DON TAPSCOTT • C . K . PRAHALAD • MARSHALL GOLDSMITH • GARY NEILSON • A . G .

LAFLEY • DAVID ROCK

IAL
EC
CELEBRATING15 YEARS OF SAR
Y

SP
THE BESTBUSINESSTHINKING V E R
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AN

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I SS

Special Issue, Autumn 2010

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15 YEARS OF SIGNIFICANCE
Since its inception, strategy+business
has focused on the value of manage-
ment thinking and practice. Be-
cause business knowledge is a mov-
ing target, in which there is always
something to learn from practice
and reflection, the best insights
about management often seem coun-
terintuitive at first. But they can
make a significant difference in your
effectiveness and the performance
of your enterprise — whether you’re
a CEO, a student, an entrepreneur,
or anyone else in business. This year,
we celebrate the magazine’s 15th
anniversary by looking back at the
wisdom we have published in our
pages. Much of it is still worth read-
ing now.
When s+b was founded in 1995
by former Harvard Business Review
editor Joel Kurtzman and a group of
farsighted partners at Booz & Com-
pany (then part of Booz Allen
Hamilton), the dot-com era was just
beginning, and the shape of the
world economy was very different
than it is today. Amazon and
Google did not yet exist; neither
China nor India was seen as a global
economic force. The United States,
where the magazine’s focus was cen-
tered at the time, was at a peak of
prosperity, with rising equity prices,
a sound federal budget heading
toward surplus, and strong business
confidence. How could anything
published in those years matter to
anyone in 2010?
Yet despite all the turbulence
since then, there has been a slow but
steady increase in knowledge about
economic value and organizational
effectiveness. The importance of
managerial capability has been dis-
counted by economists (and others)
for years, but it is now becoming
increasingly apparent. Variance in
managerial prowess explains why
some companies weathered the eco-
nomic storm and others did not,
and why some new CEOs succeed
while others crash and burn. That’s
why, at s+b — through the editor-
ships of Kurtzman (1995–1999),
Randall Rothenberg (2000–2005),
and me (since 2005) — our primary
editorial mission has been to help
readers find the most profound and
most pragmatic business insight,
and put it to use.
Consider, for instance, “Why
CEOs Succeed (and Why They
Fail): Hunters and Gatherers in the
Corporate Life” (page 8), written
in 1996 by an innovative venture
capitalist (Edward F. Tuck) and
a prominent anthropologist (Timo-
thy Earle). They show how the
CEO and the board of a major com-
editor’s letter
pany play out the same roles in our
time that the chiefs and elders of
prehistoric tribes established many
thousands of years ago. In that con-
text, the passage of 15 years is al-
most nothing.
Similarly, the 1997 article “10X
Value: The Engine Powering Long-
term Shareholder Returns” (page
16) anticipates many of the ideas
emerging now about the value of
coherence. Leslie Moeller (now a
Booz & Company partner) and
Booz alumni Charles E. Lucier and
Raymond Held studied 30-year
1
growth patterns of 1,300 publicly
traded companies in the U.S., and
found it is possible to raise a com-
pany’s value 10-fold in that time, if
you know how to muster the right
kind of innovation.
Don Tapscott’s 2001 article,
“Rethinking Strategy in a Net-
worked World (or Why Michael
Porter Is Wrong about the Inter-
net)” (page 24) remains current
because the controversy it raised still
endures: Does the Internet make
corporate boundaries obsolete?
Should companies emulate Apple,
which retains tight control over
every aspect of its enterprise, or
 IBM, which thrives by providing its
customers access to an open source
world of software, services, and
devices? The debate is far from set-
tled (especially with Apple ascen-
dant right now), but Tapscott lays
out a compelling case for open
source enthusiasm.
Perhaps the most prescient
work that s+b has published to date
was “The Fortune at the Bottom of
the Pyramid,” by C.K. Prahalad and
Stuart L. Hart (page 32). This arti-
cle, published in 2002, foresaw
business models targeteted at the
billions of “aspiring poor” in emerg-
ing markets. To reach them, multi-
editor’s letter
national companies would need to
create low-margin, low-cost goods
in “culturally sensitive, environmen-
tally sustainable, and economically
profitable” ways. Prahalad, who
passed away in April 2010 after a
sudden illness, lived to see this seem-
ingly outlandish concept become
part of the strategy of companies
around the world. (See the discus-
sion of his book in “Essential Read-
ing: Highlights from 15 Years of s+b
Book Reviews,” by s+b Senior Edi-
tor Theodore Kinni, on page 98.)
The concept of organizational
2
DNA began life in our pages as
“The Four Bases of Organizational
DNA” (page 46), published in 2003
as an effort to isolate the factors that
shape a company’s culture. As au-
thors Gary Neilson, Bruce A. Paster-
nack, and Decio Mendes describe it,
company behavior is influenced by
the design of structures (reporting
relationships and hierarchy), deci-
sion rights, motivators (incentives
and career options), and informa-
tion flow (the informal networks by
which people share knowledge).
Neilson’s ongoing work — on bol-
stering organizational capabilities
for better execution, and on the pat-
terns of CEO succession and the
qualities of effective CEOs — con-
tinues to appear in s+b.
Another author who has be-
come more prominent while writ-
ing for s+b is Marshall Goldsmith,
the executive coach’s executive
coach, now known for his bestsellers
What Got You Here Won’t Get You
There: How Successful People Become
Even More Successful (with Mark
Reiter; Hyperion, 2007) and Mojo:
How to Get It, How to Keep It, How
to Get It Back if You Lose It (with
Mark Reiter; Hyperion, 2009). In
2004’s “Leadership Is a Contact
Sport: The ‘Follow-up Factor’ in
Management Development” (page
56), Goldsmith and his coauthor
Howard Morgan reveal the most
important factor in helping leaders
become capable: following up with
other people about their own im-
provement. The Ed Koch “How’m I
doing?” style of leadership may have
been right all along.
“Manufacturing Myopia” (page
66), published in 2006, describes a
perennial affliction that is demand-
ing more attention now as produc-
ers of goods wonder where their
industries went. Authors Kaj Grich-
nik, Conrad Winkler, and Peter von
Hochberg posit a culprit different
from the usual suspects (China and
outsourcing): the conventionally
fragmented approach to manufac-
turing management. Competitive-
ness, on both a corporate and a
national level, depends on taking
this kind of guidance seriously.
One of the great executives of
our time is Procter & Gamble’s for-
mer CEO A.G. Lafley, the author
of “P&G’s Innovation Culture”
(page 78), published in 2008. He
and noted management writer Ram
Charan (who introduces the article)
conceived of it as a follow-up to
or “missing chapter” of their best-
selling book, The Game-Changer:
How You Can Drive Revenue and
Profit Growth with Innovation
(Crown Business, 2008), which dis-
cussed the human changes needed
to foster Procter & Gamble’s re-
markable strategic renaissance dur-
ing the 2000s.
This special issue also includes
2009’s “Managing with the Brain in
Mind” (page 88) by David Rock,
founder of the NeuroLeadership
Institute and one of the first writers
to explore the relationship between
neuroscience and organizational
leadership. Change efforts can take
hold only when leaders recognize
the deep, brain-based needs people
have for status, certainty, autonomy,
relationships, and fairness.
These articles are classics; they
will always be relevant. (For a list of
other classics we’ve published, see
page 104.) In this special issue, we
also celebrate some of the great busi-
ness books we have reviewed over
the years; see the survey by Senior
Editor Theodore Kinni, an expert
on business books, on page 98.
Society’s growth curve is driven
by the quality of its ideas, particular-
ly those about management. That is
the real engine behind increases in
wealth and productivity at many
companies, and it represents a pri-
mary source of strength in dealing
with today’s immense social and
environmental issues. We (and Booz
& Company, the firm that publish-
strategy + business special issue, autumn 2010
es s+b) are proud of our track record
in bringing this type of knowledge
to you. +
Art Kleiner
Editor-in-Chief
kleiner_art@strategy-business.com
 Page 3
Pick up, Issue 60, Page 101
 features
MANAGEMENT

8 Why CEOs Succeed

(and Why They Fail):
Hunters and Gatherers
in the Corporate Life
Edward F. Tuck and Timothy Earle
In the corporate world, the laws of the jungle still rule.
CEOs and boards fall prey to the habits and practices of
prehistoric hunters and gatherers.

