recognition
mance improvement with the EV. Electric vehicles of the fact that one of the major obstacles for EV
still transported people from point A to point B, adoption would be “range anxiety” — that is, fear
looked very similar to the existing cars, and were of running out of battery power — Tesla’s cars are
used in a similar fashion (wheel, accelerator, brake, designed to go farther than any of its competitors
etc.). Because the benefits of the new technology (approximately 300 miles between charges). And
were not obvious (convenience of charging at home, the way the company planned its network of charg-
in the office, or in the parking garage; zero noise and ing stations was intended to minimize range
no pollution; software-driven interface, etc.), in- anxiety: While competing EV charging networks
cumbents may have miscalculated its importance are primarily concentrated in cities or narrow cor-
and, thus, missed the opportunity first to lead and ridors within the United States, Tesla focused on
then to react in a timely manner to Tesla. In contrast, offering intercity charging capacity so that a Tesla
from the start, CAT scanners were visibly superior to owner could drive throughout the country and al-
existing X-ray technology — they provided much ways find a supercharger within range.
richer, highly valuable information to doctors and What’s more, Tesla made an important strategic
patients. Incumbents in the medical device industry decision with regard to its charging technology.
Tesla supercharging stations, which charge signifi-
cantly faster than other EV chargers, are based on a
TESLA’S GROWTH IN THE closed technology that can be used only on Tesla
U.S. ELECTRIC VEHICLE MARKET
Since introducing its first electric vehicle in the United States in 2008, Tesla has
cars. Tesla owners therefore have the best of both
become the EV industry leader. Although it is too early to know if Tesla will be worlds: In addition to having access to Tesla’s pro-
successful in the long run, it exposed a fundamental weakness in the way prietary charging network, they can charge their
incumbents approach changing technology. cars on the other available charging networks using
an adapter that comes with every Tesla vehicle.15
Sales (units)
30,000

25,000
Tesla Model S Avoiding the Trap
The stark message from our analysis is that hybrid
20,000
Tesla Model X
product strategies are usually a lure toward failure.
15,000 In the midst of threat and uncertainty created by
Nissan Leaf an emerging technology, new and old competitors
10,000
BMW i3 stake out positions in the new. However, as we have
5,000 Fiat 500e
VW e-Golf noted, only incumbent companies introduce prod-
0 Others ucts that combine elements of both new and old
2011 2012 2013 2014 2015 2016 2017
systems. The idea seems to be that the hybrids give
SOURCE: Inside EVs, WardsAuto them a beachhead in the new technology while

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enabling them to take advantage of their experi- Fernando F. Suarez (@fsuarez) is the Jean C. Tempel
ence in the old technology. Hybrids, the thinking Professor of Entrepreneurship and Innovation at
Northeastern University’s D’Amore-McKim School of
goes, help incumbents learn about the new tech- Business. James Utterback is the David J. McGrath jr
nology while it is still developing, thereby assisting (1959) Professor of Management and Innovation,
them in making a smooth transition.16 Emeritus, at MIT Sloan School of Management. Paul
von Gruben is a research fellow at Technische Univer-
The problem with this argument is that the sität Berlin in Germany. Hye Young Kang is a lecturer
clock often moves too quickly for hybrid-focused in strategy and innovation at Boston University’s
Questrom School of Business. Comment on this
incumbents. During most technological transi-
article at http://sloanreview.mit.edu/x/59328.
tions, the pace of the transition is dictated by new
entrants, who commit all of their resources and ef-
REFERENCES
forts to the emerging alternative. New market
entrants rethink and redesign their products to 1. M. Chafkin, “A Broken Place: The Spectacular Failure
of the Startup That Was Going to Change the World,”
take full advantage of the possibilities of the new
July 4, 2014, www.fastcompany.com.
technology. That is what Japanese radio makers did
2. J. Davis, “How Elon Musk Turned Tesla Into the Car
with the transistor, and it is what Tesla has been Company of the Future,” Sept. 27, 2010, www.wired.com.
doing with the EV: exploit new technological 3. K. Naughton, “Bob Lutz: The Man Who Revived the
knowledge, develop new complementary assets, es- Electric Car,” Dec. 22, 2007, www.newsweek.com.
tablish strong market leadership, and both create 4. T. Friend, “Plugged In: Can Elon Musk Lead the
and satisfy an appetite on the part of investors and Way to an Electric-Car Future?” Aug. 24, 2009,
www.newyorker.com.
customers for products that perform well in terms
5. G.R. White, “Management Criteria for Effective Innova-
of range, responsiveness, and user interface. tion,” Technology Review 80, no. 4 (1978): 14-22.
Tesla’s hybrid-free vision does not stop with 6. C. Mui, “How Kodak Failed,” Jan. 18, 2012,
EVs. It has envisioned the electric vehicle as being www.forbes.com.
part of a much larger system, one that includes bat- 7. K. Kokalitcheva, “Ex-Blackberry CEO Admits Why
teries and home charging and backup systems, and Its Most Important Device Failed,” June 10, 2015,
www.fortune.com.
even extending to roofing materials embedded
8. L. Josephs, “Long Before the Combustion Engine,
with photovoltaic technology. If the company’s
the Hybrid Car Is Facing Obsolescence,” July 14, 2017,
expansive vision pans out (though it is still far www.qz.com.
too early to tell), incumbent auto companies and 9. White, “Management Criteria for Effective Innovation.”
others may come to see the hybrid trap as bigger 10. Ibid.
and deeper than they could have imagined. 11. N. Tajitsu, O. Tsukimori, and S. Navaratnam, “Toyota
So, is the answer for incumbents simply to walk Eyes Mass EV Output in China as Early as 2019: Report,”
away from products based on the old technology July 22, 2017, www.reuters.com.

and jump headlong into the new? No, it can’t be. 12. D.J. Teece, “Profiting from Technological Innovation:
Implications From Integration, Collaboration, Licensing and
Products based on old technologies may yield profit- Public Policy,” Research Policy 15, no. 6 (1986): 285-305.
able results for years. But it is essential that a
13. M.J. Martin, “Managing Technological Innovation and
company’s legacy operations don’t hamper its ability Entrepreneurship,” (Reston Publishing Co., 1984).
to pursue new technology. Based on our research, 14. Lanny, “2017 Update: Geographic Distribution of DC
this is the single biggest risk of hybrids. Not only Fast Chargers,” Sept. 12, 2017, http://pluginsites.org.
do hybrid product strategies lead to products that 15. D. Herron, “Range Confidence: Charge Fast, Drive Far,
With Your Electric Car,” 2015, www.greentransportation
underperform from the perspective of both the old
.info.
and new technologies, but they also limit a compa-
16. N.R. Furr and D.C. Snow, “Intergenerational Hybrids:
ny’s imagination and creativity. New technologies Spillbacks, Spillforwards, and Adapting to Technology
can open opportunities that extend well beyond the Discontinuities,” Organization Science 26, no. 2 (2014):
scope of legacy products, within both current mar- 475-493.

kets and new ones. But such opportunities can be Reprint 59328. For ordering information, see page 4.
seen only by companies that are willing to view the Copyright © Massachusetts Institute of Technology, 2018.
world through the lens of the new technology. All rights reserved.

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R E TA I L I N G

TheStoreIsDead—
Long Live the Store THE LEADING
Legacy offline stores and next-generation online retailers are QUESTION
each finding their way to a new kind of shopping experience: What is the
future of
the showroom. retail?
BY DAVID R. BELL, SANTIAGO GALLINO, AND ANTONIO MORENO
FINDINGS

Traditional stores
are closing by the
thousands.

Experience-oriented
“showrooms” are
OFFLINE DEMISE AND offline renaissance is the paradox of new retail writ large. Swiss multi- emerging in their
national financial services company Credit Suisse projects that by the time the numbers are in, more stead.

than 8,500 stores in the United States will have closed in 2017.1 Consensus estimates predict that 25% 
The showroom is
where offline and
of all shopping malls will shrink or close in the near future. At the same time, online-first brands online converge.
from suitcase retailer Away to eyewear maker
Warby Parker are successfully opening pop-ups,
showrooms, and full-blown stores.2 Not to be out-
done, Amazon.com, the granddaddy of online-first,
has opened bookstores and is rumored to be plan-
ning to open 2,000 AmazonFresh grocery stores
over the next 10 years.3
The net result: Offline is dead and dying, yet it is
also alive and thriving.
To understand why, consider the arc of Bonobos,
founded in New York City in 2007 as Bonobos.com
and sold in 2017, as Bonobos, to Walmart Stores Inc.
for $310 million.4 CEO Andy Dunn founded the
company with Brian Spaly while both were MBA
students at Stanford’s Graduate School of Business.5
Their vision was simple: Sell men a better-fitting
pair of pants, and do it without the “burden” of
physical stores. Looking back to 2007, Dunn readily
admits, “I really thought stores were going away at
that time.”6 Ironically, nearly 10 years later, The
Economist praised Bonobos for pioneering a new
form of physical retail. The “zero-inventory store”
is a small-footprint store where customers get a
high-service, tactile experience, purchase via tab-
let, and order the product shipped to a location of
their choosing.7
The trends exemplified by Bonobos reveal
retail’s future: It will be small footprint and high

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R E TA I L I N G

experience, regardless of whether the retailer is that typically holds no inventory — and fulfilled, ini-
online-first with offline additions or offline-first tially (and subsequently, for repeat purchases), from
(legacy) plus e-commerce. an operationally efficient distribution center.
In this article, we pursue two interconnected The intuition for supercharging is the following:
themes: the expansion of online-first retailers into A customer who is exposed to the brand offline,
offline stores that serve the purpose of “supercharg- rather than online, is not only more likely to peruse
ing” customer value, and the transformation of and sample a wider selection of product categories,
the stores of offline-first retailers from fulfillment- but also is more immersed in the brand experience.
dominant centers into experience-dominant This immersion and affinity serve to increase the rate
centers, which simultaneously reduce store size and and volume of subsequent purchases, whether online
inventory while improving the customer experi- or offline, by an individual shopper. The experience
ence. In doing so, we explain how offline-first also generates operational efficiencies by reducing
retailers can benefit from mimicking the show- returns. This is a critical virtue, as returns are a major
room concepts started by online-first retailers, and headache for online sellers, often approaching 30%,
why online-first retailers can benefit from opening and as high as 40% for apparel sellers.8
more traditional stores. (See “About the Research.”) Resonance’s Lenihan, who identified and articu-
lated the concept of supercharging,9 suggests it is
Supercharging Customers of replicated in the world of human relationships. When
Online Brands With Offline two people have an email-only relationship, it typi-
Showrooms cally lacks the depth and intimacy of a relationship
We coined the concept, “supercharging” after first that begins with a face-to-face encounter. In the latter
hearing the principle explained in a lecture by case, future online interactions have the support and
Lawrence Lenihan, CEO of Resonance Companies, context of the initial offline connection. By analogy,
and subsequently investigating it with data obtained shoppers who have experienced a brand offline
through our extensive work with digitally native develop a greater sense of context and emotional con-
vertical brands (DNVBs). Supercharging occurs when nection to the brand, and this comes into play when
customers are nurtured in a small-footprint location they purchase online in the future.

ABOUT THE RESEARCH


We developed initial insights into “The Store Is Dead — Long Live the Store” while working in partnership with
management at Bonobos, the retail originator of the zero-inventory store and what it calls the Guide Shop.
We utilized an extensive customer database of almost 10 years of data (from the inception of the company in
October 2007) to measure the effects of customer place of birth (online or offline) on subsequent trajectories
for demand and product returns. We developed additional insights and validation from a second database from
the online-first eyewear company Warby Parker (again, from the inception of the company in February 2010).
Management of both organizations, in exchange for our research, provided us with the following data
fields: unique customer ID (disguised for confidentiality), transaction date, transaction items, transaction value,
returns, and customer (shipping) ZIP code. We were privy to information on the location and timing of show-
room and Guide Shop openings, and when or whether customers visited them.
As sales through online channels vary considerably by geographic location due to the kinds of customers,
and their preferences and offline option,i we further augmented data with readily available geodemographic
data from the U.S. Census Bureau and Esri, a geographic information systems company based in Redlands,
California. This allowed us to properly characterize the offline retailing environment when estimating online
demand. Given all the data, we tabulated summary statistics and estimated state-of-the-art econometric
models to derive our insights on supercharging. In particular, we analyzed so-called natural experiments:
real management interventions in actual markets, and the effects on customer buying and return behavior.
To track how physical stores have evolved for offline-first retailers, we used data available from Wharton
Research Data Services. This data includes square footage and inventory for a panel of offline retailers.
Finally, we created simulations to demonstrate the benefits for offline-first retailers from adopting a
zero-inventory strategy for their stores; we conducted sensitivity analyses to show how the benefits
obtained from the strategy vary by different assumptions and circumstances.

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There are less immediately apparent benefits to THE HEAD OFFICE SHOWROOM
the retailer as well. Just as customers learn more From their early days of operations, both Bonobos and Warby Parker
deployed their head offices as showrooms. Initially, it was a matter of
about the retailer and the retailer’s products when
necessity: The companies had limited capital and they knew that some
immersed in an offline experience, retailers have customers might want to touch and feel the products before purchasing —
the opportunity to observe, study, and learn about hence, it made sense to double up the physical space they had for an office
customers who enter their physical locations. and use it as a showroom too. (One might argue that the very first Warby
Parker showroom was Neil and Rachel Blumenthal’s Philadelphia apartment
Specifically, the retailer is able to observe nondigital
when Neil was an MBA student at the Wharton School.) Pretty soon, both
customer attributes, including their emotional and companies realized the symbiotic nature of this relationship. It was not sim-
sensory response to products, salespeople, and in- ply that customers could touch and feel products, or even that customers
store stimuli, and compile and collate a history of could also get a “feel” for the brand, including the employees who work
in-store interactions, product sampling, shopping there. It was the realization that product design teams and others could have
direct access to customers. In short, the offline showroom at both compa-
paths, and so on. Deployment of relevant technol-
nies’ headquarters created a constant inflow of flesh-and-blood customers,
ogy amplifies this reciprocal learning.10 One of the reminding employees of who they are ultimately working for, and allowing
key innovations initiated by DNVBs like Bonobos employees across all business functions to learn more about the nondigital
and Warby Parker was the “head office showroom,” attributes and footprint of their customers.
which nicely encapsulates both types of benefits.
(See “The Head Office Showroom.”)
Showroom experiences create better customers: initially visit the Guide Shop or similar offline
Customers are exposed to the brand in a more showrooms. We analyze this further below, but the
meaningful and immersive way, and they are better bottom line is that customers who visit the Guide
able to resolve any uncertainty about the nondigital Shop generate outsized sales.
attributes of the retailer’s products. Likewise, show- Data from Warby Parker customers show simi-
rooms create better retailers: When customers are lar findings. When showrooms are opened in
physically present in the retail environment, obser- locations where they did not previously exist, the
vation of their behaviors can lead to meaningful number of first-time customers within the trading
insights.11 Salespeople can anticipate and respond area of the showroom increases by more than 7%.13
to customer needs, provide exceptional service, rec- Showrooms also garner a higher percentage of
ommend additional items, look for signs of first-time buyers: 83%, compared with only 75%
customer discomfort, and so on. for the online channel. More telling in terms of
attribution is that when a showroom is opened,
The Quantifiable Benefits the fraction of new buyers acquired online falls from
of Supercharging 75% to 67%.
At Bonobos, we find that customers who are “born Clearly, showrooms are useful for attracting new
offline,” meaning that they complete their first trans- customers. In fact, customers with a showroom ex-
action at a physical location (one of the Bonobos perience are significantly more attached to the brand
Guide Shops),12 account for a larger than propor- than are customers who never visit and are online-
tional share of sales than the customers who are only, and they are more attached than they had been
“born online.” If we normalize the percentage of cus- before their offline experience. The purchase his-
tomers who are born offline to 20% (for ease of tories and trajectories of two actual “matched”
exposition and to maintain confidentiality), these Bonobos customers nicely illustrate the point.
customers account for 24% of the total sales, about “Tom” and “Bob” (names changed) are real
19% more volume than would be expected on a pro- Bonobos customers who live in New York City and
portional basis. made their first transactions with Bonobos in early
This apparent superiority of the customers 2015. In their first transactions, both Tom and Bob
coming from Guide Shops does not account for bought a pair of pants online. Later that year, Tom
what a business academic might call a “selection visited a Guide Shop in New York and placed a new
effect” — specifically, that more “enthusiastic” (and order ($106). Bob also placed a second order
higher-value) customers might be motivated to ($182), but he did not visit the Guide Shop. In fact,

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R E TA I L I N G

Offline-first retailers can transform stores into experience


centers where customers can engage meaningfully with
the retailer, making the store not only a place to fulfill orders
but also a destination.