STRATEGY & COMPETITION

16 10X Value: The Engine 8

Powering Long-term
Shareholder Returns 66
Charles E. Lucier, Leslie Moeller, and Raymond Held
Your company can pursue 10-fold growth over 15 years
through strategic innovation: changing the rules of the
game for your industry.

STRATEGY & COMPETITION

24 Rethinking Strategy in
a Networked World
Don Tapscott
The original manifesto for open source, Internet-
conscious competitive advantage argued that Michael
Porter was wrong about partnerships and alliances.
Here’s why working outside your boundaries is central
to business success.

28 Six Reasons There Is a New Economy

GLOBAL PERSPECTIVE

32 The Fortune at the Bottom

of the Pyramid
C.K. Prahalad and Stuart L. Hart
Low-income markets present a prodigious opportunity
for the world’s largest companies to seek their fortunes
and bring prosperity to the billions of aspiring poor who
are joining the market economy for the first time.

16
 features
MANAGEMENT STRATEGY & COMPETITION

46 The Four Bases of 78 P&G’s Innovation

Organizational DNA
Gary Neilson, Bruce A. Pasternack, and Decio Mendes
How does a company design its organization to
execute its strategy and successfully adapt when
circumstances change? The first step is to under-
stand how four key traits of an organization influ-
ence each individual’s behavior: the organizational
structure, the decision rights for processes, the
motivators, and the flow of information.
84 Becoming a Great Innovation Team Leader
50 Focus: Testing Quest Diagnostics’ DNA
Culture
A.G. Lafley, with an introduction by Ram Charan
Lafley, the CEO of Procter & Gamble, explains how
his company built a world-class organic growth
engine by investing in people. Going beyond their
book, The Game-Changer, the authors explore the
role of social systems in turning new ideas into
commercial success.
Ram Charan

MANAGEMENT MANAGEMENT

56 Leadership Is a Contact 88 Managing with

Sport: The “Follow-up the Brain in Mind
David Rock
Factor” in Management Neuroscience research is revealing the social
Development nature of the workplace and its implications for
Marshall Goldsmith and Howard Morgan management. The brain’s social needs — for status,
A review of leadership development programs at certainty, autonomy, relatedness, and fairness —
eight major corporations reveals that nothing matter more than money.
works better than interaction with colleagues.
Executives who follow up their training by BEST BUSINESS BOOKS 1995–2010
discussing their improvement plans and progress
with co-workers become the best leaders. 98 Essential Reading:
Highlights from
MANAGEMENT
15 Years of s+b
66 Manufacturing Myopia Book Reviews
Kaj Grichnik, Conrad Winkler, and
Peter von Hochberg Theodore Kinni
Why do manufacturers lose relevance and competi- Our all-time favorite business books.
tiveness? Because their operations strategies are
often the same as they were 10 or 20 years ago. ENDPAGE
Instead of drifting into decline, producers of goods
have a chance to seize the future by cultivating bet- 104 Articles of Significance
ter awareness about manufacturing costs and Of s+b’s many classic articles over the years, here
means: learning to see their operations more are a few of the editor’s favorites.
clearly and redesign them more flexibly.
Cover illustration by Opto
72 The Roots of Myopia

Special Issue, Autumn 2010

strategy+business www.strategy-business.com

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 Page 7
Pick-up, Issue 60, Page 5
 BY EDWARD F. TUCK AND TIMOTHY EARLE
WHY CEOS SUCCEED (AND WHY THEY FAIL)
HUNTERS
GATHERERS
CORPORATE LIFE
management
What are the factors that determine
which CEOs succeed and which fail?
Even in the high-tech world,
the laws of the jungle still rule.
It is enormously destructive and expensive to
change the chief executive of a growth company who
stumbles in office. The human cost is high, as well:
competent executives, used to success, fail without
understanding why. They are branded with their failure.
Some succumb to bitterness and despair; a few are
suicides.
Why do these otherwise successful, competent,
well-trained people fail? Why, in the face of good advice,
do they do things that bring about their ruin? Why, after
they fail, can people of less training, skill, and intelli-
gence turn their failures into successes?
The authors of this article are an early-stage venture
seed capitalist and an anthropologist who specializes in
leadership. We have examined the most common ways
that CEOs fail by applying the findings and techniques
AND
IN THE
of anthropology to business organizations. We have
found that the cause of these systematic failures is not
the CEO’s lack of skill, nor even his or her psychology;
it is the changing institutional context in which the
CEO must perform.
A chief executive officer will fail most often in these
three situations:
• He or she has moved to a much smaller company,
Illustration by Elwood Smith
either as an entrepreneur or to take over a startup or
early-stage company.
• The CEO’s small company has grown into a mid-
sized company.
• The CEO has been a successful vice president or
chief operating officer and has been promoted to chief
executive, or has been recruited as chief executive for
another company.
management
9
 Edward F. Tuck
ed@falconfund.com
is the principal of Falcon Fund,
a venture capital and private
equity fund for seed and early-
stage investments, and CEO of
Social Fabric Corporation, a
relationship-prediction service
that uses DNA samples. At the
time of publication, he was a
general partner of Kinship
Partners II, a venture capital
fund. He has also been the
founder or cofounder of
several companies, including
Magellan (the GPS pioneer)
and Teledesic Corporation.
Timothy Earle Originally published Fourth
tke299@northwestern.edu Quarter 1996.
is professor and chair of the
department of anthropology at
Northwestern University, posi-
tions he held at the time of
this article’s original publica-
tion. Formerly, he was a pro-
fessor of anthropology at the
University of California at Los
Angeles and director of its
Institute of Anthropology.

These three modes of failure seem unrelated; they to succeed in a group, we unconsciously call on those
are not. Something changes when a company reaches a primitive patterns of behavior that have evolved over
management

certain size that makes it somehow different to manage;
also, running an independent company is different from
running a division of a large company. In short, small-
company CEOs fail in large companies, large-company
CEOs fail in small companies, and CEOs who have
risen through the ranks can’t work with their boards.
Camp, Corporation, and Community
Every company is a polity: a politically organized com-
munity. Even though employees may be hired and fired
at will, and may be called “resources,” “heads,” “directs,”
or some other impersonal term, each director, officer,
manager, and employee of a company is a functioning
member of the polity. This is true regardless of the
degree of democracy that exists in the company, regard-
10
less of an employee’s position and regardless of whether
he or she or the company’s management wants it to be
true. Everybody in a company is part of a politically
organized community, a polity, and each person’s role
and behavior in that polity is determined by his or her
inherited nature, upbringing, and training. In a com-
pany, as in any polity, each person behaves according to
his or her rules about behavior in groups. Some of these
millions of years of living and working in groups; and
the structure of our groups comes from the way we
behave together.
Anthropologists have found patterns in these
“primitive,” isolated human polities that will help CEOs
understand and solve difficulties in their relationships
with their boards and their employees. We have found
that corporations and their boards have strong parallels
in primitive polities, and that boards are therefore orga-
nizationally different from the corporations to which
they are attached. We learned that the founder who is
ruined by his or her company’s success, the captain of
industry who cannot run a small company, and the sea-
soned executive who cannot be promoted are all victims
of the same simple and ancient effect, and we propose a
reason for that effect. First, let’s compare organizations.
Inside Primitive Organizations
Three primitive organizations have counterparts in
modern companies: the working group, camp, and hier-
archy. A fourth organization, the state, evolved later —
and it, too, has counterparts in modern companies.
1. The working group. A “working group” is found
strategy + business special issue, autumn 2010

rules come from upbringing and training. According to
anthropologists L.J. Eaves, H.J. Eysenck, and N.G.
Martin (Genes, Culture and Personality: An Empirical
Approach, Academic Press, 1989), half of this behavior
is inherited.
These rules come from our ancestors, and to a great
degree they are shared among the other members of
our species. When we are born we are humans, and we
know how to behave with other humans. When we try
in all cultures. It is a temporary association of two to six
people with useful skills, and it has a specific purpose: to
hunt, to lay a section of railroad track, to right an over-
turned car, to catch a criminal. Working groups are vari-
ously called “hunting parties,” “task forces,” “work par-
ties,” “posses,” and “patrols”: names fitting the purpose
of the group and the group’s societal context. They exist
only for the purpose at hand, and they are organized
quickly and informally.
 When a hierarchical organization like a corporation
or an army sets up a working group, a leader is named
by the hierarchy (“chairman” or “squad leader”),
although the real leader of the group emerges informally.
Sometimes the group chooses its own leader by accla-
mation (“team captain”) or by lottery (“straw boss”);
usually, the leader arises without any special action as the
work progresses, and leadership passes from one person
to another smoothly as the nature of the work changes.
A working group has a problem to solve and works dem-
ocratically, accepting suggestions from any member
regardless of his or her status outside the working
group. When the problem is solved or abandoned, the
group disbands.
The result of the group’s work has a strong effect on
the mood of its members. If the work is successful, they
are elated and often celebrate. If the work is a failure, its
members are depressed and uncommunicative for a
time. Working groups are short-lived, have only a few
members, and are re-formed as needed.
2. The camp. Hunting and gathering “camps” usual-
ly comprise about 30 people, from up to six families.
The business of the camp — hunting, gathering, cook-
ing, building — is done by temporary working groups
as defined above. Though many jobs in a camp are sepa-
rated by sex, little other specialization exists; today’s
hunter may be tomorrow’s gatherer or hut-builder,
although special skills such as stone tool making are rec-
ognized by all.
The hunting–gathering camp does not admit to
having a leader; in fact, members of the camp will deny
there is a leader. They will say, “We’re all leaders.”
Nonetheless, a member of a nearby camp will say,
“That’s Joe’s camp.”
The camp thus does have a person who facilitates
decisions. He or she does not command, but is respect-
ed because of knowledge, judgment, and skill in orga-
nizing opinion. As Andrew Schmookler has noted, this
person does not give orders, but focuses the decision-
making process. Decision making in a camp is a politi-
cal, deliberative, consensual process. The camp’s elders
are expected to choose courses of action that are accept-
able to the camp, and to accept suggestions from every-
one. The whole camp behaves in a consensual manner,
and there is strong social pressure to conform. (In func-
tioning camps, all members are interested in the facts,
are fully informed of them, continuously discuss them,
and are aware of the alternatives being considered.) At
no time are the people in the camp invited to solve a
problem as a group, nor do they wish or expect to do so.
Where a consensus is not found and distrust and
disagreement linger, the usual solution is for the smaller
faction to leave, striking off on its own. This is a fairly
normal event, as families frequently move from camp to
management
camp; but it is not without risk. The faction that takes
off risks its very survival if a new camp receptive to it
cannot be found.
When a camp grows to about 50 people, it becomes
unstable and splits into two or more camps. This pattern
of size-related instability is repeated in organizations of
all kinds across human society.
3. The hierarchy. The tribe, which may encompass
several camp-sized groups, is a hierarchy. Hierarchical
organizations have a clearly defined leader and often
many strata of authority. They have clear lines of author-
ity, and no inherent means to achieve consensus. They
evolved as a means of providing a mechanism for rela-
tions with other tribes (including commerce and war),
for conducting religious observances, and to allow occu-
11
pational specialization. But they had the fortuitous
result of solving the problem of instability in large
organizations. The tribal hierarchy made it possible for
more than 50 people to live and work together, at the
cost of personal and group autonomy.
Simple tribes are organized into local groups of a
few hundred, each with its own leadership. More com-
plex tribes are organized into regional chiefdoms of
several thousand, each with a hierarchy of leaders. At the
top of every stable hierarchy there is a camplike consen-
sual group. Even in outright dictatorships there must be
an egalitarian council, as Machiavelli advised in The
Prince 500 years ago: “A prudent prince must…[choose]
for his council wise men.… He must ask them about
everything and hear their opinion, and afterwards delib-
erate by himself and in his own way, and in these coun-
cils and with each of these men comport himself so that
 everyone may see that the more freely he speaks, the
more he will be acceptable.”
4. The state. Eventually, in the archaic world, states
evolved to organize much larger populations, which
were often living together in cities and relying on market
exchange. It was at this time that real bureaucracies
emerged, both to solve efficiently the problems of large
groups and to control those groups for the will of dicta-
torial rulers.
In the 18th and 19th centuries, with industrializa-
tion and the introduction of cheap transportation, peo-
ple began to live together in even larger groups. The
bureaucratic state then developed fully and became the
preferred method of managing any continuing enter-
prise employing more than a handful of people. At first,
these were outright dictatorships, but improvements in
communication, education, and the economy led to a
management
revision of societal values so that now all members of
hierarchical societies have some voice. This voice varies
from union grievance procedures through election of
leaders and managers through public approval of certain
actions to formal consensus meetings; however, the
structure of any stable organization of more than 50 to
100 people is some form of hierarchy.
Size Determines Structure
Why are human organizations of different sizes struc-
turally different? Why does a small organization become
unstable as it grows? Why is the triggering size the same
in different cultures? It appears that six or seven is the
largest number of relationships that one person can deal
with continuously. We need the hierarchy, with its well-
12
defined roles and patterns of behavior, to allow large
numbers of people to work together without overload.
A study by anthropologist Gregory Johnson at the
City University of New York has shown that decision-
making performance in egalitarian groups falls off rap-
idly as the group size grows beyond six. This is a result
of a well-documented limitation of the human brain,
which cannot simultaneously retain and process more
than about seven “information chunks” at once. (One
such study by the Bell System set the size of local tele-
phone numbers at seven digits.)
To make larger groups work while still retaining
their egalitarian nature, six or seven groups form a
“sequential hierarchy.” In this structure, consensus is
achieved first within small units — for example, nuclear
families — and then is attempted among the formative
groups themselves, with full consensus finally reached
after a lengthy process of referring the issue back and
forth from the smaller to the larger entities. The largest
stable group in which this process has been observed
contains about 100 people, and involves three levels of
consensus; the usual maximum is about 50 people (7
times 7), and uses two levels of consensus.
Two points to hold in mind are: 1) As group size
changes, so must its organizational structure. This is as
true for the long-term evolution of human society as it
is for the short-term evolution of a company; 2) Within
a single social system, groups of different scale exist and
require different organizational structures. A major dys-
function occurs when an organizational structure appro-
priate for one scale is used for groups of other sizes.
The Modern Organization
Thus, four types of organization have arisen when peo-
ple live together and try to do something in common:
the working group, the camp, the general hierarchy, and
the state bureaucracy.
The most primitive of these is the working group,
up to six people. It is also the one that elicits the most
profound emotional response. The camp, up to 30 to 50
people, is the next most primitive, and is also a very old
structure.
The most modern organizations, and therefore the
ones for which we are by nature least adapted, are the
hierarchy and the bureaucracy. Behavior in a tribe, a
company, or a nation is not innate: It is learned, in con-
trast to behavior in camps and working groups. An indi-
vidual’s success in a hierarchy depends on how well he or
she has learned its rules, and to what extent his or her
innate behavior allows that person to conform to those
rules. A modern corporation employing more than 100
people is a hierarchy; a company of more than 1,000 is
a bureaucracy. A camplike board of directors is at the
top, to offer guidance by diverse experience and to pro-
vide intercorporate information. The corporation’s best
work is done by working groups.
The advantages and satisfactions of recognizing the
strategy + business special issue, autumn 2010
egalitarian nature of the working group are now under-
stood; most traditional companies attempt to exploit
this. Very little analysis in a similar vein has been done
with boards of directors. Yet in corporations, the camp-
like consensual group, the prince’s council, is the board.
Since today’s boards are like the camps of primitive
societies, a successful CEO must remember how camps
behave.
A board is not a working party. It cannot solve
 Since today’s boards are like the
camps of primitive societies,
a successful CEO must remember
how camps behave.
problems, it can only approve or disapprove courses of
action proposed by its leader. If it is forced to choose
between alternatives, a crisis of leadership often arises.
The CEO’s leadership role is not openly acknowl-
edged by outside board members, who strongly assert
their equality. The CEO thus must reach consensus
among board members before proposing important
issues. This process is called “keeping in touch.”
The CEO is the natural leader of the board. Even
when a board has a chairman who is not the CEO, a
person close to the company will refer to “Joe’s [the
CEO’s] board.” If the chief executive refuses to lead,
then the CEO and board will flounder or another indi-
vidual member will assume leadership. In either case, the
CEO must be replaced. This is because the surrogate
leader cannot lead well unless he or she assumes the
CEO’s role inside the organization and on the board.
Board members expect the CEO to be their leader
and will treat him or her as such until they decide to fire
the person. Anything the CEO says or does will be dealt
with by experienced board members in the context of
CEO-as-leader. If an act or utterance of the CEO is
unreasonable in this leadership context, the other mem-
bers will believe at a deep, unconscious level that he or
she is incompetent or even insane. Since in either of
these cases the CEO must be replaced, an extremely
unpleasant and difficult task, a member will sometimes
opt for denial by assuming that a chief executive who
exhibits such behavior is manipulative or evil, either of
which is a disquieting but acceptable alternative.
The Ways CEOs Fail
We can now examine CEO failure modes by comparing
modern companies with polities in primitive cultures,
and by recognizing that much of our behavior is geneti-
cally determined and will be similar when working with-
management
in groups of the same size. Our understanding of the
short-term development of companies can thus be aided
by knowing the long-term evolution of human society.
These comparisons confirm anecdotal evidence that
successful management techniques are fundamentally
different for companies above and below a critical size,
and that techniques that succeed in a company above
the critical size will fail below it, and vice versa. The
comparisons also explain why CEOs who are successful