Bob remains an online-only customer and has not Again, relative to online-only (orange) customers,
been supercharged to this day. By his sixth transac- they are more tentative and show less ability to
tion, Bob had spent a total of $762 and bought assess fit through the online channel alone.
items from four product categories. In the same Subsequent to a showroom visit, however, when
period, Tom made two more visits to the Guide supercharged, these customers index substantially
Shop. By his sixth transaction, Tom had spent a lower product returns than their preshowroom
total of $2,082 across seven product categories. selves, at 95 (green), and lower than online-only
(For a more detailed analysis of the data, see customers as well (orange).
“Demand Benefits From Supercharging.”) Warby Parker data provides complementary
Supercharging also has a positive impact on re- evidence on how the retailer gains from seeing cus-
turns. Returns are a perennial problem in apparel tomers in person. When customers buy offline,
retailing, especially in e-commerce. A report by The customer-retailer interaction reduces return rates
Retail Equation, “Consumer Returns in the Retail by about 1% in absolute terms, a statistically and
Industry 2015,”14 puts average offline returns, across economically meaningful reduction.15 Customers
all apparel categories, at about 8% (10% during the with more complex eyewear needs, such as people
holiday season), substantially lower than the 30% to who need to wear glasses throughout the day, are
40% often seen with online purchases. more likely to visit showrooms. Strikingly, the re-
As before, we do not report the actual return duction in returns for these customers is nearly
rate but index it at 100 for customers who are online- four times greater, at 3.6%. Complex-need custom-
only and never visit a showroom. (See the orange ers are better able to assess product suitability
bar in “Effect of Showroom Visits on Returns.”) offline, and Warby Parker is better able to service
Customers who eventually visit a showroom index and understand this group offline as well.
at 117 for returns on their online preshowroom
purchases (yellow bar), meaning they are more Offline Retailers:
likely to return items relative to online-only shoppers. From Inventory to Experience
Offline-first retailers can learn from the innova-
tions of the DNVBs. First, they can transform stores
EFFECT OF SHOWROOM into experience centers where customers can en-
VISITS ON RETURNS gage meaningfully with the retailer, making the
Customers who experience the brand
offline and are thereby “supercharged”
store not only a place to fulfill orders (and some-
are less likely to return the items they times not even that) but also a destination.
purchase. This transformation is already happening. South
Index Korean multinational Samsung Group recently
150
opened its flagship store, Samsung 837, in New York
City. Rather than selling and fulfilling orders,
100
Samsung 837 is a 55,000-square-foot space where
Never visited
Prior to customers can try out Samsung products and have a
50 supercharging good time. In addition to the newest Samsung prod-
Supercharged
ucts offered to the consumer market, the store
0 features installations that change every season, in-
Average product
return rate cluding interactive virtual reality rides, disc jockeys,

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DEMAND BENEFITS FROM SUPERCHARGING


Demand benefits from supercharging cus- of the online-only customers at 100. Prior to products in 15.5% of the total categories
tomers offline at a Bonobos Guide Shop are visiting a showroom, customers who even- sold by Bonobos, on average. We again
reflected in three metrics: average transac- tually do so are less frequent Bonobos define this as the baseline, indexed at 100.
tion value, order velocity, and breadth of shoppers than their online-only counterparts. Prior to their supercharging experience, cus-
purchasing across the product line. This likely reflects a lower level of comfort tomers who eventually visit the Guide Shop
Analyses below focus on customers who with an online-only experience. Post-show- (yellow) show less breadth of brand engage-
made the same total number of transactions, room experience, however, supercharged ment than their online-only counterparts and
which facilitates an apples-to-apples
comparison. (See “Effect of Showroom
Visits on Shopping Patterns.”) The left-most EFFECT OF SHOWROOM VISITS ON SHOPPING PATTERNS
orange bar represents the average transac-
tion value of customers who never visit a Index
150
Guide Shop and are therefore never subject
to a supercharging experience. We index
their average spend as the baseline at 100 100
points (we do so for ease of exposition and Never visited
to preserve confidentiality of the actual dollar Prior to
50 supercharging
value). The yellow bar represents customers
Supercharged
who will be supercharged eventually (via a
visit to the Guide Shop), but it reflects the 0
average value of their transactions prior to Average Average Average number
transaction value time between purchases of product categories
supercharging. At 103 points, the yellow bar
average spend index is statistically indistin-
guishable from the orange bar. The lift Customers who experience the brand offline and are thereby
“supercharged” spend more per transaction, shop more
induced by the Guide Shop (green bar) is frequently, and buy in more categories.
substantial. The average value of transac-
tions made by customers after they have
visited a Guide Shop is 141 points, a super- customers (green bar) increase their pur- are indexed at 80. This is a continuation
charge effect of more than 40%. Note that chase frequency relative to online-only of what we saw in the “average time
after a Guide Shop visit, transactions could customers (orange bar) and their pre-Guide between purchases” grouping. Similarly,
be made either online or offline. Shop selves (yellow bar) as the inter-purchase the breadth index for the average transaction
A similar dynamic is at work for fre- time index drops considerably, to 90. by supercharged customers (green bar)
quency and breadth of purchases across Bonobos is a multicategory apparel re- increases to a whopping 126 after the
the product line. Again, the orange bar tailer, selling pants, shirts, jackets, suits, and showroom experience. These customers
(see “average time between purchases” other items. Customers who never enter a go from buying in about 12.4% of the total
grouping) indexes the visit frequency showroom and are online-only (orange) buy assortment to more than 19.5%.

a 75-seat theater, and a selfie station that encourages ideas as they imagine how the products would look
customers to share their pictures on social media.16 in their homes. And Nordstrom Inc., a luxury de-
This parallels innovations that DNVBs had intro- partment store chain based in Seattle, Washington,
duced, such as Warby Parker’s store photo booths, is starting to roll out small-format stores without
where customers can take pictures with different merchandise, where customers can try products
frames and share them with friends. Bucketfeet, a (which are not stocked at the store), interact with
Chicago-based retailer of artist-designed footwear, personal stylists, or even get a manicure or a drink
has studios where artists exhibit their work and cus- at an in-store bar.17
tomers can design their own shoes. Here again, online-first retailers offer interesting
Legacy retailers can also redesign merchandise models that offline retailers can learn from. Bonobos
presentations to provide a richer and more pleasant and Trunk Club, a personalized clothing service
store experience. Minneapolis, Minnesota-based based in Chicago, for example, allow customers to
discount retailer Target Corp., for example, has in- make one-on-one appointments with salespeople.
troduced new layouts, called “vignettes,” for its In a similar vein, online-first retailers have explored
home-décor category. By showcasing products in how to integrate and improve the customer experi-
showroom-like areas, customers gain decorating ence by combining data from the different channels.

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R E TA I L I N G

Amazon Books provides a curated assortment by to return products at the store, rather than shipping
displaying in the stores only those books that are them to a sorting center.
rated four stars and above on its website.18
Other retailers have implemented advanced The Store Shrinks Into a Showroom
technologies that increase the utility that custom- The transformation of the role of stores in offline-
ers attribute to stores. San Francisco-based software first retailers is seen in the evolution of several hard
company Oak Labs Inc., for example, developed metrics for leading apparel retailers. Consider the
in-store intelligent fitting rooms, where customers trajectory of average (normalized) store size for a
can see how the clothes would fit under different general retailer, Walmart, and for a specialty ap-
circumstances.19 These enhanced experiences not parel retailer, JoS. A. Bank Clothiers Inc., based in
only attract customers to stores but also provide Hampstead, Maryland. (See “Average Offline Store
the retailer with opportunities to learn about Size Over Time.”) While we’ve shown only two
shopper behavior. stores for ease of exposition, the pattern is similar
Retailers can generate store visits by implement- for many representative retailers, including Bed
ing omnichannel initiatives, such as in-store pickup Bath & Beyond Inc., Neiman Marcus Group LLC,
of online orders. Spanish retailer Desigual, for ex- and numerous others.22
ample, has built unattended ship-to-store lockers Clearly, the average store size is decreasing over
in its stores where customers pick up their online time, consistent with the idea that offline-first re-
orders for free.20 Again, this encourages customers tailers are providing a more intimate environment
to visit the store and refresh their connection with and moving away from stores with a predominantly
the retailer. Brickwork Software, a New York City fulfillment-oriented role. Dollars of inventory per
startup that provides a location-based service that square foot also shows a declining trend. Because
allows customers of its retail clients to book ap- many legacy retailers now have a substantial online
pointments and reserve “try-ons” at nearby stores presence and omnichannel capabilities, they are
of their choosing.21 able to greatly reduce the fraction of stock keeping
Through these initiatives, savvy retailers nudge units (SKUs) they routinely carry in their stores.23
customers to visit offline locations when they are If offline-first retailers continue to transition
shopping, or searching, online. This strategy is also their stores from a fulfillment-dominant role and
useful for transactions that have a higher risk of add more experiential components, what benefits
being returned: Retailers can encourage customers and costs could they experience if they take this
transition to its ultimate conclusion: the zero-
inventory store, as pioneered by Bonobos? We have
AVERAGE OFFLINE STORE SIZE OVER TIME conducted a series of simulations to explore the
Research shows that traditional stores are shrinking. benefits and costs of such radical transformation,
and we provide the key insights below.
Average Store Size (sq. ft., thousands)
125 Our simulations consider a fashion-apparel
120 chain with 200 physical stores. As would be the case
Walmart Stores Inc.
115 in real life, each store has a different footprint and
110
different average demand.24 We choose a conserva-
105
tive average retail markup of 125%. We then
100
95 compare the performance of conventional stores
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 with what could be achieved via showrooms in com-
5.4 bination with centralized fulfillment. We do this by
5.2 manipulating two key retail variables: the chance
JoS. A. Bank Clothiers Inc.
5.0 that customers can find items for sale — that is, the
4.8 in-stock rate — and the amount of inventory that a
4.6 retailer has to hold in order to meet a specific in-
4.4 stock rate objective.

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If offline-first retailers continue to transition their stores from a


fulfillment-dominant role, what benefits and costs could they
experience if they take this transition to its ultimate conclusion:
the zero-inventory store?

In our simulated world, we imagine two separate use the same amount of inventory, the showroom
scenarios. In the first, the store and the showroom retailer generates 7% more revenue and 14% higher
are both required to maintain the same probability gross margins.
that items carried are actually in stock — that is, the So far, we have simply described the effect of the
same in-stock rate. Note, however, that the amount direct cost reduction that comes from the pooling of
of inventory needed to ensure this might be different inventory in a centralized location. Showroom ben-
for the store and the showroom. In the second sce- efits, however, do not stop there. Relative to stores,
nario, we reverse the problem and force the store and showrooms require a smaller footprint, which trans-
showroom to hold the same quantity of inventory lates into lower fixed costs. Furthermore, they do not
(for the showroom, no inventory is held on-site; need to be replenished multiple times a week, re-
rather, it is held in a centralized fulfillment center). ducing logistic costs. Showroom employees need
When the inventory positions are held constant, the not tend to big boxes coming from the distribution
probability that customers can find items in stock center, nor arrange products on the shelves. Finally,
might differ between the store and showroom. stores that are converted into showrooms can be re-
In the first scenario, let’s imagine that the retail- designed to create a more welcoming and engaging
er’s goal is to offer its customers a 95% in-stock environment.
rate, 25 both in traditional offline stores and in We do recognize that there is cost attributable to
showrooms. (Inventory requirements to achieve potential lost sales, as customers who seek instant
this in-stock rate depend on the level of demand gratification — or have an immediate need — can-
uncertainty.) The first insight is that demand pool- not take product from showrooms. This effect,
ing from converting traditional stores into unfortunately, is hard to estimate in general, but it
showrooms brings a substantial reduction in the can be assessed to some degree on a case-by-case
amount of inventory that is needed. Even at a mod- basis by retail professionals. (A customer might
est level of uncertainty (say 20%) about what sales have a more urgent need for a Bonobos suit, for
will be, there is a 25% reduction in the amount of example, than for Away luggage.) Regardless, it
inventory that needs to be carried in order to main- remains a source of potentially significant risk.
tain the 95% in-stock rate for the showroom. Nevertheless, our simulation can be used to il-
The second insight is that this leads to gross lustrate how “bad” things need to be, in terms of
margins going up by about 40% (again using the sales, to make the showroom a losing proposition.
20% demand uncertainty value). For a retailer wanting a 95% in-stock rate, it’s pos-
Next, we simply “reverse” the analysis and hold sible to lose up to 15% of sales and yet obtain the
total inventory constant in the two systems. If we same gross margin as that provided by using stores.
fix the inventory level to that needed for a retailer to In short, the showroom model appears a viable
achieve a 95% in-stock rate when using show- strategy — even when lost sales from customers
rooms, we find that the same level of inventory wanting immediate gratification are significant.
would provide only a 59% in-stock rate when using We began this article with an apparent paradox:
traditional stores. Offline is dead and dying, yet it is also alive and
Naturally, the in-stock rate has a big effect on thriving. The bottom line is that stores are very
revenue and gross margin. In a world with 20% de- much alive, but with a subtle yet profound shift in
mand uncertainty, and when stores and showrooms focus — from fulfillment to experience-oriented

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R E TA I L I N G

The bottom line is that stores are very much alive, but with
a subtle yet profound shift in focus — from fulfillment to
experience-oriented environments.

environments. Smaller footprint, tech-enabled, Shopping,” Paco Underhill introduced and validated the idea
high-touch, and creative spaces are becoming the of an anthropological view of shoppers. His researchers
literally followed shoppers through the store environment
norm — and they are proving effective for retailers in order to glean nuggets of insight into their behavior.
built originally with bricks and bytes alike. 12. As of January 2018, Bonobos had 48 Guide Shops
throughout the United States. https://bonobos.com/
David R. Bell (@davidbnz) is the Xinmei Zhang and guideshop.
Yongge Dai Professor of Marketing, Wharton School, 13. D.R. Bell, S. Gallino, and A. Moreno, “Offline Show-
University of Pennsylvania, and president of Idea rooms in Omnichannel Retail: Demand and Operational
Farm Ventures, a New York City-based venture stu- Benefits,” Management Science, published online
dio. (He is also an investor in Bonobos and Warby March 23, 2017.
Parker.) Santiago Gallino is associate professor of
business administration, Tuck School of Business, 14.The Retail Equation, “Consumer Returns in the Retail
Dartmouth College. Antonio Moreno is the Sicupira Industry,” 2015.
Family Associate Professor of Business Administra- 15. Once frames are fitted with customer-specific prescrip-
tion, Harvard Business School, Harvard University. tion lenses, the salvage value is close to marginal cost.
Comment on this article at http://sloanreview.mit
16. M. Matousek, “Samsung’s Vision for the Future of Re-
.edu/x/59302.
tail Is a Store That Doesn’t Try to Sell You Anything — Take
a Look Inside,” Jan. 1, 2018, www.businessinsider.com.
REFERENCES 17. S. Kapner, “Nordstrom Tries on a New Look:
Stores Without Merchandise,” The Wall Street Journal,
1. J. Wattles, “Stores Are Closing at an Epic Pace,” Sept. 10, 2017.
April 22, 2017, http://money.cnn.com.
18. N. Walters, “7 Cool Things You Can Buy at the New
2. J. Smith IV, “Long Live Retail: Fashion Startups Finally Amazon Books Store in New York,” Aug. 29, 2017,
Learned Why Physical Stores Still Matter,” Observer, www.thestreet.com.
Jan. 8, 2015.
19. K. Opam, “Oak Labs’ Interactive Fitting Room Feels
3. See, for example, M. Addady, “Amazon Wants to Like the Future,” Nov. 18, 2015, www.theverge.com.
Open 2,000 Grocery Stores Across the U.S.,” Fortune,
Oct. 27, 2016. 20. S. Miles, “5 Buy Online, Pick Up In-Store Platforms
for Retailers,” Aug. 9, 2016, http://streetfightmag.com.
4. M. de la Merced, “Walmart to Buy Bonobos, Men’s
Wear Company, for $310 Million,” The New York Times, 21. A customer walking in New York City enters “Nike
June 16, 2017. stores” in the search bar on his or her mobile phone. Brick-
work surfaces store locations and appointment options.
5. Spaly went on to found Trunk Club, which sold to Nord-
strom for $350 million. This “curated commerce in a box” 22. Additional examples are available from the authors,
has found favor with Stitch Fix, an online subscription and upon request. All the reported differences are statistically
personal shopping service, as well. significant with p<.01.