as division or subsidiary managers in large companies are
unable to run independent companies. These failures are
related to their inability to deal with their camplike
boards of directors.
Consider the following scenarios:
Problems with the board: the new CEO’s surprise.
13
Those few extraordinary individuals who succeed by
climbing to the top of a hierarchy are surprised and
sometimes quickly fail when faced with the need to
immediately lead the board. The new CEO is in the
same position as a camp leader, but without the useful
experience of having lived in a camp.
The result is that the CEO often arrives at his or her
position as head of the board without realizing that the
role has fundamentally changed.
A CEO in this position assumes that the whole
organization is simply like his or her old division or
function. If his or her whole experience has been in hier-
archies, the CEO may define the role as giving or receiv-
ing orders; he or she has always been told what to do or
has told others what to do. If the CEO has had no expe-
rience with boards of directors, he or she may make the
fatal error of regarding the board as a new boss, as a
 As the company continues to grow beyond
the size of a camp, people say,
“We’ve lost something important.
It isn’t fun anymore.”
working group to solve the company’s problems, or as a
part of the organization that he or she must supervise. If
management
the CEO is told to lead the board but not command it,
and to work by consensus, he or she may find this guid-
ance incomprehensible. Denying the realities of the new
situation, the CEO may either actively avoid assuming
leadership of the board or try to manipulate it or dictate
to it. He or she can be further confused by fellow board
members, who may insist either that the board has no
leader or that the leader is the aging chairman.
If, in fact, the CEO does not lead the board, the
board’s other members, who are operating out of their
primitive, innate rule book, have little conscious insight
into the situation. They are confused and become un-
ruly. The CEO and sometimes the organization itself
then fail. Often, neither the board members nor the
CEO can explain the failure. They then go on to repeat
14
the pattern until the board gets a CEO who will lead or
until the CEO accepts his or her leadership role or re-
turns to a subsidiary role in another company.
Problems with becoming big: the faltering founder.
Unless he or she has access to an enormous amount of
money, the founder of a company must first found a
camp. In a camp, as we have seen, there is little special-
ization; in a new company, it is common to hear, “I wear
a lot of hats.” It is also common to operate by consen-
sus: Members marvel at the speed with which decisions
are made, and at their feeling of mutual support, clear
objectives, and clean, unambiguous communication.
Employees at all levels speak as though they know what
is going on throughout the company. Most of the com-
pany’s people work far more hours than a normal work-
day; they enjoy their work.
If the company succeeds, it grows. At first, the com-
pany’s members are elated with the growth, and point to
the company’s new people as evidence of its success.
Soon, however, typically when the company reaches 25
people, a few dissonant voices are heard: “She’s trying to
do my job,” “I don’t know what’s going on anymore,”
and, as the company continues to grow beyond the size
of a camp, “We’ve lost something important. I don’t
know what it is, but it’s gone. It isn’t fun anymore.” At
this point, one or two key employees decide to leave, or
simply begin to work 40-hour weeks.
If an insensitive CEO doesn’t understand what is
happening, he or she will say that the people are
ungrateful and will withdraw; a more sensitive CEO will
redouble efforts to communicate. Both will fail.
The appropriate action is to assemble a hierarchy,
using experienced people, when the staff numbers more
than 20. Some key people will be dissatisfied and leave,
because they left a hierarchy for the camplike feeling of
the small company; some will feel betrayed. Others will
adjust. The CEO must gradually abandon his or her role
as consensus leader and take on the role of chief.
This is a difficult transition even for CEOs who
understand the problem. Often, founders have chosen
their role because of difficulties in the hierarchy of a pre-
vious company; they see the transformation of their
strategy + business special issue, autumn 2010
company to a hierarchy as a personal failure. At best,
they must deal with alienation and feelings of betrayal in
people with whom they have worked closely, and with
whom they shared the bonding and elation of a success-
ful working party. Sometimes, even if their companies
succeed, they are unhappy and unfulfilled.
Problems with going small: a chief without a tribe.
The opposite occurs when a CEO is recruited from a
large company to run a young one. Such people often
have no experience with consensus-based groups.
When the CEO arrives at his or her new company
and finds that everyone has a title and a place in an
organization chart, he or she is pleased, and often begins
the process of interviewing people to see if they are well
qualified for their positions.
The CEO is then usually dismayed. If he or she
concludes that the staff is incompetent, however, that
conclusion will be wrong. If, on the other hand, he or
she believes that the titles and the organization chart
describe the real organization, and then attempts to
operate the company accordingly, the CEO will fail
immediately. There is no hierarchical organization; it is
a camp. The CEO cannot delegate; he or she must work
by consensus.
Gaining Anthropological Guidance
The literature and techniques of anthropology and cul-
tural evolution can be used to understand business
organizations at different scales. We have explained three
familiar failure modes of chief executive officers, derived
from studies of primitive societies and their leadership.
We have shown that these failure modes can be avoided
if the CEO and the company’s employees understand
and conform to the deep structure of their organization.
We have also shown that the board of directors of a
modern corporation is a more primitive and intrinsically
different structure from the organization it serves, and
that CEOs must use fundamentally different techniques
to work with their boards and with their companies.
Many failures of companies and their chief execu-
tives can be avoided by supplementing graduate business
training, which now deals largely with the structure and
management of hierarchies, with training in consensual
organizations such as boards, skunkworks, and small
companies. The goal is for the new CEO to have the
training to understand the differences between the
organization he or she is entering and the one he or she
is leaving.
In the absence of knowledge, people do the things
that have worked for them in the past. When these
things fail to work, people simply do them more inten-
sively, like a tourist in a foreign country who just shouts
louder if he or she is not understood.
But new CEOs have staked everything on their new
jobs and they desperately want to succeed. When they
arrive in an unfamiliar organization, they are receptive to
guidance they believe may keep them from failing. A
person who is entering a small company for the first
time, and whose work has largely been in hierarchies,
would be wise to find an insightful friend who has suc-
cessfully run a small company, or a person with exten-
sive board experience, to act as an advisor.
Venture capitalists, executive recruiters, and board
members of young companies who have a stake in the
success of the people they fund or recruit can reduce
their risks considerably by discussing consensual organi-
zations with their candidates.
One of the authors of this article has made a recent
habit of exploring the central issues that have been dis-
cussed here with company founders (who are frequently
pro-consensus and anti-hierarchy) and with experienced
candidates for top management jobs (who are dramati-
cally the reverse). In two cases, after such a discussion, a
founder suggested that he take the role of a function
manager in the new company rather than be its CEO,
management
and that he and the investors go out together to recruit
an experienced hierarchical CEO to run the new enter-
prise when it grew to an appropriate size.
In both cases, the company was unusually success-
ful. Perhaps more important, the founder happily
remained with the company in a productive and reward-
ing role. +
Reprint No. 96402
Resources
Timothy Earle, “Chiefdoms in Archaeological and Ethnohistorical
Perspective,” Annual Review of Anthropology (Annual Reviews, 1987): A
source of the insights in this article.
15
Eric Flamholtz, How to Make the Transition from Entrepreneurship to a
Professionally Managed Firm (Jossey-Bass, 1986): Describes what happens
when a camplike company must become a hierarchy.
Allen W. Johnson and Timothy Earle, The Evolution of Human Societies
(Stanford University Press, 1987): Includes observations on the structure
and leadership of primitive polities. Insights from this book have been
used throughout this article.
Gregory A. Johnson, “Organizational Structure and Scalar Stress,” in
Theory and Explanation in Archaeology, edited by C.A. Renfrew, M.J.
Rowlend, and D.A. Segraves (Academic Press, 1982): Why consensus
doesn’t work in groups larger than six people.
Niccolò Machiavelli, The Prince, translated by Luigi Ricci (New American
Library, 1952): The classic for leaders of a state — or a hierarchy.
Andrew Bard Schmookler, The Parable of the Tribes (University of
California Press, 1984): This work, subtitled The Problem of Power in
Social Evolution, contains many strong parallels to modern corporate
behavior.
For more thought leadership on this topic, see the s+b website at:
www.strategy-business.com/organizations_and_people.
 BY CHARLES E. LUCIER, LESLIE MOELLER, AND RAYMOND HELD
What does it take to grow shareholder value
at world-class rates? More than profit and
revenue increases. It takes strategic
innovation to make it into the top tier.
10X Value
strategy & competition
THE ENGINE POWERING LONG-TERM SHAREHOLDER RETURNS
16
The question of how to achieve long-term sustain-
able growth in shareholder value is at the top of the
CEO agenda. Many companies have successfully
focused their efforts on cost reduction through increased
labor and asset productivity, and have achieved short-
term increases in shareholder value as a reward. With
their businesses running efficiently, these companies
have refocused their energies into developing long-term
growth strategies.
Aggressive revenue-oriented strategies are the most
common approach to creating long-term value for
shareholders. These strategies typically include acquisi-
tions, new products that extend the line, and marketing
programs to improve customer loyalty and retention.
Unfortunately, our research indicates that these
strategies can cause more harm than good. Superior
long-term value for shareholders is derived only from a
specific type of revenue growth: growth that results
when a company delivers an order-of-magnitude
increase in value to its customers, which we call “10X
value.” An order-of-magnitude improvement in the
value proposition — obtained through a mixture of
product, image, service, and price — not only stimulates
growth by compelling customers to purchase, but also
enables a company to earn superior profitability. A 10X
Illustration by Dan Page
value innovation changes the industry’s basis of compe-
tition and forces competitors to react, often by trying to
copy the innovation.
We find that attempts to grow revenue rapidly with-
out a 10X improvement in value are seldom successful
and often counterproductive. They involve either costly
acquisitions that are subsequently divested, “renting”
strategy & competition
17
 Charles E. Lucier
chucklucier@yahoo.com
is a writer and contributing
editor to strategy+business.
He was instrumental in the
founding of this magazine.
At the time of this article’s
publication, he was a senior
vice president at Booz Allen
Hamilton (whose commercial
business later became Booz &
Company), and the managing
partner of its Cleveland office.
Leslie Moeller
leslie.moeller@booz.com
is a partner with Booz &
Company in Cleveland. He
leads the firm’s North
American work in the con-
sumer, media, and retail
industries. He is the coauthor
of The Four Pillars of Profit-
Driven Marketing: How to
Maximize Creativity,
Profitability, and ROI (McGraw-
Hill, 2009).
Raymond Held Originally published Third
is the chief financial officer Quarter 1997.
of Kellogg de Mexico. At the
time of this article’s publica-
tion, he was a senior associate
in the engineering and manu-
facturing group at Booz Allen
Hamilton.

new customers with the latest promotion, or the exten- revenue between 1985 and 1994, USAir, Fleming, and
sion of product lines at the expense of the long-term loy- Black & Decker had a modest or negative growth in
strategy & competition

alties of current customers. The only reliable way to earn
returns for shareholders in the top 10 percent over a
period of 10 to 15 years is through a 10X value innova-
tion. Of course, our findings do not invalidate the
importance of rapid productivity improvements and
revenue growth in all businesses. To sustain even average
returns for its shareholders, a company must achieve
continual improvements in its productivity and target
increases in market share.
This article relates our findings on 10X value as a
cause of shareholder value growth and discusses the
implications for senior managers. These findings result
from an ongoing effort to uncover the dynamics of
growth. They are based on an assessment of the creation
of long-term shareholder value by more than 1,300 large
18
companies publicly traded in the United States between
1967 and 1997, supplemented by case studies of 65
companies in the top 10 percent of shareholder value
creation for at least a decade. Although the quantitative
research that underlies this article focuses on United
States companies, our subsequent research suggests that
the conclusions are equally valid in other countries.
Indeed, many top-performing U.S. companies (for
shareholder value.
Additionally, industry growth rates are almost com-
pletely unrelated to the likelihood that a company will
create superior shareholder value over the long term.
Contrary to prevailing strategic thinking, companies in
slow-growth, mature markets are somewhat more likely
to create superior returns for shareholders than compa-
nies in fast-growth industries.
Finally, the tactics implied by traditional strategic
planning — which focuses on achieving better market
and cost positions than competitors through superior
planning and management — results, at best, in growth
rates a few points faster than average and significantly
less than the top-performing companies.
Innovation: The Value Multiplier
What then are the drivers of sustained superior long-
term growth in shareholder value? More than 90 percent
of the companies we studied that achieved top-decile
returns for at least 10 years have been able to sustain
rapid increases in operating earnings through the con-
tinual creation of 10X value for customers. They then
achieved top-line growth by replicating the 10X value to
strategy + business special issue, autumn 2010