6. L. Zumbach, “Bonobos CEO Says ‘Guideshop’ Model 23. K. Stock, “Staples Is Shrinking; Radio Shack Is
Is Working,” Chicago Tribune, April 25, 2016. Sinking,” March 6, 2014, www.bloomberg.com.

7. “Shops to Showrooms: Why Some Firms Are Opening 24. For the technically inclined, the simulated demand
Stores With No Stock,” The Economist, March 10, 2016. for each store comes from a log-normal distribution (to
ensure that the sales number generated for each store
8. C. Reagan, “A $260 Billion ‘Ticking Time Bomb’: and from each draw from the simulation is positive).
The Costly Business of Retail Returns,” Dec. 16, 2016,
www.cnbc.com. 25.“95% in-stock rate” means that there is a 95% chance
that a customer will find his or her preferred item in stock.
9. Lenihan delivered this insight while giving a guest
lecture to MBA and undergraduate students at the i. See D.R. Bell, J. Choi, and L. Lodish, “What Matters
Wharton School. Most in Internet Retailing,” MIT Sloan Management
Review 54, no. 1 (fall 2012): 27-33.
10. L. Dishman, “Inside LA’s New, Futuristic Store —
Magic Mirrors Included,” Oct. 8, 2015, http://fortune.com. Reprint 59302. For ordering information, see page 4.
11. This concept has a long and important history in retail- Copyright © Massachusetts Institute of Technology, 2018.
ing. In his best-selling book, “Why We Buy: The Science of All rights reserved.

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S T R AT E G Y

The End of Scale


New technology-driven business models are undercutting the
traditional advantages of economies of scale. But large companies
still have strengths to exploit — if they move quickly.
BY HEMANT TANEJA WITH KEVIN MANEY

FOR MORE THAN a century, economies of scale made the corporation an ideal engine of business.
But now, a flurry of important new technologies, accelerated by artificial intelligence (AI), is turning econ-
omies of scale inside out. Business in the century ahead will be driven by economies of unscale, in which the
traditional competitive advantages of size are turned on their head.
Economies of unscale are enabled by two complementary market forces: the emergence of platforms and
technologies that can be rented as needed. These developments have eroded the powerful inverse relationship
between fixed costs and output that defined economies of scale. Now, small, unscaled companies can pursue
niche markets and successfully challenge large companies that are weighed down by decades of investment in
scale — in mass production, distribution, and marketing.
Investments in scale used to make a lot of sense. Around the beginning of the 20th century, the world was
treated to a technological surge unlike any in history. That was when inventors and entrepreneurs developed
cars, airplanes, radio, and television, and built out the electric grid and telephone system.
These new technologies ushered in the age of scale by enabling mass production and offering access to
mass markets. Electricity drove automation, allowing companies to build huge factories to churn out a
product in massive quantities. Radio and TV reached huge audiences, which companies tapped through
mass marketing. The economies of scale governed business success.
Scale conferred an enormous competitive advantage. It not only lowered fixed costs — it also created a
forbidding barrier to entry for competitors. Organizations of all kinds spent the 20th century seeking scale.

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That’s how we ended up with giant corporations, P&G as a Consumer Goods Platform
and universities with 50,000 students, and multina- Smart corporations will learn to harness economies
tional health care providers. of unscale, but that will require a significant shift in
Today, we’re experiencing a new tech surge. This the managerial mindset. Leaders might take cues from
one started around 2007, when mobile, social, and the evolution of Procter & Gamble Co. (P&G).
cloud computing took off with the introduction of In 1837, William Procter and his brother-in-law,
the iPhone, Facebook, and Amazon Web Services James Gamble, formed a company in Cincinnati,
(AWS), respectively. Now, we’re adding AI to the Ohio, to make candles and soap. The company
mix. AI is this century’s electricity — the technol- grew slowly and got a boost from contracts with the
ogy that will power everything. Union Army during the Civil War. Its breakthrough
AI has a particular property that supplants mass came in 1878, just as newspapers were reaching
production and mass marketing as a basis of com- consumers en masse and railroads opened that
petitive advantage. It can learn about individuals could efficiently carry products to any major city.
and automatically tailor products for them at scale. According to lore, one of the company’s chemists
This is how the GPS navigation app Waze gives you accidentally left a soap mixer on during lunch, stir-
a route map tailored to your destination at a spe- ring more air than usual into P&G’s white soap.
cific moment in time — a map that probably won’t The air made the soap float. The company branded
work for anyone else or at any other time and the product as Ivory and marketed it nationwide.
doesn’t need to. AI enables mass customization for P&G began to scale up.
increasingly narrow markets. If a product is custom After World War II, as the consumer market took
built specifically for you, you’ll probably prefer it to off, P&G brought out Tide detergent, the first mass-
a product that’s built for millions of people who are market soap specifically for automatic clothes
only kind of like you. washers. By the end of the 20th century, P&G had
This is the basis of economics of unscale. The scaled up to a behemoth, offering more than 300
winning companies in today’s tech surge are com- brands and raking in yearly revenues of $38 billion.
panies that profitably give each customer exactly In 2016, analyst firm CB Insights published a
what he or she wants, not companies that give ev- graphic showing all the ways small, entrepreneurial
eryone the same thing. unscaled companies were attacking P&G. (See
There is another, equally important way in “Unbundling Procter & Gamble.”) In it, P&G no
which the current tech wave is propelling econo- longer appears as a monolithic scaled-up company
mies of unscale. Because companies can stay that has powerful defenses against upstarts; instead,
nimble and focused by easily and instantly renting it is depicted as a series of individual products, each
scale, they can adjust more quickly to changing de- vulnerable to upstart, technology-enabled, product-
mand and conditions at much lower cost and with focused companies. P&G’s Gillette razors are being
far less effort. challenged by Dollar Shave Club’s and Harry’s Inc.’s
Thus, scaled companies find themselves belea- subscription models; a niche of buyers of P&G’s
guered by unscaled competitors. Stripe is an huge Pampers brand of disposable diapers are get-
unscaled financial services company based in San ting peeled off by The Honest Co.’s environmentally
Francisco that is challenging the big banks. Airbnb, friendly diapers; Thinx “period panties” are going
also based in San Francisco, is an unscaled hotel after P&G’s Tampax tampons in a new, uncharted
company that is taking customers away from the way; and eSalon’s “custom” hair coloring is compet-
big chain hotels. Warby Parker is a New York ing with P&G’s Clairol mass-appeal hair coloring.1
City-based unscaled eyewear company that is This is a clear indication of what big corporations
threatening the big eyewear brands. are facing in an era that favors economies of unscale
If economies of unscale will rule in this new over economies of scale. Small, unscaled companies
world of business, how can a corporation, which, can challenge big companies with products or
by definition is a large, scaled-up enterprise, com- services more perfectly targeted to niche markets —
pete and thrive? products that can win against mass-appeal offerings.

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UNBUNDLING PROCTER & GAMBLE


Far from the monolithic giant impervious to threats that some once thought it to be,
P&G has been attacked by startups on all fronts.

When unscaled competitors lure away enough cus- product innovators (who can “rent” P&G’s distri-
tomers, economies of scale begin to work against the bution, marketing, and knowledge to bring their
incumbents. The cost of scale rises as fewer and products to market).
fewer units move through expensive, large-scale fac- Connect + Develop hasn’t transformed P&G
tories and distribution systems — a cost burden not from a scaled company to an unscaled company,
borne by unscaled companies. but it has moved the company down the right path.
P&G is aware of the challenges unscaled com- According to a 2015 paper by Nesli Nazik Ozkan, an
petitors pose, and it is responding. For about a economics professor at Istanbul University, about
decade, P&G has been running a program called 45% of initiatives in the company’s product devel-
Connect + Develop. After 175 years of inventing opment portfolio had key elements discovered
most of its new products in-house, the company’s through Connect + Develop.2 A future, unscaled
executives came to understand that there were version of P&G might look more like a giant con-
more smart inventors outside of P&G than could sumer products platform rented by a constantly
possibly be contained inside P&G, and the internet evolving swarm of small, focused entities — an
provided a way to reach them. AWS model for tangible consumer goods.
Connect + Develop invites anyone who has a
product that might be a good fit with P&G to sub- GE and Walmart Seek
mit a development proposal to the company. Economies of Unscale
Though it isn’t phrased this way, Connect + P&G is not the only big company experimenting
Develop positions P&G as a platform for niche with economies of unscale. General Electric (GE), a
products in a way that benefits the company (which multinational conglomerate based in Boston,
captures some of the value of new, unscaled prod- Massachusetts, is another old, enduring company
ucts, instead of competing against them) and trying to stay vital in the unfolding era. GE’s big bet

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S T R AT E G Y

is on Predix, an AI-based platform that other com- Seen through one lens, Walmart bought Jet.com
panies can use to capture the promise of the for its brain trust and innovative technology. Through
internet of things (IoT). the lens of unscale, however, it looks like Walmart is
For most of its history, GE has built industrial trying out a platform strategy. Perhaps Jet.com will
products — train locomotives, airplane engines, fac- evolve into a way for focused, niche consumer retailers
tory automation machinery, lighting systems, and so to rent the power of Walmart’s platform to sell physi-
on. In the 2010s, GE embraced IoT, rightly under- cal products to anyone anywhere.
standing that many of its industrial products were
already jammed with sensors. These sensors could Three Ways to Unscale
communicate their data back through the cloud to Large Companies
Predix, which, in turn, could use that data to learn Savvy Fortune 500 leaders will find ways to reinvent
even more about GE’s machines in aggregate. their companies for the era of unscale. Here are
Predix helps GE optimize its products for its three ways they can stay relevant and play impor-
customers. What Predix learns from all GE loco- tant roles in an unscaled economy:
motives helps a railroad better operate its GE 1. Become a platform. Connect + Develop, Predix,
locomotives. In this age of unscale, GE has also and Jet.com are all examples of platform plays that
opened up Predix to other companies, which use it other large-scale companies can emulate. Electric util-
to create a catalog of apps for industrial designers. ities can adopt a platform mindset and morph their
Genpact, a global professional services firm based grids into systems that can support thousands of
in Hamilton, Bermuda, that was spun off from GE small energy producers. Major banks can become
in 2005, used Predix to host its critical spare parts platforms for small, focused financial apps, such as
inventory optimizer; and Tech Mahindra Ltd., a consumer savings apps Digit, Acorns, and Stash.
Mumbai-based multinational that also uses Predix, This is not to say that every corporation must be-
offers an app to remotely manage solar farms. GE come a platform or perish. Rather, a successful
even hosts a conference called Predix Transform, platform strategy offers one path to growth in the
where industrial developers learn from one an- unscaled era. Platforms can be enormously profit-
other and help build a Predix ecosystem. able and enduring because the companies operating
As with P&G, Predix isn’t overhauling GE in and on the platform come to depend on them for their
of itself. But it is one way for GE to take advantage success. This is why AWS has emerged as a profit en-
of unscaling, using its skill set and data to create a gine for Amazon, with operating margins in excess
platform that others can rent. of 20%, compared to the low single digits for
Walmart Stores Inc.’s acquisition of Jet.com Inc. Amazon’s retail business.
in 2016 offers another lesson in unscaling for large Vibrant corporations have spent decades build-
companies. Walmart was a superstar at building ing scale that’s highly specialized for their industry.
scale, and now, it is supremely vulnerable as retail They’ve built efficient factories, distribution chan-
unscales — which is why it paid $3 billion to buy a nels, retail outlets, supply chains, marketing
barely proven company. Jet.com is built upon a so- expertise, and global partnerships. Now their lead-
phisticated AI platform that aims to give consumers ers should ask themselves if there’s a better business
the lowest prices possible (even lower than in simply and elegantly renting that capability to
Walmart) by analyzing a range of factors, including other companies.
how much the customer is ordering and how far Imagine Ford Motor Co. as a car-making plat-
the customer is from the product. Most of the form that allows hundreds of small companies to
products on Jet.com come from independent design innovative new vehicles and get them made,
retailers — more than 2,000 of them. The pitch to marketed, and delivered to customers — all in a
retailers is that Jet.com itself won’t compete against way that allows these small carmakers to serve a
the retailers, unlike the way Amazon often goes niche market at a profit. Imagine that Anheuser-
head to head with retailers that sell through Busch InBev SA/NV stopped buying brands and
Amazon Marketplace. instead became a beer platform by allowing

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Big companies in the unscaled era should seek to look more


like a network of small businesses, each absolutely committed
to making a product that’s perfect for its slice of the market.

microbrewers to rent its production and distribu- to understand a particular customer for one of its
tion capabilities to bring their concoctions to products, it can offer that customer other products
market with a few clicks on a web page. from its portfolio. A big company could bundle to-
2. Instill an absolute product focus. As compa- gether products tailored to each customer.
nies get big, their focus often gets lost amid process, To get a sense of how this works, take a look at
bureaucracy, politics, concerns about stock price, The Honest Co. In 2012, Honest started selling a line
and a whole lot of other matters that have nothing to of safe, organic diapers and wipes by subscription.
do with making a great product for a sharply defined That first year, the company pulled in $10 million in
market. They try to create products that appeal to revenue by serving a niche customer who wanted a
the most people possible so they can achieve econo- niche product that was different from mass-market
mies of scale and become more profitable. But in an brands. The company used that knowledge to de-
unscaled era, making such mass-appeal products velop other products in the same vein — including
becomes an Achilles’ heel — a setup for a product- shampoo, toothpaste, and vitamins.
focused small competitor to knock down. By 2016, Honest had 135 narrowly focused
Big companies in the unscaled era should seek products and bundled them into the right set of
to look more like a network of small businesses, products for the right customers. That year, sales
each absolutely committed to making a product exceeded $300 million. In a way, Honest had be-
that’s perfect for its slice of the market, because big come a mini P&G, offering a variety of items, but
companies will wind up renting everything else. with one big difference: The company knew its cus-
Companies have been shedding noncore tasks for tomers and could bundle its various products
several decades. Apple Inc. and Nike Inc. contract accordingly. Each of P&G’s products is a stand-
out manufacturing to Chinese companies, while alone brand, sold in stores to people P&G cannot
Netflix runs its entertainment streaming service know or understand as intimately as Honest does.
on AWS instead of building data centers. Next- (Honest’s growth slowed in 2017, and CEO Brian
generation unscaled corporations will outsource Lee stepped down, but the company remains com-
far more. Anything that doesn’t have to do with mitted to its product bundling strategy.)
developing a great product needs to go. Dynamic rebundling allows a company to mimic
The product creators will drive business, while the advantages of scale without actually building
top management provides the platform for them to scale. The company can stay nimble and innovative,
build upon. The Fortune 500 corporations of 20 focusing on product, and use its portfolio to expand
years from now are likely to be smaller, faster mov- its sales to each individual customer. Thus, a future
ing, and more like a network of small companies P&G might operate as a platform for thousands of
than the business giants of today. product-focused entities, yet be intelligent enough
3. Grow through dynamic rebundling. The win- to understand and offer each customer an expressly
ners in the unscaled economy make every customer designed bundle of products.
feel like a market of one. Products and services that
can be tailored to the individual will beat out mass- The Unscaled Ethos of Amazon
market products and services. But there is one way a If you want a final glimpse of the unscaled future,
corporation — that is, a collection of products — look at the ethos behind Amazon.com Inc. In
can maintain an advantage. Once a company comes early 2017, CEO Jeff Bezos published a letter to