example, the Coca-Cola Company) achieved much of
their growth by replicating their 10X value in other
countries.
Several findings from this research contradict con-
ventional wisdom. First, the relationship between rev-
enue growth and growth in shareholder value — defined
as increases in stock price plus dividends, adjusted for
stock splits — is not close in either the short term or the
long term. For example, despite significant growth in
attract new segments of customers (what we call a
“growth superhighway”).
To accomplish this, they relied on continual, high-
ly productive innovation: developing and constantly
enhancing unique approaches to serve customers more
effectively and sharing the value with customers. This
often resulted in value propositions that offered both
better differentiation and lower pricing. Although the
result of innovation is often a breakthrough that changes
 The initial target market was purveyors
of medical supplies and parts.
Then FedEx discovered that most of
the material sent was paper.
the rules of the game, all of the companies we studied
relied on a series of innovations, not a single “big idea.”
The highest-performing companies were divided
into two types of innovators. Strategic innovations —
dramatic improvements in the entire business system
that deliver value to customers — powered about half of
them. For this group of “strategic innovators,” willing-
ness to share the benefits with customers was an essen-
tial factor — to drive top-line growth, and to stimulate
additional improvements in the business system and
remain ahead of competitors. Innovation in products or
services that create 10X value for customers powered the
other half of the top-performing companies.
• Strategic innovators. Although it is not surprising
that a successful strategic innovator creates extraordinary
value for its shareholders, we were surprised to discover
that nearly half of the top decile of companies for each of
the three decades we studied fall into this category.
Strategic innovation is unusual in any one industry: in
the 75 industries in the United States that we investi-
gated, we found an average of 0.6 successful strategic
innovations per industry per decade. Nonetheless, 5 per-
cent of all large publicly traded companies are strategic
innovators, which is a significant number.
Because strategic innovators change the rules of the
game in their industries, most of their stories are well
known. Nevertheless, three findings common to all of
the strategic innovators deserve mention.
First, strategic innovations are not brainstorms or
concepts that emerge fully formed: The initial concept is
different from the typical game-changing innovation.
Strategic innovation requires not only a breakthrough
idea, but also the commitment and the feedback
processes to refine the idea until it is successful. For
example, FedEx Corporation was founded to provide
guaranteed overnight delivery, which was a break-
strategy & competition
through idea. However, the initial target market was
purveyors of critical supplies, such as medical supplies
and parts. It was the later discovery that most of the vol-
ume of material sent was paper, and the subsequent
positioning of FedEx to provide the reliable delivery of
important business material, that really drove growth.
Innovations that in retrospect may appear to be a single
idea were in fact the result of a series of linked innova-
tions and adaptations.
Second, strategic innovation is difficult and time-
consuming to put into practice. Home Depot Inc., for
example, was a strategic innovator in its transforming
the category of home improvement retailing. An indi-
cation of the magnitude of the difficulty is the 15 years
required for any of its competitors to create an equally
19
successful format — even though they could build upon
Home Depot’s experience. A strategic innovator’s com-
petitive advantage is not the breakthrough idea, but
rather the myriad details of the successful business sys-
tem and the ability to adapt rapidly and improve.
Finally, to create superior value for shareholders,
strategic innovators don’t need to start in a large market
segment. In fact, the companies that created the highest
rate of return for their shareholders over a decade were
somewhat smaller (in revenue) than the average large
publicly traded company at the beginning of the decade
and larger than the average large publicly traded com-
pany at the end of the decade. Strategic innovators are
much more likely to succeed when they initially focus
on a peripheral segment. The innovator can learn how
to make its breakthrough idea really work to deliver 10X
value in the periphery, often without reaction from the
 dominant competitors focused on the core markets.
Nucor Corporation illustrates the pattern. Nucor
began as a manufacturer of steel joists and a regional
manufacturer of reinforcing bars — the lowest-quality
steel, of least interest to the major integrated mills. Over
time, it moved into light structural shapes, medium
structural shapes, and finally, flat rolled steel. By the
mid-1990s, Nucor had become the second-largest steel
producer in North America.
• Product and service innovators. These companies
bring a series of successful “new to the world” products
to market. Their success lies in coupling an effective
innovation process with a superior product concept, and
repeating this success time after time. Just one new
product is no longer enough to power superior share-
holder value; top-decile growth in shareholder value
requires getting new products right consistently.
strategy & competition
Although the most successful product innovators
are effective throughout the innovation stream of activi-
ties, it is excellence in one of four activities that powers
success. These are market understanding (defining cus-
tomer and channel needs and opportunities ahead of
competitors); technology management (ensuring that
the correct high-impact technologies are available when
needed); product planning (integrating market needs
with product architecture to enable competitive specifi-
cation, development, and delivery of products); and
product development (translating a product line or
process specification into an engineered design that can
be competitively delivered to customers).
For instance, Nike Inc.’s success comes from an
understanding of its customers’ total experience with its
20
product, including intensive managerial experience with
the products and a special panel of athletes to provide
feedback on designs and trends. Leading-edge products
combine with powerful advertising campaigns using role
models to enhance the customer’s athletic shoe experi-
ence. Intel Corporation, on the other hand, creates value
from a focus on maintaining market leadership by using
technology to constantly improve physical product per-
formance. Before a new product is launched, a design
team is working on the next-generation technology that
will make the new product obsolete — bringing a con-
tinuous stream of higher-powered chips to the market.
In capital-intensive industries, driving value
through continual product innovation often requires
“new to the world” innovations that “bet the company.”
For the Boeing Company, the development of each new
aircraft is a major decision, one that could permanently
damage the company if it fails. For instance, from the
late 1980s to the early ’90s Boeing spent US$4.5 billion
to develop the 777 aircraft, at a time when the compa-
ny’s equity was $8 billion. The success of this aircraft was
instrumental in helping the company turn its sales num-
bers around during the industry rebound of the late
1990s. Intel has to make similarly risky bets on each
next wave of microprocessor technology. Although mak-
ing these bets can be frightening for all involved, they
must enable the stream of continual product innovation
required to deliver 10X value. In addition, big bets cre-
ate a barrier to entry by less-experienced companies, and
this helps to maintain the product innovator’s superior
value over its competitors.
The Growth Superhighway
To earn superior returns for shareholders, a company
must effectively exploit its 10X value to sustain annual
top-line growth of 15 to 25 percent without mistakes
that negatively impact earnings. Whatever the source of
their 10X value, the companies that created the greatest
long-term value for their shareholders all created a
growth superhighway — that is, the capability to repli-
cate revenue growth along one targeted path.
All companies seek growth through some mix of
strategy + business special issue, autumn 2010
market share gains within current segments, new seg-
ments, new geographies, and acquisitions. Most compa-
nies try to generate growth through most of these paths.
The companies that create the most long-term value for
their shareholders are unusual in that they focus on one
primary path. For example, Walmart and Home Depot
have grown primarily through geographic expansion,
the Shaw Group and WMX Technologies (formerly
Waste Management Inc.) expanded by acquisition;
Nucor and Rubbermaid pursued adjacent segments; and
Intel has primarily focused on rapid rollout within its
current segments.
Global expansion is an increasingly important
growth superhighway. Coke’s ability to replicate its 10X
value proposition overseas — especially in developing
and supporting the local bottlers who sell and distribute
the product — has been the principal driver of its
growth. Similarly, Carrefour SA, the leading French
hypermarket retailer, has had tremendous success in
expanding its format in Latin America. In Carrefour’s
case, international expansion into less-developed mar-
kets has been especially effective because the hypermar-
ket value proposition is more than a 10X improvement
over the small local supermarkets and general merchan-
dise retailers.
The best-performing companies invest in routiniz-
ing expansion along the targeted growth path. For exam-
ple, Walmart has a standard, very efficient process to
build a new store, Home Depot excels in quickly pene-
trating a new metropolitan area with a critical mass of
stores, and Shaw and WMX learned to install their 10X
value-creating system quickly in the companies they
acquired. Once these companies stray from their growth
superhighway, their performance can become highly
variable. For example, Home Depot’s entry into Canada
by acquisition and its formats targeted at other customer
segments (for example, Expo) have not really panned out.
It appears that more than one growth superhighway
may be viable in an industry. For example, between
1972 and 1985, WMX and Browning-Ferris Industries
each created 10X value for customers and top-decile
returns for their shareholders, even though WMX grew
primarily by acquisition and Browning-Ferris mainly by
geographic expansion. Hence, the imperative appears to
be less to select the correct growth path than to focus on
strategy & competition
one path and invest in building the capability to make it
a superhighway.
Implications for Management
Our findings demonstrate that creation of 10X value for
customers along a growth superhighway leads to superi-
or long-term value for shareholders. The four impera-
tives top management must heed to develop and exploit
a 10X value proposition are: challenge; focus; differenti-
ate your management approach; and lead, don’t follow.
• Challenge. Companies that create superior long-
term returns for their shareholders have financial per-
formance that is significantly — not incrementally —
better than average. Increasing the rate of growth in
earnings and revenue of an average company by two or
21
three points will not result in 80th or 90th percentile
returns to shareholders.
By setting the strategic long-term challenge of
achieving dramatically higher financial goals, a CEO can
help stimulate a fundamental rethinking of the business
that might yield 10X value for customers.
• Focus. The best-performing companies that we
have studied all prospered by creating 10X value for cus-
tomers in one business and by exploiting their advantage
down one growth superhighway. Focus enables a com-
pany to continue to innovate, to gain leverage from scale
as it grows, and to sustain its advantage over competi-
tors. Companies that lose their focus on one growth
superhighway often falter in creating superior long-term
returns to shareholders.
The multibusiness corporations like General
Electric Company and PepsiCo that have created 10X
 It will be very difficult for
any corporation to create and exploit
10X value in two distinct
business units simultaneously.
value have done so in only one business unit at a time
(specifically, GE Capital and Frito-Lay). In part, this fact
strategy & competition
may merely reflect the inherent difficulty of creating
10X value. However, we believe that it will be very
difficult for any corporation to create and exploit 10X
value in two distinct business units simultaneously.
10X value creation is simply too demanding in terms of
management talent, investment to finance rapid growth,
and the attention of the CEO.
One principal reason that large multibusiness com-
panies have been less likely to create 10X value than
single-business companies may have been an unwilling-
ness to focus on a single business unit as the driver of
superior long-term shareholder value creation.
The good news is that even in a corporation as large
and diverse as GE, one division that creates 10X value
and exploits the advantage along a growth superhighway
22
can yield excellent long-term results to shareholders. For
example, GE is an extremely well-managed company
with returns to shareholders in the 75th percentile
between 1985 and 1994. However, without GE
Capital’s 23 percent annual earnings growth, the corpo-
ration’s earnings would have grown at only 6 percent
instead of 9 percent, and returns to shareholders proba-
bly would have been only average.
• Differentiate your management approach. Cre-
ation of 10X value for customers requires a distinctive
management model. This involves the rapid incorpora-
tion of feedback from customers into the evolving value
proposition; investment in rapid growth, often before a
compelling case can be made that the investment will pay
off; an entrepreneurial culture with rapid decision mak-
ing; and compensation heavily incentivized toward bot-
tom-line growth or superior returns to shareholders.
Although single-business companies can embrace
this model, multidivision corporations face a formidable
challenge. The usual multidivision corporate planning
and budgeting processes, culture, and compensation sys-
tems are inconsistent with the 10X value creation
model. For example, traditional strategic planning usu-
ally focuses on what is and what has been, whereas 10X
value creation involves “new to the world” innovation.
An analytical demonstration that something that has
never been done will prove to be a superior investment
is very difficult.
The solution for a large multidivision company that
wants to create 10X value in a business is to differentiate
its management systems. That is, it can use different
planning, budgeting, and compensation systems in the
division targeting 10X value and allow that business’s
culture to diverge somewhat. More traditional planning
and budgeting systems are better adapted to businesses
that are not trying to create 10X value. These systems
can stimulate productivity improvements, target oppor-
tunities for profitability increases and market share
gains, quickly match successful initiatives by competi-
tors, and ensure that business units create and execute
near-term plans consistent with a long-term strategic
direction.
strategy + business special issue, autumn 2010
• Lead, don’t follow. 10X value creation requires
senior management leadership. There are two key roles
to be played: a senior champion who makes the refine-
ment and success of the 10X value innovation his or her
sole objective, and a CEO who decides which bets to
make and who creates the environment for success.
Creating 10X value starts with the conviction that a
market is ready for value innovation, like that shown by
Sam Walton in leaving Ben Franklin stores when that
company rejected the idea of a “Walmart” or by Gary
Wendt and Larry Bossidy in building GE Capital acqui-
sition by acquisition during the 1990s. We are not say-
ing these leaders had a vision that popped fully formed
into their minds, but they did have the commitment to
refine the idea until it succeeded, the willingness to
make mid-course corrections, and the ruthless execution
to make the financials attractive while evolving along a
growth superhighway. Although the CEO usually plays
the champion’s role in small entrepreneurial companies,
in large companies the role does not have to be played
by the CEO (for example, at GE Capital it was played
by the head of the business).
The CEO plays three critical roles in the creation of
superior value for shareholders. He or she sets the objec-
tive of truly superior (top 10th or 20th percentile) long-
term returns to shareholders. He or she evaluates the
opportunities for 10X value creation across the business
units, betting on no more than one or two prospective
growth engines and adjusting the bets as new informa-
tion comes to light. Finally, the CEO ensures that man-
agement processes, incentives, and leadership of the tar-
geted bets support 10X value creation.
In our discussions with CEOs of large companies,
their major concern is risk: How likely is an innovative
growth strategy to succeed? What is the downside if it
fails? Our response is that if the CEO’s objective is top
10th or 20th percentile long-term returns to sharehold-
ers, then there is no real alternative to a 10X value cre-
ation strategy.
Because 10X value creation strategies typically
involve pilot programs to refine the concept, significant
financial commitments may not be required initially.
The downside of the pursuit of an innovative strategy
that is ultimately unsuccessful is less the financial loss
than the loss of time and management attention that
would have been used more productively elsewhere.
Partially successful 10X value creation strategies can still
produce excellent returns for shareholders, albeit returns
sustained for a shorter period of time (because competi-
tors can match the innovation quickly) or fall “only” in
the 70th or 80th percentile. For example, Procter &
Gamble Company spends heavily on technology to
improve products significantly (its R&D spending is
about 4 percent of sales whereas Unilever’s is about 2
percent) and has developed the ability to globalize the
products rapidly. Although P&G cannot claim every
breakthrough — indeed, it missed such product ideas
as pull-up diapers and peroxide and baking soda in
toothpaste — it creates a sufficient stream of global win-
ners, such as two-in-one shampoo and compact deter-
gents, to fuel returns to shareholders, as of 1997, in the
81st percentile.
CEOs of companies with successful 10X value cre-
strategy & competition
ation strategies consider them to be low risk: As long as
they can sustain the 10X advantage, there is no need to
worry about the actions of competitors or the cyclicality
of the underlying market.
Superior long-term growth in shareholder value is
feasible only with creation of 10X value for customers
through strategic or product innovation, sharing part
of the value with customers and capturing part of the
value in attractive profitability. Ultimately, 10X value
creation is strategically liberating: Virtually all compa-
nies, even large corporations in mature industries, have
the potential of creating superior long-term returns for
their shareholders. +
Reprint No. 97302
23
Resources
Paul Leinwand and Cesare Mainardi, “The Coherence Premium,”
Harvard Business Review, June 2010, Reprint R1006F,
www.booz.com/global/home/what_we_think/capabilities_driven_
strategy/hbr_article: Takes the concept of focus further by showing how
aligning strategy, capabilities, and products and services leads to a long-
term “right to win” in the market.
Charles E. Lucier and Amy Asin, “Toward a New Theory of Growth,”
s+b, Winter 1996, www.strategy-business.com/article/8660: Paved the way
for this article by asserting that increasing revenue is not enough; 10X
shareholder-value growth requires strategic innovation.
Kenichi Ohmae, “The Godzilla of the New Economy,” s+b, First Quarter
2000, www.strategy-business.com/article/10401: A prescient look at the
rapidly growing 10X-value companies of the turn of the century: Amazon,
Nokia, eBay, Docomo, Cisco Systems, and more.
For more thought leadership on this topic, see the s+b website at:
www.strategy-business.com/strategy_and_leadership.
 BY DON TAPSCOTT