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S T R AT E G Y

shareholders in which he wrote, “I’ve been remind- internet coming from a mile away, for example, but
ing people that it’s Day 1 for a couple of decades. I delayed moving online until it was too late for
work in an Amazon building named Day 1, and many of them. If a big company operates as a col-
when I moved buildings, I took the name with me.”3 lection of nimble small companies, it is more likely
Day 1, Bezos wrote, is about constantly creating to spot and react to new technologies as tastes shift.
new, nimble, product-focused businesses inside The final Day 1 point is “high-velocity decision-
Amazon, businesses that can be built quickly on top making.” It fits right into the unscaling playbook.
of Amazon’s corporate platform and act like un- As Bezos writes, “Never use a one-size-fits-all
scaled upstarts. To Bezos, Day 2 dawns when a decision-making process.” Let the smaller units
business gets bogged down by its own scale. make their own decisions based on their insights
How will Bezos manage to keep Amazon cycling and their customers’ realities. The more a com-
through Day 1 over and over again? “I don’t know pany scales, the more complex it gets, and so,
the whole answer,” he admits in the letter, “but I may decisions seem complex. Executives feel they need
know bits of it.” He offered four points that he con- a huge amount of input and information before
siders a “starter pack of essentials for Day 1 defense.” making a decision. All that leads to stagnation and
They align with what we know about unscaling. the onset of Day 2. Companies need to make deci-
The first point is “true customer obsession.” In sions like it’s Day 1 and move on fast if the decision
this unscaled era, the products that win make you proves to be wrong.
feel like a market of one. Doing that requires deep Remember, the corporation hasn’t been around
knowledge of the customer and a willingness to forever. It was an invention of the Industrial Age
build products that perfectly address a certain seg- and it was created in response to a unique set of
ment, however small. As we’ve seen, big companies conditions. It makes sense that a new set of condi-
usually fail at this, because they strive to build tions needs a new structure. Maybe it will look like
products for the broadest possible set of customers. something that doesn’t yet exist. But surely some
“Staying in Day 1 requires you to experiment pa- kind of unscaled corporation will emerge in the
tiently, accept failures, plant seeds, protect saplings, near future.
and double down when you see customer delight,”
Bezos wrote. And because of that approach, over Hemant Taneja (@htaneja) is a managing director at
General Catalyst Partners, a venture capital firm with
the years Amazon has brought us things like the offices in San Francisco, Palo Alto, New York City, and
Kindle, Amazon Web Services, and Alexa. The com- Boston, and a lecturer at MIT and Stanford. Kevin Maney
(@kmaney) is an author and a journalist, who writes
pany seems to renew itself constantly.
weekly about technology and society for Newsweek.
Bezos’s second point is “resist proxies.” Scaled Taneja is the author, with Maney, of Unscaled: How AI
companies can get lost managing things that don’t and a New Generation of Upstarts Are Creating the
Economy of the Future (PublicAffairs, 2018). This
matter. One example is process. Too often, Bezos
article is adapted from that book. Comment on this
writes, “the process becomes the thing. You stop article at http://sloanreview.mit.edu/x/59321.
looking at outcomes and just make sure you’re
doing the process right.” Other bad proxies include REFERENCES
market research in place of actually knowing cus-
1. “Disrupting Procter & Gamble: Private Companies
tomers. “You, the product or service owner, must Unbundling P&G and the Consumer Packaged Goods
understand the customer, have a vision, and love Industry,” CB Insights, April 19, 2016, www.cbinsights
.com.
the offering.” That intentionally sounds like in-
2. N.N. Ozkan, “An Example of Open Innovation:
structions for a startup company. Bezos wants
P&G,” Procedia: Social and Behavioral Sciences 195
Amazon to feel like a collection of startups. (July 3, 2015): 1496-1502.
His third point: “Embrace external trends.” As 3. J. Bezos, “2016 Letter to Shareholders,” Amazon.com,
Bezos notes, “The big trends are not that hard to April 12, 2017, www.amazon.com.
spot (they get talked and written about a lot), but Reprint 59321. For ordering information, see page 4.
they can be strangely hard for large organizations Copyright © Massachusetts Institute of Technology, 2018.
to embrace.” Newspaper companies saw the All rights reserved.

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P R O D U C T I N N O VAT I O N

Finding Applications THE LEADING


QUESTION
How can com-
panies target

for Technologies new applica-


tions for their
technologies?

Beyond the Core


FINDINGS

Make deliberate
efforts to tap the
potential of your
technologies be-
yond core markets.

Business 
Begin with an un-
derstanding of what
your current tech-
nologies can do.

Once you identify
Only a small number of companies systematically search alternative applica-
tions, you can decide
for opportunities to apply their technology outside their whether to develop
products yourself or
core markets. As a result, many work with partners.

miss out on potential profits and


avenues for growth and renewal.
BY ERWIN DANNEELS AND FEDERICO FRATTINI

YOUR COMPANY MAY be sitting on a hid-


den treasure. The technologies underlying your
core business could have lucrative applications be-
yond the ones that you provide to your current
customers. However, if your company is like others
we have studied, you aren’t pursuing those oppor-
tunities, or you’re doing it half-heartedly at best.
In recent years, we have researched or provided
consulting to several dozen organizations in the
United States and Europe. In doing so, we have fre-
quently identified untapped opportunities where
fungible technologies might deliver significant
benefits to customers in diverse industries.
Companies are often successful at applying
technologies to new products for the customers
they already serve. But they frequently stumble
when they try to leverage their technologies in new
markets. Determining how to go about applying
one’s technologies to different markets isn’t obvi-
ous. The goal of this article is to help managers find
and address applications outside of the businesses
for which a technology was originally developed.
We call this process “technology leveraging” —

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applying technological competence to customers in Worcester, Massachusetts. SNI developed a new


the company does not yet serve.1 technology for positioning the heads of its com-
Consider Kuka AG, a producer of industrial ro- puter numerical control grinding machines by
bots headquartered in Augsburg, Germany. At the using a set of stacked interlocking gears. In addition
end of the 1990s, the company began looking for op- to placing the grinding wheel on a plane (along X
portunities to apply its robotics technologies outside and Y axes), it also allows for angular motion.
of manufacturing. The search led to the establish- In its search for nonmachine tool applications,
ment of a new division aimed at the entertainment the company had to be clear about the technology’s
ABOUT THE and simulation sectors. In 2010, the company’s ro- core functionality. Management concluded that, at
RESEARCH
Our framework is based on bots became the core element of Universal Studios its core, the technology gave users the ability to posi-
our experience in advising Florida’s Harry Potter and the Forbidden Journey tion objects in space. Once this was established, SNI
companies on technology ride. During the ride, the robotic arms dive, turn, specified how the technology performed along mul-
leveraging, discussions with
and pivot in synchrony with projected images, giving tiple dimensions (such as force, precision, speed,
practitioners, and scholarly
research on the topic. In participants the illusion of extreme movement. The range, and energy consumption). Based on the set of
the past decade, we have new business provided Kuka, recently purchased by characteristics, it studied alternative technologies
advised more than 20 com- Midea Group Co. Ltd. of Guangdong, China, with a that provided similar functionality and developed a
panies and participated in
new source of revenue and profits.2 table that compared competing technologies and
25 technology-leveraging
projects. Based on these en-
In our experience, only a small number of compa- listed the advantages and disadvantages of each. This
gagements, we developed nies make a deliberate effort to tap the potential for enabled managers to identify their competitive ad-
insights into the processes business outside their core markets. As a result, most vantages and see which technologies they could
and approaches that are companies miss out on potential profits and avenues compete with and which ones were superior.
conducive to successful
for growth and renewal. Society also loses because it In many settings, this step requires extensive testing
technology leveraging. In ad-
dition, we have discussed doesn’t get to reap the benefits of technological prog- and investment in research and development. Indeed,
technology leveraging with ress. Through our research and practical expertise, you can’t look for new applications until you know
more than 40 research and we have developed a process to help companies better what your technology can do vis-à-vis what competing
development, licensing,
leverage technology. It relies on four steps: solutions do. For example, Saint-Gobain S.A., a French
and intellectual property
managers, chief technology
1. Characterize the technology. multinational corporation that produces a variety of
officers, and consultants. 2. Identify potential applications. construction materials along with advanced materials
We have also collaborated 3. Select from among the identified applications. for use in semiconductor manufacturing, wanted to
with BlueThink S.p.A., a 4. Choose the best entry mode. apply its ceramics technologies to new markets that
consulting firm based in
Milan, Italy, that specializes
were less cyclical. However, like SNI, it couldn’t start
in technology transfer and STEP 1: Characterize the technology. The first pursuing new markets until it knew what the technol-
technology leveraging. Our step in leveraging technology is to describe the un- ogy was capable of (for example, the temperatures it
discussions have helped to derlying technological competence. The idea is to could tolerate). Characterizing the technology has to
corroborate the framework
“de-link” the technology (for example, a robotic be done before seeking input from the market.
in this article, which builds
on our studies published in arm that can move in multiple directions) from the
several academic journals. specific products in which it is currently used. To STEP 2: Identify potential applications. Once
do this, companies need to identify the functions companies have specified what the technology is,
the technology can perform. The exercise gives they can begin to explore new settings where it
managers a way to explore the technology’s fungi- might be applied. Their market research should
bility and begin to imagine new applications. A consider a broad scope of potential applications,
good characterization can broaden the scope of the but it should also hew closely to an understanding
potential opportunities and get managers to focus of the technology’s functionality, as described in
clearly on the technology’s abilities and limits. Step 1. Searching for new applications requires a
The process begins with understanding the variety of techniques. Although we recommend
“core functionality” of the technology the company you start with desk research, you’ll likely make the
hopes to leverage. Consider the case of Service most progress by getting out of the office and inter-
Network Inc. (SNI), a machine tool manufacturer acting with people at conferences and trade shows.

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You can’t look for new applications until you


know what your technology can do vis-à-vis
what competing solutions do.

Desk research involves searching databases for industry studies. Which technologies are currently
patents, trade literature, trade conference programs, used to serve the functionalities you identified in
and general web searches. In searching for new tech- Step 1? What are the pain points and stumbling
nology applications, it’s frequently helpful to study blocks where current solutions fall short? Keep in
technologies that have the same core functionality mind such research is often just a warm-up for more
and examine how they are being applied. These ob- active engagement. Trade shows provide an excel-
servations will help you identify technologies that lent way to see firsthand where the technology and
yours might compete with or substitute for. SNI its alternatives might be applied, and to hear about
found, for example, that its positioning technology the pain points of the existing technologies. Indeed,
was unique because it allows objects to rotate. after attending a broad trade show, companies can
One way to identify inventions similar to yours is obtain valuable information by attending more
a patent search. While researching patents, be sure to focused, industry-specific trade shows to explore
look for claims regarding functionality. Rather than ideas in more detail.
using a single set of search terms, try a variety of One company we studied, Mario Cotta Zincometal
words that point to similar functions. In different in- Group S.p.A., also based in Milan, did just that. A
dustries, different words may be used to convey the leading manufacturer of pneumatic knife holders,
same functionality. Consider the experience of SAES circular knife blades, and slitting systems, Mario
Getters S.p.A., an industrial materials company Cotta developed an innovative cutting machine for
based in Milan, Italy, whose products are used in producing paper tissue. This machine bypasses some
various industrial and medical applications. In an ef- phases of the traditional production process, which
fort to find new markets for its functional polymers, allows the company to cut lead times and manufac-
which absorb gases, managers conducted search turing costs. Company executives sensed that the
queries for competitive technologies using an array technology had possible applications beyond tissues,
of keywords (everything from absorber and absor- although it didn’t know what the other applications
bent to functional, getter, reactive, scavenger, and might be. Eager to find new markets, they decided to
inhibitor). The company found that, besides its fa- attend Drupa, a large printing and cutting technol-
miliar direct competitors, there were other patent ogy trade show held every four years in Düsseldorf,
holders it didn’t know about operating in the chemi- Germany. Employees from Mario Cotta participated
cal, packaging, and printing industries. Managers in the 2012 show both actively (with a booth dis-
became aware that people in these other industries playing the proprietary technology) and passively
spoke different languages from the one they used. (with three people touring the show to scout out
For example, instead of talking about getters (a mate- new opportunities). Thanks to this effort, the com-
rial technology originally developed for the display pany identified a potential application involving
market), they tended to use terms such as fillers, scav- industrial felts. To learn more about this prospect,
engers, and desiccants. This awareness prompted managers attended a more specialized trade show
managers to refine the search for new applications, called Converflex, where they established contacts
and later provided the company with input on words with potential clients. While Drupa gave manage-
to use when communicating about the technology ment an overview of how the company’s cutting
with potential customers. machine might work outside its original sector, the
To learn about possible areas of application, you specialized trade show provided a more specific set
may want to start with trade publications and broad of options.

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In addition to trade shows, some companies have applications for citrus fiber have come from students
found it productive to reach out to experts both in- who participated in the company’s global contests.
side and outside the organization for ideas. For One of them, developed by students from Oregon
instance, in an effort to develop ideas on how to le- State University, has shown the feasibility of using
verage its expertise in ceramics technology several citrus fiber to reduce the oil content in fried seafood
years ago, Saint-Gobain convened a brainstorming and other fried food.
meeting of some of its top scientists and engineers
from various divisions and specialties. We have also STEP 3: Select from among the identified ap-
seen companies tap university researchers and pro- plications. Once companies have de-linked their
fessors to good effect, as many academics don’t technologies from their original product applications,
specialize in particular markets and often have a they can begin to “re-link” them to new markets.
broad range of contacts. Thus, the next step is determining which potential ap-
When looking for new ideas, some companies plications to pursue. Although selecting opportunities
have found that reaching out to people whose with the most promise may appear to be straightfor-
knowledge base differs from theirs can be more ward, in practice it can be more involved. First, you
productive than working with contacts who have need to assess the requirements of the new applica-
overlapping expertise. A German high-tech com- tions to make sure the technology is up to the task. In
pany that we worked with, for example, developed many cases, the technology needs to be adjusted, and
an innovative technology for generating electricity that often takes both time and money.
from superconductors. The technology was origi- Based on our experience, simulation studies can
nally created for distributed residential energy be helpful, but they may not be enough. They often
generation systems, but the company envisioned underestimate the problems that will arise when
that it might work in other settings. To find addi- actually applying the technology. Early prototypes
tional applications, the company invited several may be the only way to reveal such problems, and
university professors and researchers who worked they’re more effective at making the value of the
in the energy field to take part in informal meetings technology tangible to prospective customers.
and focus groups to brainstorm on new ways to Consider the case of a U.S. company that manu-
apply the technology. The meetings were moder- factures components for controlling sealing in
ated by professors from the Italian university where automotive applications, such as engine valves. As
the focus groups were held, who challenged the the company searched for new applications for its
participants to identify potential applications that technology, it conducted simulations in which the
made use of the technology’s core functions. In ad- technology was used in medical settings. Two po-
dition to suggesting new applications, some of the tentially promising medical applications were seals
attendees shared contact information of people for blood bags and catheters. Unfortunately, the
they knew working in related fields. simulations didn’t pick up on a critical difference
Yet another path forward is to engage with com- between what the sealant does in the automotive
munities of problem-solvers who could offer setting and how it needed to work in biomedical
suggestions for potential applications. Research has applications. In automotive applications, the seal-
shown that many potential problem-solvers are mo- ant has to be rigid because the components it joins
tivated by contests such as those hosted on platforms together don’t change during operation; in bio-
operated by open innovation and crowdsourcing medical settings, it has to be elastic because the
specialists like InnoCentive or IdeaConnection.3 sealant must adapt to the changing shape of the
Fiberstar Inc., for example, a privately held biotech- components. This difference didn’t become obvi-
nology company based in River Falls, Wisconsin, has ous until the company began making prototypes.
found that contests can lead to new applications. When considering new applications for new
Fiberstar’s most successful invention to date is a markets, it’s critical for managers to study the tech-
natural citrus fiber derived from citrus pulp, a nologies that are currently being used in the new
byproduct of orange juice production. Most of the markets and to fully understand their pros and

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HOW TO LEVERAGE TECHNOLOGY


Leveraging technology involves “de-linking” the technology from its current product application and then “re-linking” it to new applications.
De-linking starts with understanding the capabilities and the limits of the technology, which then sets the stage for identifying new applications.
Re-linking consists of selecting the most attractive markets and then determining whether to serve them with products developed internally
or to work with external partners and licensees.

Characterize Identify potential Select among identified Choose the best


the technology applications applications entry mode

De-linking Re-linking

cons. In what ways does your technology perform STEP 4: Choose the best entry mode. The fourth
better than the current approach? How is it worse? and final step in leveraging technology involves deter-
Is it possible to develop a value proposition that mining the best way to develop and commercialize the
makes the product using your technology superior, products that use it. In bringing a technology to mar-
either in the value it provides or cost savings? ket, companies need to decide whether to develop
In bringing your technology to new markets, the products themselves or work with a third party. This
goal should be to find new application areas where decision can have significant implications in terms of
your technology is superior. To be sure, superiority capital requirements, time to market, level of control,
can take several forms: achieving better performance and required commitment.5 However, there are no
on existing performance dimensions, introducing a universal guidelines that apply in every situation.
new performance dimension, or delivering the When assessing the relative benefits of one ap-
desired outcome at a lower cost. Often, it’s a combi- proach versus another, managers should begin with
nation of factors. SNI, the machine tool company an understanding of their organization’s existing
discussed earlier, found that its product could be resources and capabilities. For example, does the
built at a competitive cost, and based on its design, company have the manufacturing facilities and
would be less expensive for users to operate it. know-how to make the product? If yes, it may make
An Italian company we have worked with that sense to commercialize the technology internally.6
specializes in protective packaging solutions for busi- To the extent that you will be attempting to enter a
nesses and consumers uses three criteria to evaluate previously unserved market, you also need to know if
and prioritize new applications for its proprietary the company has the necessary resources to serve the
technology: (1) technical feasibility, the extent to new market. If not, you need to either develop or ac-
which the technology can be adapted to the identified cess a new set of market-related resources, including
application; (2) market attractiveness, the potential a new distribution channel and a clear sense of how to
economic value; and (3) innovativeness, the extent to meet customer needs.7 In our experience, developing
which the technology is novel compared with the new market-related resources (such as customer
technologies currently used in the targeted sector. relationships for a new industry) can be difficult.
Management ranks potential applications along The fact is that many companies that are able to
these criteria using a weighted scoring method.4 develop technologies don’t have the skills and
Sometimes the decision to pursue an alternative resources to commercialize their creations to suc-
application is complicated by the certification and ceed in new markets. That’s why some companies
regulatory process that the focal technology has to need to find application development partners that
go through. For example, a U.S. company we know have the necessary resources, be it manufacturing
explored the possibilities of using its advanced know-how, distribution capability, or brand equity.
metal composites to produce cardiac pumps. SAES Getters, for example, decided that the best
However, it reconsidered after learning about the way to apply its industrial materials technology to
challenges of achieving certification and approval food packaging was to collaborate on research
by medical authorities. with a small Italian company named Metalvuoto

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P R O D U C T I N N O VAT I O N

S.p.A., which specialized in developing plastic films our experience, companies that achieve the most
for preserving food. Eventually, it acquired the success in leveraging their technologies commit
company. themselves to multiyear budgets for technology
Still another option is to license the core technol- leverage and make it part of their strategy.
ogy (as opposed to a fully developed application) to For many companies, the untapped potential of
another organization. This involves commercializ- underutilized technologies can mean lost opportu-
ing the company’s technology through out-licensing nities — missed growth and profits. For society in
agreements to other manufacturers, although it can general, it can mean jobs that aren’t created and
also involve selling patents or spinning out the products that aren’t developed. These are treasures
entire business unit that focuses on the new tech- we think are worth hunting for.
nology. Licensing offers an effective vehicle for
converting proprietary technology into a more gen- Erwin Danneels is an associate professor of strategy at
eral technology platform. the University of South Florida’s Muma College of Busi-
ness in Tampa, Florida. Federico Frattini (@fedefrattini)
In many cases, a big challenge is establishing the is a professor of strategic management and innova-
value of the technology — it’s easy to undervalue it tion at Politecnico di Milano’s School of Management
and charge a royalty fee that does not adequately in Milan, Italy. Comment on this article at http://sloan
review.mit.edu/x/59327.
capture the value it provides to new users. We saw
this happen with a leading manufacturer of anti-
REFERENCES
vibration systems for heavy trucks and industrial
1. E. Danneels, “The Process of Technological Compe-
vehicles. The company licensed its technology for
tence Leveraging,” Strategic Management Journal 28,
use on light trucks. However, management was not no. 5 (May 2007): 511-533.
familiar with the new market and agreed to a royalty 2. C. Dell’Era, N. Altuna, S. Magistretti, and R. Verganti,
fee that was low relative to the value the technology “Discovering Quiescent Meanings in Technologies:
Exploring the Design Management Practices that
created. Indeed, licensees tend to know more than
Support the Development of Technology Epiphanies,”
licensors about the value a particular technology can Technology Analysis & Strategic Management 29,
bring to specific applications (which often puts no. 2 (2017): 149-166.
licensors at a disadvantage). 3. A. King and K.R. Lakhani, “Using Open Innovation
to Identify the Best Ideas,” MIT Sloan Management
Review 55, no. 1 (fall 2013): 41-48.
On the Hunt for Opportunities 4. M. Bianchi, S. Campodall’Orto, F. Frattini, and P. Vercesi,
Although companies aren’t always aware of it, the “Enabling Open Innovation in Small- and Medium-Sized
technologies they use in their core businesses often Enterprises: How to Find Alternative Applications for Your
Technologies,” R&D Management 40, no. 4 (September
have more than one application. Unless managers
2010): 414-431.
take steps to figure out the additional applications,
5. M. Bianchi, V. Chiesa, and F. Frattini, “Selling Technolog-
they risk leaving money on the table. Yet tapping ical Knowledge: Managing the Complexities of Technology
into new opportunities can be complicated. First, Transactions,” Research-Technology Management 54,
no. 2 (2011): 18-26.
it requires companies to free themselves from the
6. An online tool such as the one hosted at www
pull of their current customers and think more
.npdportfolio.com can be used to make resource fit
broadly.8 Seeking out new markets is a skill in and and requirement assessments.
of itself — one quite different from serving current 7. E. Danneels, “The Dynamics of Product Innovation and
customers. Firm Competences,” Strategic Management Journal 23,
no. 12 (December 2002): 1095-1121.
In many cases, it also requires a leap of faith.
Because it is difficult to judge ex ante whether con- 8. V. Govindarajan, P.K. Kopalle, and E. Danneels,
“The Effects of Mainstream and Emerging Customer
ducting a leveraging project will be worth it, many Orientations on Radical and Disruptive Innovations,”
companies resist committing the resources to The Journal of Product Innovation Management 28,
no. S1 (November 2011): 121-132.
explore opportunities in a serious way. However,
the reality is that projects aimed at leveraging tech- Reprint 59327. For ordering information, see page 4.
nology will always have to compete with the Copyright © Massachusetts Institute of Technology, 2018.
company’s mainstream businesses for resources. In All rights reserved.

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C O R P O R AT E G O V E R N A N C E

Why the Influence of


Women on Boards
Still Lags
The representation of women on corporate boards has risen substantially over the
past decade, but the growth rate is slowing. Meanwhile women’s power on the boards
on which they sit is often limited.
BY KIMBERLY A. WHITLER AND DEBORAH A. HENRETTA

ALMOST ALL FORTUNE 500 executive boards willingness to suspend judgment and work France, Germany, the United Kingdom,
now include at least one woman, and many together to find a better ‘third way.’ I have and the United States found that compa-
have two or more. The average board seen this not only on large public corporate nies in the top quartile of board diversity
among these companies is made up of nine boards, but also in small private startups (with diversity defined in terms of both
men and two women — double the num- and not-for-profits.” gender and nationality) saw return on
ber of female board members in shareholder equity that averaged
2006. While these gains are promis- 53% higher than that of compa-
ing, they appear to be slowing. Last nies in the bottom quartile. Their
year, the overall number of female margins were also 14% higher
corporate directors in the Fortune than those of the companies with
500 actually dipped slightly. the least diverse boards.
Why the apparent flattening? It’s Our research has led us to be-
not because women haven’t per- lieve that the reason women aren’t
formed well in their board roles. making more rapid inroads is that
Indeed, many executives are con- few have reached the most influ-
vinced that having more women as ential board leadership positions.
directors improves performance. A.G. Although more women are on
Lafley, who has served on a number of boards now than 10 years ago,
boards including Procter & Gamble very few have been promoted to a
(as chairman), General Electric, and post that would give them influ-
Legendary Entertainment, tells us ence beyond their seat at the table.
that in his experience, women add “There are three layers of prog-
important perspective: “I believe the ress for women,” explains former
advantages of diversity and, more broadly, A range of consultants and academics Xerox Corp. CEO Anne Mulcahy, who cur-
inclusion, are relatively well-known and for have demonstrated that boards with more rently sits on several Fortune 1000 boards.
some of us confirmed by experience. More gender diversity are more innovative, more “There’s the breaking in part of getting onto
creativity, more innovation, more inquiry, strategically minded, and generally more boards. Then there is the critical mass part
more and broader experiences to draw on, effective. A 2012 study by McKinsey & Co. of getting more than one woman on each
better problem-solving, greater ability and of 180 publicly traded companies in board. And then there is the influence part

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C O R P O R AT E G O V E R N A N C E

of getting women into leadership positions Our analysis of the 2016 Fortune 500 When Women Are in
where the real power resides.” companies affirms that women are still un- Power Roles
By leadership positions, Mulcahy is re- derrepresented in power roles. Just 6% of The correlation between women holding
ferring not just to the board chair and lead board chair positions at these companies powerful board roles and overall board rep-
independent director roles. The real work are occupied by women. In nearly half resentation is clear. Similarly, when women
of boards gets done in committees, she says, (45%) of those cases, a woman occupies the lead a board, there tend to be more women
and not all committees are created equal. chair role by virtue of being the company’s in other powerful board roles. In companies
There is “an unwritten, unstated hierarchy CEO. This effect is even more striking where women occupy the board chair role,
of power,” Mulcahy notes, and most of the among the very largest companies. In the the percentage of women who chair at least
executives we interviewed confirmed her Fortune 100, two-thirds of the women in one committee is higher, the percentage of
observation: Beyond the board chair and chair positions are also CEO. And for those women leading the compensation and
the lead independent director, those chair- boards that have a lead independent direc- audit committees is higher, and the average
ing the audit, compensation, nominating, tor (not all boards do), we find women percentage of women on the board in-
and governance committees hold the real occupy the role just 10% of the time. creases from 20% to 28% overall.
power positions. After these power com- In the committee chair positions, the Independent of whether or not a
woman is the board chair, the trend holds.
When women lead the nominating or gov-
Although more women are on boards now ernance committees, on average, there are
21% more women on the board. When a
than 10 years ago, very few have been female chairs the audit committee, there
promoted to a post that would give them are, on average, 18% more women on the
influence beyond their seat at the table. board. Whether the relationships are
causal or not, the correlation is strong.
Mulcahy shared a story about being on a
mittees, she notes, “comes everything else: numbers start to look better. According to board where a woman chaired the science
infrastructure, risk, finance, sustainability, 2016 data, 58% of boards have at least one and technology committee: “I watched her
corporate relations, and so on.” woman chairing a committee. But this is not fight — and fight hard — to get another
Leaders of committees set the agenda for the case with the most powerful committees. female scientist/technologist onto the
decision-making and therefore wield more For instance, only 21% of nominating/cor- board.” The woman’s efforts ultimately car-
power than other directors. In the commit- porate governance committees are chaired ried the day, and the new female member
tees generally acknowledged to involve by women. Even less common are women joined, but according to Mulcahy, only her
heavier lifting — especially audit, nominat- chairing audit committees (18%), compen- powerful position as chair made it possible.
ing/governance, and compensation — their sation committees (13%), or executive “Without her strong advocacy and her
power can meaningfully change the course committees (5%). position, it never would have happened.”
of events. They have built-in influence over Where are the rest of the women chairs? Mulcahy’s own takeaway from that ex-
important board decisions such as who the “It has been my experience and observation perience is a reminder that women need
next CEO will be, who comprises the slate of that females often chair the sustainability and other women to act as sponsors, particu-
future board members, how executive com- corporate relations committees and not the larly on a board dominated by men. “If no
pensation is structured, and more. audit, compensation, or nominating and women are in lead positions, or represented
The story of women on boards is, thus, governance committees,” says Stephanie on nominating/governance committees,
a mixed one. Yes, the raw numbers have Burns, former CEO of Dow Corning Corp. there may not be outspoken advocacy for
changed substantially over the past decade. and now a director on multiple boards. The other women,” she said. “Decisions fall into
But the lack of ascension to key leadership evidence supports Burns’ observation: the retired-male-CEO world.”
board positions once women have taken a On corporate responsibility/public policy/ Of course, when women have more in-
seat on the board is limiting their influence patient safety committees, women hold the fluence on boards, they aren’t using it
and impact. This, in turn, can have a nega- chair position 38% of the time. Women also primarily to bring in more women. Our
tive effect on the prospects for continued chair sustainability/innovation committees theory is that some of the increase in
growth in female board participation. 25% of the time. female representation that coincides with

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having women in power roles occurs be- would prepare them for a finance or an Place women on the nominating and
cause experience and exposure to women audit committee. “One woman on one of governance committees. A number of di-
in different board roles increases their my boards held an important White House rectors we interviewed specifically pointed
male colleagues’ comfort. appointment,” Dow Corning’s Burns re- to nominating and governance as impor-
calls. “While she is very smart and a good tant assignments for women directors.
Within Our Power contributor, her experience base likely These two committees tend to have a lot of
Maggie Wilderotter, former CEO of doesn’t qualify her” to take on a power role seasoned and experienced directors, who
Frontier Communications Corp., believes in a corporate board. Contrast this with Sue tend to be predominantly men. Because
it’s only a matter of time before women Redman’s experience of being recruited to a their networks are likely primarily com-
gain more influence. “I think women are board and rapidly advancing to the chair of posed of men, they are more likely to
underrepresented in leadership roles be- its audit committee, despite being its first nominate men for board candidate slates.
cause they haven’t paid their dues yet,” she female member. The former CFO of Texas Base chair selection on merit. Finally,
says. “They are the new kids on the block A&M University, Redman chalks up her it makes sense to put some pressure on
and need to earn their right to be in a com- rapid rise to the Sarbanes-Oxley Act of boards to improve selection processes for
mittee chair or board leadership role.” 2002, which had just specified “you had to committee chairs, which at best are seen as
tenure-based (rather than merit-based)
and, at worst, are seen as the casual, unre-
We should not assume that women being flective workings of old boys’ clubs. On
various occasions, as a manager and as a
recruited onto boards arrive with a thorough board member, Redman observed that “the
understanding of board dynamics and a clear determination of potential was not based
game plan for how they will make their mark. on evaluations but based on subjective fac-
tors that made the men more comfortable.”
Women’s advocates have been fighting
While we agree that tenure is a factor, have a finance expert on the committee and to increase gender diversity on boards for
we believe that companies can do a num- they had to have had prior experience pre- decades. Progress has been made, but there
ber of things to make progress faster: paring and auditing financials and had to is a long way to go. We have identified one
Encourage more measurement of be a CFO or an auditor.” primary reason in this article. For real,
female board members’ influence. Focus new board recruits on a power- lasting change that wins companies the
Measurement and scrutiny bring about ful destination. We should not assume full benefits of gender-diverse decision-
change: It’s worked that way in the long that women being recruited onto boards making, boards need to look beyond
fight to raise the number of women on arrive with a thorough understanding of inclusion and toward influence.
boards, and it can work that way in helping board dynamics and a clear game plan for
them earn more powerful roles on the how they will make their mark. Coaching Kimberly A. Whitler (@KimWhitler) is an as-
sistant professor of business administration
board. Mulcahy sees the same opportunity from experienced board members is im- at the University of Virginia’s Darden School
to boost influence by increasing transpar- portant once women reach the board level, of Business. Previously, Whitler spent nearly
20 years in general management and mar-
ency, “not just in showing how many as they need advice and guidance on the
keting roles. Deborah A. Henretta (@DebPG)
women are on boards, but in calling out best path to power. is an independent board director serving on
how many women are in leadership roles.” Encourage women to mentor other four public boards — Dow Corning Corp.,
Meritage Homes Corp., NiSource Inc., and
Ideally, she says, some objective source women. Women’s networks exist at every
Staples Inc. — and several not-for-profit
would take on the accountability to refresh level of management — why not at the boards. Henretta is also a senior adviser to
the data annually and publish trends board level? Stephanie Burns, now a direc- SSA & Co. Previously, she spent 30 years
at Procter & Gamble Co., where she held a
analysis. tor at HP Inc., observes that “it would be number of executive positions. Comment
Recruit women with the right back- great to have forums where directors could on this article at http://sloanreview.mit.edu/
grounds to serve on power committees. share experiences and talk about business/ x/59301.
While many women tapped for a board seat governance challenges.” Some such forums Reprint 59301. For ordering information, see page 4.
have had illustrious careers, they have not do exist, and with corporate support, they Copyright © Massachusetts Institute of Technology,
necessarily been dedicated to work that could expand. 2018. All rights reserved.

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Essential reading for


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leading source of ideas on how
technology is transforming
the practice of management.

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LEADERSHIP

5 Steps Leaders Must Take


in the Age of Uncertainty
Corporate executives need to move beyond managing only their own
company and become active influencers within broader systems.
BY MARTIN REEVES, SIMON LEVIN, JOHANN D. HARNOSS, AND DAICHI UEDA

BUSINESS LEADERS INCREASINGLY find them- are embedded. These ecosystems are nested
selves in unfamiliar territory marked by complex adaptive systems: multilevel, inter-
high levels of uncertainty and instability, connected, dynamic systems hosting local
a slowing global economy, and shifting interactions that can give rise to unpre-
political realities. Global economic policy dictable global effects and vice versa.
uncertainty has tripled since 2000 and con- Acknowledging the unpredictability, non-
tinues to accelerate. Our own research shows linearity, and circularity of cause-and-effect
that this systemic uncertainty feeds into cor- relationships within these systems is a no-
porate decision-making. Companies are table departure from the simpler, linear
more exposed than ever to economic and models that underpin traditional mecha-
political feedback, and their performance nistic management thinking.
swings are increasingly due to noncompeti- What does a nested ecosystem look like?
tive effects. This phenomenon affects players Companies are part of industries and mar-
across entire industries and, in the extreme, kets — business ecosystems — that are
can threaten their very survival. embedded in local and national economies,
Take the U.S. retail industry, for exam- underestimated the social demand and re- which in turn are interwoven with societies.
ple. Over the last several decades, companies sulting political support for renewable Changes at lower levels (for example, the
like Walmart Stores Inc., The Gap Inc., and energy. As we found in our analysis, with sourcing practices of U.S. retailers) influence
many others successfully played a global the help of the S&P Capital IQ database, the higher-level systems (such as the economic
cost arbitrage game by taking advantage of top 10 European energy utilities lost 40% value and social status of manufacturing
labor cost differences, low trade barriers, of their market value since their peak in skills in society), which then reshape policy
and information technology (IT) advances. 2007 — the top three lost as much as 75%. (border tax proposals, for example) and thus
As we know today, such sourcing strategies Political and macroeconomic forces are the fates of subsystems — namely, compa-
have unleashed economic, social, and polit- shaping the business environment as never nies. A new systems-based mental model
ical feedback effects, culminating in strong before. The implications for corporate will help leaders understand, adjust to, and,
political backlash. Retailers faced the possi- strategy and leadership are profound. within limits, shape these feedback dynam-
bility of a border adjustment tax, which ics. We see it as a prerequisite to maintaining
could have wiped out a substantial propor- Change in Perspective Needed competitive advantage.
tion of the industry’s profits. While this We believe business leaders need a new men- Our analysis compared the relative per-
threat may have abated, the possibility of tal model to better understand the complex formance effects of noncompetitive factors
increased protectionism remains. interplay between companies, economies, and competitive factors (for example, prof-
Other examples are manifold and not and societies. To do so, they must shift itability, earnings before interest and taxes
limited to the United States. Consider their focus to the broader business and margin). We’ve found the importance of
utilities in Europe, where companies social ecosystems in which their companies noncompetitive factors — such as political/

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LEADERSHIP

regulatory exposure — has increased rela- messaging in the 1990s, chip manufacturers act as disruptors to prod other stakeholders
tive to competitive ones and even exceeds solely marketed to their direct users — in the system to adopt new behaviors, even
competitive factors in financial services. design engineers at computer manufactur- when the direct benefits to their own com-
ers — but as the market matured, chips panies are not clear or immediate.
A New Leadership Paradigm were in danger of becoming commoditized. Take the suffering U.S. textbook indus-
Business leaders need to master the art of By finding an indirect but more powerful try. Some of its systemwide woes come
shaping systems, rather than just operat- leverage point — the end consumer — Intel from technological substitution, but a
ing within them. This means not merely was able to change the role that chip manu- more fundamental challenge is that the
extending their current game, which typi- facturers play in the IT value chain and entire sector has been impervious to per-
cally focuses on the company, the resources assume a leadership role in the industry. In sistent warning signals about its lack of
it controls, and its immediate competitors, that process, Intel grew its value by more openness and anachronistic pricing prac-
suppliers, and customers — they need a than 40 times; its share price grew from 81 tices. As a result, the industry now faces a
completely new set of priorities and capa- cents to around $34.20 (as of June 2017). host of competition and substitutions,
bilities. Leaders can take these five steps to 3. Orchestrate collaboration in the sys- ranging from open-access journals to mas-
effectively shape the extended system in tem. Leading in a system requires striking a sive open online courses.
which they participate. balance between the often-conflicting 5. Lead with a new mindset. Leaders
1. Observe and understand the broader needs of companies and the broader system need to leverage more informal ways of
system. First, leaders need to mentally situ- that they constitute. To do so, leaders must exercising leadership that can transcend
ate their business in the context of a wider foster mutualism and trust among the com- organizational boundaries. We have seen
system that includes consumers, ecosystem panies. In practice, this requires not just some leaders rely on superior visionary
partners, media institutions, and policy modeling the right behaviors by creating abilities to exercise thought leadership in
makers. This means understanding the key value for the overall system but also actively an industry; others leverage their ability to
players and their interests and mapping out surfacing and resolving tension within the convene and build trustful relationships.
the important relationships among them. system. Active conflicts, such as between Ultimately, these actions transform leader-
Often, opportunities for and threats to the nongovernmental organizations and large ship from a position of authority into an
business become visible only by consider- companies serving similar constituencies, activity that can create broader influence.
ing the broader system beyond traditional can lead to productive information ex- This transformation requires a mindset
industry boundaries. change and activity; these interactions, shift from thinking in reductionist models
The music industry in the 2000s is a while stressful, typically help both sides im- of company performance toward more
classic case of what happens when busi- prove and sharpen their value proposition, holistic models of system performance.
ness leaders fail to see the bigger ecosystem whereas unsurfaced tension increases the Leaders who manage this shift are bound to
picture. Record labels faced with new digi- risk of deeper disruptions down the road. create an advantage for their company as
tal competitors were on a downward spiral Healthy systems require both collaboration well as their wider ecosystem.
and unable to muster the systemic re- and small, manageable conflicts.
sponse to break out of it. Eventually, it took 4. Foresee and manage systemwide Martin Reeves (@MartinKReeves) is a senior
an industry outsider, Apple Inc. founder risks. Because of the increasing intercon- partner at The Boston Consulting Group’s
(BCG) New York office and director of the
Steve Jobs, to lead (nearly) all major music nectedness and interdependence of BCG Henderson Institute (BHI). Simon Levin
labels onto one platform, and with it open companies, many corporate risks present is professor of ecology and evolutionary bi-
a viable path to new digital revenues. themselves to the entire system rather than ology at Princeton University who specializes
in the theory and management of complex
2. Master the art of intervening in the to individual companies. To manage sys- adaptive systems. Johann D. Harnoss
system. Next, leaders need to learn how to temwide risks, leaders must be able to (@Johann_Harnoss) is a project leader at
BCG and an ambassador to the BHI. Daichi
intervene effectively in a complex adaptive detect potential threats to the system’s
Ueda is a former consultant at BCG and am-
system. A common managerial mistake is to health and have the courage to preemp- bassador to the BHI. Comment on this article
limit oneself to direct leverage points. tively change practices to avert them. This at http://sloanreview.mit.edu/x/59112.
Instead, seemingly softer indirect points means that they need to play the roles of an-
Reprint 59112. For ordering information, see page 4.
can often provide more leverage in complex tennae that sense changing political, social, Copyright © Massachusetts Institute of Technology,
systems. One example: the Intel Inside and technological signals; articulate the 2018. All rights reserved. This article was originally
campaign. Before Intel Corp. changed its risks these developments bring; and also published online. It has been adapted for print.

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O R G A N I Z AT I O N A L B E H AV I O R

Why Best Practices


Often Fall Short
For many leaders, the allure of best practices is strong and their expectations
for results are unrealistic.
BY JÉRÔME BARTHÉLEMY

EXECUTIVES TEND TO take the value of best CEOs tend to be more risk-averse than
practices as a given. We have an abiding shareholders would like them to be, so the
faith in the idea that the most direct route boards of many organizations now offer
to improved performance is to study what top executives a portion of their compen-
successful companies do and copy them. sation in the form of stock options. This
Best practices certainly do have their encourages leaders to take greater risks on
benefits. In Bordeaux, France, for instance, behalf of shareholders because they stand
many wineries now follow practices recom- to gain from increases in share price. By
mended to them by winemaking consultants, being bolder, the theory goes, CEOs make
such as micro-oxygenation, a technique that more money for the company (and its
involves injecting controlled doses of oxygen shareholders). Research confirms that the
into wines during fermentation. Micro- more CEOs are paid in stock options, the
oxygenation softens tannins, which mini- more aggressively they invest in research
mizes the need for long-term storage and critical to the success of the organizations and development (R&D), capital expendi-
makes wines easier to drink young. For that embrace them. For instance, a best- tures, and acquisitions. Bigger bets, in
most vintners, this leads to an improve- selling author once claimed that creative turn, lead to bigger gains — but also bigger
ment in quality. But there is a downside: companies such as Pixar Animation Studios losses. Risky practices that lead to extreme
Micro-oxygenation also makes wines taste all have centralized restrooms. He argued performance — either big wins or big
more similar, and thereby reduces brand that locating the restrooms in the middle losses — cannot really be considered best
distinction and competitive advantage. of a company’s offices fosters creativity be- practices at all. On the contrary, best prac-
This phenomenon isn’t peculiar to cause it leads to chance encounters among tices are tried and tested practices that
winemaking. After following the outsourc- employees from different departments who consistently enhance performance.
ing, franchising, and wine industries might not otherwise mix with one another. Therefore, on a risk-adjusted basis,
closely for the past 15 years, I’ve come to In reality, the practices that explain a com- copying practices that are just OK may be
the conclusion that adopting a best prac- pany’s success are rarely that obvious. Nor a better bet than copying practices that
tice is a great way to achieve average results. does correlation prove causation: Many an- ostensibly promise a huge upside.
Not only that: Adopting a best practice alysts believe that Pixar’s creativity owes For instance, a team of researchers ex-
that is wrong for your company can de- more to its nurturing peer culture, which amined the impact that three standard
stroy value. allows employees to get candid feedback on management practices — targets, incentives,
their unfinished work, than to the location and monitoring — have on performance.
What’s Really the Best? of its restrooms. Using data on thousands of organizations
Managers often assume that everything a Consider also a very different example: across several countries, they found that
successful company does is a best practice. In corporate finance, the use of stock op- implementing these standard manage-
But many such practices aren’t actually tions is often viewed as a best practice. ment techniques enhances productivity,

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O R G A N I Z AT I O N A L B E H AV I O R

profitability, and sales growth. It also Hidden Costs goal is to boost operational quality and re-
decreases the likelihood of bankruptcy. Finally, it’s important to understand the duce errors. Six Sigma was developed at
Setting targets, rewarding employees hidden costs of a best practice. The imple- Motorola Inc., and one of the most high-
based on performance, and monitoring mentation of a new practice often depresses profile companies to embrace its principles
what goes on within your company are short-term performance because it disrupts was General Electric Co., McNerney’s
not particularly glamorous activities, but the company’s existing processes. The more previous employer. Initially, Six Sigma gen-
they are generally more effective than the new practice differs from the old one, erated substantial cost savings for 3M. But
many best practices that are more highly the greater the implementation cost. there was a downside: By mid-2005, when
touted. One study of large U.S. companies ex- McNerney left 3M to become CEO of
To reduce the risk of adopting the amined the relationship between financial Boeing Co., Six Sigma had contributed to
wrong best practice, begin by considering performance and the adoption of eight IT compromising 3M’s ability to innovate,
how similar your organization is to the best practices (use of application service which had always been the company’s most
businesses that follow the practice. For providers, implementation of business pro- important competitive advantage. To limit
instance, because McDonald’s Corp. is cess reengineering projects, participation the damage, George Buckley, 3M’s next
famous for using a policy of granting in e-commerce, and use of customer rela- CEO, largely discontinued the use of Six
geographically nonexclusive licenses to tionship management, data warehouse, Sigma in research and development (R&D).
franchisees, many new franchisers have enterprise resource planning, groupware, As he explained: “You can’t put a Six Sigma
adopted this practice. However, research or knowledge management systems) and process into [R&D] and say, well, I’m get-
has shown that granting nonexclusive li- found that the implementation of IT best ting behind on invention, so I’m going to
censes increases the likelihood that a new practices leads to an initial performance schedule myself for three good ideas on
franchiser will fail. Prospective franchi- dip. According to the study, performance Wednesday and two on Friday. That’s not
sees fear that the value of their license will starts to improve only after the third year of how creativity works.”
suffer if another unit of the same brand adoption. Clearly, the stakes for implement- The hidden costs of a new practice are
opens nearby, and they look skeptically at ing a new practice — however “best” it may particularly large when its implementation
licenses that don’t have territorial exclu- appear — can be quite high. alters a company’s core pursuit (such as
sivity. Their objection is not a major Sometimes, in fact, adoption costs are so 3M’s focus on innovation). If your organiza-
concern for established franchisers such high that switching to a likely better practice tion is doing well, think twice about
as McDonald’s that have enough resources can be worse than staying the course. For adopting new practices. If you’re in trouble,
to open and operate their own outlets, but instance, research on technology startups in however, you may want to adopt a new ap-
new franchisers need franchisees in order Silicon Valley found that of the five most proach temporarily. For instance, Six Sigma
to grow. Indeed, McDonald’s itself fol- popular management models, the one that was arguably the right prescription for 3M
lowed an exclusivity policy in its early is far and away the best is the so-called com- in the short run, despite the nasty side ef-
years when it was still growing. mitment model, which focuses on hiring fects. When McNerney first arrived, 3M’s
Most best practices are similarly situa- employees based on cultural fit and devel- profitability was low and its stock price was
tional. Should you outsource a process or oping strong emotional bonds with those lagging. Thanks to Six Sigma, 3M’s effi-
perform it in-house? My research suggests employees. Startups using the commitment ciency improved, and by 2005, it was in a
that outsourcing is a best practice when model are less likely to fail and more likely better position to focus on innovation again.
the activity is surrounded by a lot of un- to go public than startups that follow other Finally, it is important to keep in mind
certainty, but not when it offers the potential management models. However, the same that even the best of best practices has
for competitive advantage and the sup- study found that switching management a limited shelf life. The more popular a
plier is likely to behave opportunistically. models after launch triples the likelihood of practice becomes, the less likely it is that
For instance, Apple Inc. outsources manu- failure, even when the change is to the ad- adopting it will enable you to outperform
facturing because production does not mittedly superior commitment model. your competitors. A similar dynamic often
generate a competitive advantage in com- Best practices also often come with hid- occurs in sports. In football, for example,
puters and consumer electronics. On the den long-term costs. In 2001, Jim McNerney when Bill Walsh became head coach of the
other hand, design is crucial to Apple’s was appointed CEO of 3M Co. Within three National Football League’s San Francisco
success, so the company performs that years, he converted the entire company to 49ers in 1979, he implemented and popu-
activity in-house. Six Sigma, a system of best practices whose larized an innovation known as the West

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Coast offense. With the West Coast offense,


Walsh led the 49ers to Super Bowl champi-
onships after the 1981, 1984, and 1988
seasons. The team went on to win two more
Super Bowls under George Seifert, but the
distinctiveness of the benefits associated
BREAKING
with the West Coast offense started declin-
ing after other teams began hiring coaches
who had worked as assistants to Walsh
CONVENTION,
and those coaches implemented similar
schemes with their new teams. As micro-
oxygenation is to wine, so the West Coast
offense was to football.
The key is to find a best practice early,
INVENTION
while it is still in use only by a small number
of organizations. For example, while most
mergers and acquisitions fail, research has
shown that a practice known as staged in-
vestment can significantly increase their
likelihood of success. Staged investment in-
volves entering into a strategic alliance with Since its founding, MIT has fostered a spirit of ingenuity and
the partner before eventually buying it. creative disruption. As a result, our faculty and students are behind
Although this technique significantly some of the world’s boldest inventions and innovative companies.
decreases the odds of merging with the That’s also why thousands of global executives and senior managers
wrong company, only 1% of buyers are cur- come to MIT Sloan Executive Education every year seeking new
rently taking advantage of it. A potential frameworks and hands-on experiences to help their companies be
explanation is that staged investment delays more agile, innovative, and productive.
the synergy creation process. Therefore,
companies prefer to make outright acquisi- Keep your company on the leading edge. Enroll now in these upcoming programs:
tions — that often end up as failures. Leading Change in Complex Organizations
As is the case with so many things, the May 14–18
successful use of best practices is found in
Understanding Global Markets: Macroeconomics for Executives
moderation: Be selective about which June 4–6
practices you choose to follow, and be real-
istic about the returns you will achieve. The Platform Strategy: Building and Thriving in a Vibrant Ecosystem
June 7–8
right best practices can help improve your
performance, but they alone cannot turn Building Game-Changing Organizations: Aligning Purpose, Performance, and People
June 14–15
you into an outstanding performer.
Business Dynamics: MIT’s Approach to Diagnosing and Solving Complex Business Problems
Jérôme Barthélemy is a professor of strategy June 18–22
and management at ESSEC Business School
in Paris. His book Libérer la Compétitivité
(Unleash Your Company’s Competitive Spirit)
(Pearson, 2016) received France’s best executive.mit.edu/smr
management book award in 2017. Comment Open enrollment courses,
on this article at http://sloanreview.mit executive certificates, and custom
.edu/x/59325.
programs for your organization
Reprint 59325. For ordering information, see page 4.
Copyright © Massachusetts Institute of Technology,
2018. All rights reserved.

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ETHICS

Which Rules Are


Worth Breaking?
Disruption of an established business model requires companies to disregard
the “rules” of the status quo. But there must be limits.
BY R. EDWARD FREEMAN AND BIDHAN (BOBBY) PARMAR

THE 21ST CENTURY business world is being Uber became extremely successful in a
built on disruption in industry after indus- very short time. By 2014, it was providing
try. The old rules simply no longer apply to 1 million rides a day. By 2016, despite
the industries being challenged: Thanks to increasing competition, it was providing
Airbnb Inc., for instance, the lodging indus- about 5.5 million rides a day globally.
try will never be the same, and thanks to
Amazon Inc., retail will never be the same. Object of Scorn But more recently, Uber
At one level, disruption is nothing new — has become more of a poster child for bad
it’s simply a more modern way of rephrasing behavior — in the eyes of its employees, its
economist Joseph Schumpeter’s theory of users, its communities, and the ride-hailing
“creative destruction.” But at another level, industry in general — as a series of mistakes
something else is happening. Many innova- and controversies began to litter its path.
tors are not just building better mouse- Early last year, Uber found itself in the
traps; they are also trying to articulate and center of a controversy during the protests
consciously break the rules of the game, over the Trump administration’s first travel
sometimes by figuring out ways to accom- ban. Thousands of people who were pro-
plish more with less, sometimes by finding testing the ban engaged in a side campaign
ways around legal barriers, and sometimes explored new territory, offering customers to discourage people from using Uber be-
by taking the low road. They consciously the convenience of on-demand ride hailing cause the company suspended surge pricing
defy the rules, but there’s risk in defying too via a simple app on their mobile phones. for rides from New York’s JFK International
many rules. Customers got more efficient rides that Airport when taxi drivers stopped pickups
were digitally integrated into their daily at the airport to protest the ban. Uber’s crit-
Disruptive Darling Consider Uber Tech- routines, and many of the previous hassles ics likened the company’s move to crossing
nologies Inc. Only a few years ago, the San of getting around — from calling car a picket line set up by the taxi drivers.
Francisco-based ride-hailing service was services or pulling out cash or credit cards A few weeks later, a former Uber engi-
the poster child for the new sharing econ- for each taxi trip to having to make ride neer wrote a bombshell blog post alleging
omy. As Uber gained popularity, startups in appointments ahead of time — became a that the company repeatedly turned a blind
other industries described themselves as thing of the past. Uber also provided drivers eye to sexual harassment in the workplace
the Uber of clothing, or food delivery, or the benefits of flexible work and additional and had a culture of gender discrimination.
travel reservations. Uber’s business model income. Then other sexual harassment issues came

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to light: A senior vice president of engineer- Psychological studies have shown a correla- Pay for What You Break There is more to
ing was forced to step down after allegations tion, for instance, between unethical business than narrow outcomes defined in
of harassment at his previous job emerged, behavior and creativity: Research conducted terms of profit and shareholder value. Vio-
a manager was fired for groping women at a by Francesca Gino and Scott Wiltermuth lating rules and norms has real costs, and
company event, and a management team in demonstrates that there’s a creative upside you have to pay for what you break.
Seoul was reported to have visited escort to cheating. People who cheated in one task Our own research demonstrates that
karaoke bars. were more likely to generate creative solu- employees are more likely to experience
Uber’s problems continued to multiply. tions in subsequent tasks. The researchers meaningful work in organizations that
Google, an Uber investor, sued the com- attributed the uptick to a heightened feeling they perceive to be pursuing an important
pany for stealing intellectual property of being unconstrained by rules. purpose. People gain more autonomy and
from Waymo, Google’s autonomous car Disruptive companies like Uber need to competence, and have better relationships,
program. Then, when one of Uber’s self- move from a perspective that rules and in companies they think are focused on a
driving cars ran a red light, the company norms don’t matter to a more specific under- purpose beyond profit. This has tangible
initially blamed “human error” but later standing of which rules are worth breaking payoffs, translating to lower turnover, a
acknowledged that the fault lay in the self- and why. When disrupting the status quo, higher degree of employee engagement,
driving system, which did not recognize smart startups would do better using a scal- and better customer service.
the traffic lights. And after a New York pel rather than a hatchet to avoid cutting off Startups and other organizations that
Times report called out Uber’s practice of vital relationships and essential resources. want to disrupt the status quo and also be
responsible corporate citizens need a fine-
grained understanding of which rules they
A general attitude that “the rules don’t apply to want to break. Organizations need the
capability to understand ahead of time the
us” paired with a narrow focus on outcomes consequences of breaking certain rules,
creates fertile ground for ethical crises. specifically an understanding of who will
be harmed and who will benefit. Involving
stakeholders in the process of developing
using “Greyball” software to deceive au- A general attitude that “the rules don’t new products and services is essential to
thorities in areas where the ride-hailing apply to us” paired with a narrow focus on allow businesses to appreciate the stake-
service was restricted, Uber brashly de- outcomes (particularly shareholder value) holders’ perspectives and better identify
fended its tactics before later conceding creates fertile ground for ethical crises. and avoid ethical disasters. Without the
that it would no longer use the software. While an organizational culture geared capacity to anticipate and circumvent
This string of controversies led to a toward winning can be helpful in many problems that could arise as a result of its
mass exodus of Uber senior executives, in- ways, it can also cause unnecessary self- innovations, a company — even one with
cluding the president, the vice president of damage because not all rules are worth great and truly innovative ideas — can suf-
products and growth, the head of Uber’s breaking — even when there is a short-term fer a death by a thousand cuts.
artificial intelligence labs, and CEO Travis benefit. For example, in the public’s eyes, Yes, we need disruption. But let’s make
Kalanick himself. breaking rules about taxi licenses appar- it responsible disruption.
ently isn’t as severe of an offense as flouting
Think Different, but Not Too Different It societal norms about respecting gender R. Edward Freeman is a professor of strat-
egy, ethics, and entrepreneurship at the
takes creativity to develop and deploy inno- equality. When key stakeholders perceive Darden School of Business at the Univer-
vative products and services that disrupt the that a good rule has been violated, they get sity of Virginia. He tweets @re_freeman.
status quo, and creativity involves thinking upset and can find ways to retaliate. Eventu- Bidhan (Bobby) Parmar is an associate
professor at the Darden School. Comment
differently about overcoming constraints. ally, the negative impressions from repeated on this article at http://sloanreview.mit
But constraints exist for a reason: Laws and transgressions accumulate and affect the .edu/x/59313.
social norms are important checks on indi- brand, making it harder to appeal to high-
Reprint 59313. For ordering information, see page 4.
vidual and corporate behavior.Nonetheless, quality employees, customers, suppliers, Copyright © Massachusetts Institute of Technology,
there are forces that make it tempting and communities, all of which are necessary 2018. All rights reserved. This article was originally
to push aggressively on constraints. for the company to flourish. published online. It has been adapted for print.

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EXECUTIVE BRIEFINGS
SPRING 2018 • VOLUME 59 • NUMBER 3

Turn Strategy Into Results


Donald Sull (MIT Sloan School), Stefano Turconi (London Business School), Charles Sull (Charles
Thames Strategy Partners), and James Yoder (formerly Charles Thames Strategy Partners) pp. 24-32

Strategy, at its heart, is about choice. Few companies succeed by making a single big bet. Winning strate-
gies, authors Donald Sull, Stefano Turconi, Charles Sull, and James Yoder observe, are based on “a bundle
of choices”: which customers to serve, the scope of the business, product offerings, and capabilities that
interact with one another to help a company make money. While describing a strategy favors complexity,
executing strategy requires simplicity, the authors explain, so that leaders at every level of the organization
can understand, communicate, and remember it.
The authors examined the SEC filings of 494 companies included in the 2014 Standard & Poor’s 500
Index and other communications to investors as a means of identifying their strategic priorities. To set a
strategic agenda and drive implementation effectively, they found that strategic priorities need to balance
guidance with flexibility, counterbalance the inertia of business as usual, and unify disparate parts of the
business. The article describes seven characteristics of effective strategic priorities and offers practical
diagnostics that managers can use to assess their companies’ strategic priorities.
1. Managers should limit the number of priorities to a handful. A small number (three to five) is easier
to remember and communicate throughout the organization.
2. Companies should focus on mid-term objectives (things that can be accomplished in three to five
years) as opposed to short- or long-term goals. Once the goals have been set, they should discourage
managers from revising them.
3. Managers should concentrate on things that will pull the company forward (as distinct from what
worked in the past). This might involve entering new markets or adding new capabilities.
4. Managers need to be prepared to make “the hard calls.” “The discipline of whittling down priorities to
a handful,” they write, “can force a leadership team to surface, discuss, and ultimately make a call on
the most consequential trade-offs the company faces in the next few years.” Many companies try to
avoid these decisions and pay a price.
5. Companies should address their “critical vulnerabilities” — the elements of the strategy “that are
most important for success and most likely to fail in execution.” They should understand whether the
risks are tied to external factors (such as new competitors) or internal factors (such as culture).
6. The objectives should provide guidance to people within the organization on what to prioritize.
Although revenue and profit goals are specific, companies don’t always provide sufficient guidance on
how the company can reach them.
7. Finally, companies should develop agreement among top managers on the strategic priorities. The authors
found that, at many companies, senior executives either didn’t know or couldn’t agree on the key priorities.
REPRINT 59209. For ordering information, see page 4.

Why Sustainable Thinking Matters More Than Ever


Shifting expectations by investors, consumers, and governments are putting new pressures on corporate
leaders to think more expansively about their companies’ responsibilities to society and what they can
do to change behavior. In this set of articles, MIT Sloan Management Review offers a fresh perspective
on the role of corporations in today’s society, and the extent to which they have obligations beyond
increasing profits.

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EXECUTIVE BRIEFINGS

The collection is made up of five articles:


• In “Stop Focusing on What Other Businesses Do,” Andrew Winston (Winston Eco-Strategies), writes
about the dangers of basing future strategy on historical patterns. The author argues that technology
and society are changing fast, requiring executives to adjust. “Business faces rising expectations from
society, and that shift is changing the nature of strategy and competition,” he writes. “Looking at yes-
terday’s norms will make your business outdated and irrelevant.” pp. 34-35
• “Share Your Long-Term Thinking,” by Tim Youmans (Hermes Equity Ownership Services) and Brian
Tomlinson (CECP), focuses on the importance of communicating long-term plans. The authors list
reasons why this is in a company’s best interests, including: demonstrating that the company has a
long-term plan; showing that it is aware of megatrends; showing investors that it has considered envi-
ronmental, social, and governance issues; and inspiring and retaining employees and investors. pp. 36-38
• “The Personalized Future of Urban Transportation,” by Venkat Sumantran (Celeris Technologies), Charles
Fine (MIT Sloan School), and David Gonsalvez (MIT), discusses the future of urban transportation. In this
article, the authors describe the opportunity for automakers, cities, and entrepreneurs “to innovate and
proliferate new travel modes and solutions, enhancing variety, options, and utility for users.” pp. 39-45
• “Business Needs a Safety Net,” by David Kiron (MIT Sloan Management Review) and Gregory Unruh
(George Mason University), covers government’s role in stabilizing healthy markets and planning
responses to destabilizing events. The authors contend that the future role of government is likely to
grow in response to increased uncertainty and natural catastrophes. “As the effects of climate change
become more prominent,” they write, “business needs to grapple with its own attitude toward government
as an enabler of, rather than a constraint on, their respective corporate purposes.” pp. 46-48
• “Why Companies Should Report Financial Risks From Climate Change,” by Robert G. Eccles (Saïd
Business School, University of Oxford) and Michael P. Krzus (independent consultant), reveals why
companies should report financial risks created by climate change. The article reviews the recommen-
dations of the Task Force on Climate-related Financial Disclosures commissioned by the governor of
the Bank of England and advises companies to get behind them. pp. 49-51

The Hybrid Trap: Why Most Efforts to Bridge Old


and New Technology Miss the Mark
Fernando F. Suarez (D’Amore-McKim School of Business, Northeastern University), James Utterback
(MIT Sloan School), Paul von Gruben (Technische Universität), and Hye Young Kang (Questrom
School of Business, Boston University) pp. 52-57

Technological transitions are challenging, particularly for companies in mature industries. Incumbents
are frequently blindsided by new technologies, thereby missing opportunities to enter emerging markets
early. While some established companies become early adopters of new technologies, the authors argue
that they typically lack the vision and the commitment to become leaders. Too often, they cling to the
familiar, developing “hybrid” products that combine elements of the old and the new. This puts even the
best incumbent companies in a weak position when the market finally embraces the new technology,
something the authors call the “hybrid trap.”
This article takes a close look at the auto industry’s transition from internal combustion engines to
electric vehicles (EVs) and compares it to precedents in other industries. Several incumbent automakers,
such as General Motors Co. and Honda Motor Co. Ltd., entered the EV market early, but they backed
away from these projects in favor of continued emphasis on established engine technology. Gradually,
most of them focused on hybrid cars that combined old and new technologies. This opened the door to
new competitors, notably Tesla Inc., which focused solely on the EV technology. By mid-2017, nearly
every old-line engine producer was playing catch-up on EV technology, working to release new electric
models in the next two to five years.
Although it is too early to know if Tesla will be successful in the long run, the Tesla example, in the
authors’ view, points to a fundamental weakness in how incumbents respond to industry transforma-
tions. In the 1960s, U.S. electronics companies responded to the introduction of Japanese transistor
radios by developing products that blended transistor technology with traditional vacuum tubes. In
the early 1990s, Kodak Ltd. tried to sell a “film-based digital imaging” product, which merged film

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photography and digital technology. And a decade ago, BlackBerry Ltd. tried to respond to the challenge
of the iPhone by releasing a phone that had both a touchscreen display (like the iPhone) and a traditional
keyboard (like earlier BlackBerry phones).
The answer for incumbents, the authors write, isn’t to walk away from products based on the old
technology and jump headlong into the new. But they need to take precautions so that the company’s
legacy operations don’t hamper their ability to pursue new technology. New technologies can open
opportunities that extend well beyond the scope of legacy products. But such opportunities can be
accessed only by companies that are willing to view the world through the lens of the new technology.
REPRINT 59328. For ordering information, see page 4.

The Store Is Dead — Long Live the Store


David R. Bell (Wharton School, University of Pennsylvania), Santiago Gallino (Tuck School of
Business, Dartmouth College), and Antonio Moreno (Harvard Business School) pp. 59-66

At a time when many traditional retailers are closing their physical stores, digitally native vertical brands
such as Bonobos, which specializes in men’s apparel, and Warby Parker, which specializes in eyeglasses,
are aggressively expanding into offline locations. In this article, the authors explore two related trends:
(1) the expansion of online-first retailers into offline stores that “supercharge” customer value and (2) the
transformation of stores run by traditional, offline-first retailers from fulfillment-dominant centers into
experience-dominant centers.
As authors David R. Bell, Santiago Gallino, and Antonio Moreno note, as digitally native vertical brands
have learned to build relationships with customers, traditional retailers have been reducing their store sizes
and inventories and are attempting to improve and elevate the customer experience. “Showroom experi-
ences,” they write, “create better customers.” When customers are exposed to the brand in a showroom, “they
are better able to resolve any uncertainty about the nondigital attributes of the retailer’s product.” Similarly,
the authors say, “showrooms create better retailers: When customers are physically present in the retail
environment, observation of their behaviors can lead to meaningful insights.”
The authors developed their early insights into what customers value while working closely with
Bonobos and Warby Parker. Through simulations, they saw that stores with smaller footprints and a
higher level of service led to better results economically — improved margins, smoother logistics, and
better control of inventory. They found that, rather than being dead, physical retail stores were very
much alive with a profound shift in focus — from fulfillment to experience-oriented environments.
The authors conclude that online-first retailers and traditional retailers have something to learn from
each other. Offline-first retailers can benefit from copying the showroom concepts originated by online-
first retailers; online-first retailers can benefit by opening more traditional stores.
REPRINT 59302. For ordering information, see page 4.

The End of Scale


Hemant Taneja (General Catalyst Partners) with Kevin Maney (author and journalist) pp. 67-72

For more than a century, economies of scale made the corporation an ideal engine of business.
However, the emergence of platforms and technologies that can be rented as needed have eroded the
relationship between fixed costs and output that defined economies of scale. Together, these new factors
have enabled small companies to pursue niche markets and successfully challenge large established
companies that are weighed down by investments in mass production, distribution, and marketing.
“Investments in scale used to make a lot of sense,” argues author Hemant Taneja. They supported the
development of cars, airplanes, radio, and television, and built out the electric grid and telephone system.
But with the emergence of mobile, social, cloud computing, and artificial intelligence in recent years,
Taneja argues that business logic has shifted toward what he describes as “the economics of unscale,”
which allows for mass customization for increasingly narrow markets. Because companies can stay nimble
and focused by easily and instantly renting scale, they can adjust quickly to changing demand and conditions
with little cost and relatively little effort.

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EXECUTIVE BRIEFINGS

According to Taneja, large corporations are taking note. Traditionally, Procter & Gamble Co. invented
most of its new products in-house. But in recent years it has started to tap into ideas from outside inventors
who submit ideas via the internet. Other large companies, including General Electric Co. and Walmart
Stores Inc., are tapping into new, unscaled businesses as well.
Taneja presents three recommendations to large companies seeking to remain relevant. His first rec-
ommendation is to become a platform. Operating a platform can be enormously profitable because the
companies that operate on the platforms come to depend on them for their success. The author’s second
recommendation is to instill a product focus. Big companies, he argues, get sidetracked on issues that
have little to do with making great products. But in an unscaled era, this can create openings for focused
small competitors. His third recommendation is to find growth opportunities through what he calls
“dynamic rebundling.” The winners in the unscaled economy, he writes, “make every customer feel like
a market of one.” Products and services that are tailored to individuals will often have an advantage over
mass-market products and services, Taneja says. Corporations, therefore, can try to maintain their advan-
tage with collections of products from their portfolios that they bundle for particular customers.
REPRINT 59321. For ordering information, see page 4.

Finding Applications for Technologies Beyond the Core Business


Erwin Danneels (Muma College of Business, University of South Florida) and Federico Frattini
(School of Management, Politecnico di Milano) pp. 73-78

The technologies underlying a company’s core businesses can have lucrative applications beyond the ones
they provide to current customers. However, many companies don’t pursue these opportunities, or do it
half-heartedly. Typically, authors Erwin Danneels and Federico Frattini observe, companies are more com-
fortable developing new products for the customers they already serve than they are with applying their
technologies in new markets (a process they call “technology leveraging”). Only a small number of compa-
nies make a deliberate effort to tap the potential for business outside their core markets.
Using examples from companies the authors have studied or advised, the article describes a four-step
process for leveraging technology that involves: (1) characterizing the technology, (2) identifying potential
applications, (3) choosing from among the identified applications, and (4) selecting the best entry mode.
The first step involves “de-linking” the technology from the specific products in which it is currently
used. To do this, the authors explain, companies need to identify the functions the technology can per-
form. A good characterization can broaden the scope of the potential opportunities and allow people to
focus clearly on the technology’s abilities and limits. In many settings, this step requires extensive testing
and R&D investment. As they explain, “You can’t look for new applications until you know what your
technology can do vis-à-vis what competing solutions do.”
Once companies have specified what the technology is, they can begin exploring new settings where
it might be applied. Although the authors recommend starting with desk research, the biggest benefits
often come from getting out of the office and interacting with people. Trade shows, they say, provide an
excellent way to see firsthand where the technology and its alternatives might be applied, and to hear
about the pain points of the existing technologies. Another approach is to tap into communities of
problem-solvers who might be able to provide suggestions.
Although identifying opportunities with the most promise may appear to be straightforward, in
practice, the authors note, it can be more involved. Companies often underestimate the challenges of
applying the technology, which may be revealed only by building early prototypes. In bringing technol-
ogy to new markets, the goal should be to find new application areas where your technology performs
better on existing performance dimensions, introduces a new performance dimension, or delivers the
desired outcome at a lower cost.
The fourth and final step in leveraging technology involves determining the best way to develop and
commercialize the products that use the technology. In bringing technology to market, companies need
to decide whether to develop products themselves or work with a third party. This decision can have
significant implications in terms of capital requirements, time to market, level of control, and required
commitment. However, there are no universal guidelines that apply in every situation.
REPRINT 59327. For ordering information, see page 4.

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LEADERSHIP

Putting an End to Leaders’ Self-Serving Behavior (Continued from page 96) and consistently to prevent motivated rea-
enable self-serving behavior. Specifically, contrast, when individuals held strong be- soning from taking place. For instance,
we investigated how certain contextual and liefs rooted in fairness and equality (that is, decision-makers in organizations may be
individual characteristics can facilitate mo- moral identity), they exhibited less self- able to convince themselves that certain
tivated reasoning aimed at justifying serving behavior. stakeholders are more deserving than
self-serving decisions. Examples of businesspeople taking others without realizing that they have
We explored this issue through two more than their fair share are ubiquitous in reached such conclusions due to their mo-
experimental studies, one using a hypo- modern organizational contexts. Some of tivated biases. Organizational systems and
thetical business decision-making scenario the most vivid, recent illustrations come processes can make moral concerns more
(in which 395 people participated, 52% from the housing bubble that arose during a or less salient to employees. Competitive
women) and the other using a behavioral period of market flux and opaque hedging environments and contexts that intensely
task in the laboratory (in which 239 people strategies. The resulting crisis was driven by emphasize financial concerns, for instance,
participated, 52% women). In both stud- self-focused bankers who were rewarded can prompt organizations to unwittingly
facilitate motivated reasoning and self-
serving behavior.
Recognize the added complexities that
Examples of businesspeople taking more arise on the global stage. Operating glob-
than their fair share are ubiquitous in modern ally increases the ambiguity surrounding

organizational contexts. decision-making and presents decision-


makers with more complex, multifaceted
issues than they face in domestic business.
In many emerging and developing coun-
ies, we assigned participants to conditions for their high-risk practices, and the most tries, institutional environments are
in which they received either identical per- profoundly affected individuals came from weaker — as compared to economies at
formance information with respect to minority racial groups. Ten years on, the high levels of development — and involve
another party (strong, unambiguous con- pain felt by these groups is still severe. arbitrary law enforcement, bureaucratic
text) or in which they and the other party Given that organizational realities are irregularities, and widespread corruption,
were favored by different performance cri- often fraught with ambiguity, our research all of which might reinforce the contextual
teria (weak, ambiguous context). In the offers several strategies to prevent such con- ambiguity of situational cues. Organizations
latter case, participants could use moti- texts from prompting motivated reasoning: should give their employees explicit, clear
vated reasoning to convince themselves Choose leaders who tilt away from guidelines for engaging in cross-cultural
that their own performance criterion was self-serving frameworks. Organizations interactions to reduce contextual ambigu-
more relevant for the task at hand, thereby should ensure that decision-makers have ity. Doing so will produce a more holistic,
convincing themselves that they deserved central (and internalized) moral identities comprehensive understanding of other
larger shares of the resource. and that people who unwaveringly en- global business contexts in which deci-
The results showed that, in fact, when dorse status hierarchies don’t always end sions are less susceptible to self-serving
there’s ambiguity in the context, people do up in positions of power, as is often the interpretations.
convince themselves that they deserve more case. Organizations need to realize that,
resources than others, a form of motivated by ignoring such factors, they may be in- Morela Hernandez is an associate professor
of business administration at the Darden
reasoning that in turn facilitates their self- advertently facilitating the relationship School of Business at the University of
serving behavior. This effect was even between contextual ambiguity and moti- Virginia. The Darden School is on Twitter
@dardenmba. Links to Hernandez’s work
stronger when individuals held strong ide- vated reasoning.
are available at morelahernandez.com. Com-
ologies that endorse status hierarchies (that Create systems that reinforce fairer ment on this article at http://sloanreview.mit
is, social dominance orientation) and the evaluations. Our findings underscore the .edu/x/59315.
belief that because of their age, race, gender, need for managers to not only create sys-
Reprint 59315. For ordering information, see page 4.
economic status, or other individual char- tems and processes that incorporate a Copyright © Massachusetts Institute of Technology,
acteristics, some people should be relegated consideration of stakeholder needs and in- 2018. All rights reserved. This article was originally
to lower levels of our social hierarchy. In terests, but do so clearly, unambiguously, published online. It has been adapted for print.

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LEADERSHIP

Putting an End to Leaders’


Self-Serving Behavior
New studies demonstrate that many executives act with a sense of entitlement
and suggest strategies to mitigate selfish thinking.
BY MORELA HERNANDEZ

ALTHOUGH WE MIGHT hope that leaders in


business environments will embrace their
decision-making responsibilities with a
clear head and an open heart, empirical
research has shown otherwise. Instead,
business leaders are often selfish. Access to
resources in many organizations is a mov-
ing target, leaving many managers feeling
protective of what’s theirs. And when they
take more than their fair share — extra
resources for themselves at the expense of
others — they often do so because they
honestly think they are entitled to these
resources and believe they have earned the
right to take more.
Where does this kind of entitlement
come from?
As I’ve tried to reconcile current political
events — such as the European Union’s People use this kind of reasoning to reach poor moral characteristics are deemed likely
reaction to Brexit, the continuing global conclusions that help them support their to behave unethically. Instead, researchers
refugee crisis, and the ongoing debates in self-serving beliefs. After all, reasoning, it have examined how people can engage in
the United States about tax and health care has been said, “was designed by evolution to self-serving behaviors while convinced of the
reform — with scholarly work on ambigu- help us win arguments.” rightness and fairness of doing so. Few stud-
ity and decision-making, I’ve come to think ies, however, have explored the circumstances
that feeling entitled to a larger share of a The Effects of Self-Serving in which this type of selfishness — one that
resource might come not from objective as- Behavior comes with a sense of entitlement and jus-
sessments of reality but rather from what Understanding the effects of self-serving be- tification — is likely to arise.
social scientists call motivated reasoning. liefs is a tricky business. In the last decade of Working alongside my colleague Laura
Motivated reasoning occurs when people research in behavioral ethics, for instance, Noval, of the Imperial College Business
“selectively notice, encode, and retain infor- scholars have moved away from a “bad ap- School in London, we sought to understand
mation that is consistent with their desires.” ples” approach in which only people with how organizations (Continued on page 95)

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