Rethinking
strategy & competition

in a Netw
24

(or Why Michael Porter Is Wrong about the Internet)

Illustration by John Hersey
 The Harvard strategy guru errs
when he says partnerships erode competitive
advantage. Instead, they are now central
to business success.
Strategy
orked World
For decades, the starting point for strategic think-
ing has been the stand-alone, vertically integrated cor-
poration. These powerful companies do everything from
soup to nuts and dominate the competitive landscape. We
think of them as intrinsic to the economy, and they pro-
vide the context for theories about competitive strategy.
Companies prospered with this model of produc-
tion because it was cheaper and simpler for them to per-
form the maximum number of functions in-house,
strategy & competition
25
rather than incurring the high cost, hassle, and risk of part-
nering with outsiders to execute vital business activities.
This is no longer true.
The CEO of Boeing Company says his company is
no longer an aircraft manufacturer; it has become a sys-
tems integrator. Mercedes-Benz doesn’t build its own
E-Class cars; the Magna Corporation does the work,
including final assembly. IBM has become a computer
company that doesn’t really make its computers; its part-
 Don Tapscott Originally published Third
dtapscott@digital4sight.com Quarter 2001.
is president of the New
Paradigm Learning
Corporation and cofounder of
Digital 4Sight, a company that
designs and implements new
business models for corpora-
tions. He is the coauthor, with
David Ticoll and Alex Lowy, of
Digital Capital: Harnessing the
Power of Business Webs
(Harvard Business School
Press, 2000).
ner network does.
Indeed, we are seeing spectacular growth in contract
strategy & competition
manufacturing — with companies such as Celestica,
Flextronics, and Solectron partnering with computer
and telecommunications vendors to provide core elec-
tronics manufacturing services. Virtually overnight, the
top five contract manufacturing firms have achieved
aggregate revenues of more than US$50 billion, averag-
ing return on invested capital of more than 25 percent.
All of this is possible because of networking —
specifically, the Internet. This deep, rich, publicly avail-
able communications technology is enabling a new busi-
ness architecture that challenges the industrial-age cor-
porate structure as the basis for competitive strategy. My
colleagues at Digital 4Sight and I have studied hundreds
of different examples of this architecture, what we call a
business web, or b-web. We define it as any system com-
26
posed of suppliers, distributors, service providers, infra-
structure providers, and customers that uses the Internet
for business communications and transactions. B-webs
across industries, in which each business focuses on its
core competence, are proving to be more supple, inno-
vative, cost-efficient, and profitable than traditional ver-
tically integrated competitors.
Established companies, not dot-coms, are the main
beneficiaries of b-web thinking. Successful businesses
such as Citibank, Herman Miller, Dow Chemical,
American Airlines, Nortel Networks, and Schwab are
now transforming themselves by partnering in areas that
were previously unthinkable. The performance advan-
tages of a b-web also explain why new Internet-based
companies such as eBay, Travelocity, E-Trade, and
Amazon are growing dramatically and competing well
despite volatility in their stock prices. And b-webs ex-
plain why an upstart e-business entity like Napster is
wreaking havoc in the music industry, and why open
source software such as Linux poses a huge threat to
Microsoft.
Profound changes to the deep structures of the cor-
poration are under way. Yet most of this underlying
restructuring has been either unnoticed or underappre-
ciated by the financial media and business schools. They
remain shell-shocked at the rise and collapse of the
Nasdaq. And since “Nasdaq” and “New Economy” are
so frequently (but incorrectly) used interchangeably,
the Nasdaq collapse is often cited as proof that the New
Economy is a bogus notion. (See “Six Reasons There Is
a New Economy,” page 28.) As for eBay, Amazon,
Linux, Napster, and others, they are dismissed as
Internet aberrations.
Michael Porter’s obituary for the New Economy,
“Strategy and the Internet,” published in the March
2001 Harvard Business Review, is typical of this think-
ing. In it, Porter exhorts business leaders to “return to
fundamentals” and abandon thoughts of “new business
models” or “e-business strategies” that he says encourage
managers “to view their Internet operations in isolation
from the rest of the business.”
When a politician makes a motherhood statement
strategy + business special issue, autumn 2010
that receives wide support, pollsters say it “resonates
with” the voters (i.e., it’s considered credible and is con-
sistent with citizens’ values). Such is the appeal of
Porter’s article. Profitability still counts. True economic
value, measured by sustained profits, is the arbiter of
business success — not eyeballs, stickiness, hits, or even
market share. To compete, companies must operate at a
lower cost and/or command a premium price, either
through operational effectiveness or by creating unique
value for customers. Being a first mover does not guaran-
tee competitive advantage over the long haul.
Unfortunately, he uses these truths to prop up a
false thesis. Because corporate objectives remain
unchanged by the Net, Porter argues, the best methods
of achieving these goals, including operating within a
vertically integrated structure, must be unchanged, too.
Porter sees the world as two warring camps: the
Internet zealots and the defenders of tried-and-true
business thinking, such as himself. And it’s pretty clear
who’s winning. This gives him the basis on which to
assert that “the experiences companies have had with
the Internet thus far must be largely discounted and
…many of the lessons learned must be forgotten.” If
you were an industry leader prior to the Internet’s burst-
ing on the scene, continue your time-tested business
processes. Use the Net as a “complement to traditional
ways of competing,” he says, rather than “cannibalizing”
a healthy company.
Regrettably, a much-needed return to fundamentals
has become a new fundamentalism that argues managers
should turn back the clock for business wisdom. Al-
though there is some merit in Porter’s view that “in our
quest to see how the Internet is different, we have failed
to see how the Internet is the same,” it is utter
folly to believe the Internet brings nothing fundamen-
tally new.
What Is the Internet?
Much of Porter’s reasoning stems from his misunder-
standing of the Internet itself. He concedes that the
Internet is important — it’s just not that important.
“But for all its power, the Internet does not represent
a break from the past; rather, it is the latest stage
in the ongoing evolution of information technology,”
he writes. Rather than viewing the Net as the emerging
infrastructure for economic activity, he puts the Internet
architecture on the same level as “complementary tech-
nological advances such as scanning, object-oriented
programming, relational databases, and wireless com-
munications.”
It is wrong to trivialize the Net in this way. The Net
is much more than just another technology develop-
ment; the Net represents something qualitatively new
— an unprecedented, powerful, universal communica-
tions medium. Far surpassing radio and television, this
medium is digital, infinitely richer, and interactive. The
Net is becoming ubiquitous; it will soon connect every
business and business function and a majority of
humans on the planet. All other communications tech-
nologies, such as telephone, radio, television, and wire-
less, are being sucked into the Net’s maw.
Porter also makes an all-too-common mistake in
assuming that the Internet we see today — a network
that connects desktop PCs — is the same Internet we
will see tomorrow. This is nonsense. The Internet of
tomorrow will be as dramatic a change from the Internet
of today as today’s Internet is from the unconnected, pro-
prietary computing networks of yesterday.
The Net continues to soar in reach, power, and
functionality. It is not only the means to link computers,
but the mechanism by which individuals and organiza-
tions exchange money, conduct transactions, communi-
cate facts, express insight and opinion, and collaborate
to develop new knowledge.
Mobile computing devices, broadband access, wire-
strategy & competition
less networks, and computing power embedded in
everything from refrigerators to automobiles are con-
verging into a global network that will enable people to
use the Net just about anywhere and anytime. No facet
of human activity is untouched. The Net is a force of
social change penetrating homes, schools, offices, facto-
ries, hospitals, and governments. When an institution
such as the Massachusetts Institute of Technology says it
will post its entire curriculum on the Net — including
such items as lecture notes and course reading lists — it
is attempting to shape the nature of pedagogy and learn-
ing everywhere.
The 20th-century corporation was based on an
infrastructure that included the electric power grid,
roads, railroad tracks, and primitive analog networks
27
like the telephone. Rather than viewing the Net as com-
parable to “scanning,” Porter should see it as the new
infrastructure of the 21st century. Many strategists look
beyond individual corporations to think about the
structure of industries. However, the Internet precipi-
tates one of those rare occasions in economic history
when we must think even more broadly in order to
understand how the entire infrastructure for wealth cre-
ation is changing.
What Is a New Business Model?
Porter believes there is no such thing as a “business
model,” let alone a new one, and I don’t fault him for
questioning the validity of the term. Analysts have used
it loosely, in reference to everything from selling rocks
online to a Vickery auction for financial services.
Often the term business model is used more or less
 Six Reasons There as Internet companies or dot-coms,
think about them as companies that
Is a New Economy use the Internet infrastructure to cre-
ate effective b-web–based business
models. In this sense, the New
Economy can include steel compa-
growth comes from small companies;
entrepreneurialism is everywhere.
5. New education models and insti-
tutions. As lifelong learning becomes
the norm, the services of private com-
panies, not public institutions, are

T here is nothing fundamentally

new about the way capitalism
works. In capitalist countries, there is
still private, not state, ownership of
wealth, and the economy is based on a
market. The traditional business cycle
(overproduction, inventory gluts, tight
employment markets, inflation) is
alive and well. Profits are still the ulti-
mate measure of success. Yet, there
strategy & competition
nies, banks, gas distribution compa-
nies, and furniture manufacturers,
just as the old economy can include
high-technology firms.
3. New sources of value. In today’s
economy, value is created by brain,
not brawn, and most labor is knowl-
edge work. Knowledge infuses itself
throughout products and services.
Michael Porter is right to say that
proliferating to meet growing de-
mand. The model of pedagogy is also
changing with the growth of interac-
tive, self-paced, student-focused
learning. Colleges are becoming
nodes on communications networks,
not just places where people go to
study.
6. New governance. Industrial-age
bureaucracies rose simultaneously

are characteristics of 21st-century
capitalism that make it entirely differ-
ent from its predecessors.
1. New infrastructure for wealth
creation. Networks, specifically the
Internet, are becoming the basis
of economic activity and progress.
This is not unlike how railroads, roads,
the power grid, and the telephone
supported the vertically integrated
corporation.
2. New business models. Instead of
thinking of New Economy companies
intellectual capital has no intrinsic
value. However, recent experiments in
measuring knowledge-based assets
suggest wealth contained in such
assets can outstrip the wealth con-
tained in physical assets and even
bank accounts.
4. New ownership of wealth. The
silk-hatted tycoons owned the most
wealth in industrial capitalism. Today
60 percent of Americans own stock,
and the biggest shareholders are
labor pension funds. Most economic
with the vertically integrated corpora-
tion and mimicked its structure. New
Net-driven governance structures,
such as the Knowledge Network of
Los Angeles, enable Internet-based
cooperation between public and pri-
vate organizations to deliver services
for citizens. Expect to see similar
changes in the democratic procedure
(e.g., the voting processes) and the
relationship between citizens and the
state.
—D.T.

28
synonymously with business strategy. For example, Adrian
Slywotzky describes it as “the totality of how a company
selects its customers, defines and differentiates its offerings
(or response), defines the tasks it will perform itself and
those it will outsource, configures its resources, goes to
market, creates utility for customers, and captures profits.
It is the entire system for delivering utility to customers
and earning a profit from that activity.”
insurance company, the retailer, the oil company, and
the bank were different, they shared the characteristic of
vertical integration.
Traditional business theorists like Michael Porter
favor vertical integration and argue against partnering.
In his seminal book, Competitive Strategy, he devotes an
entire chapter to a vigorous defense of the vertically inte-
grated firm. Today he writes how the “myth” that “part-
strategy + business special issue, autumn 2010

Our view is narrower than this. Quite simply, a
business model refers to the core architecture of a firm,
specifically how it deploys all relevant resources (not just
those within its corporate boundaries) to create differen-
tiated value for customers. Historically, strategists
weren’t particularly concerned with business models,
because each industry had a standard model, and strate-
gists assumed the model in that industry. Although the
auto manufacturer, the integrated steel company, the
nering is a win–win means to improve industry eco-
nomics” has “generated unfounded enthusiasm for the
Internet.” He cites a litany of reasons he believes it’s bet-
ter not to partner.
However, it is indisputable that the Net dramatical-
ly reduces search, coordination, contracting, and other
transaction costs between firms. Because of this, myriad
new business models have emerged that are different
from the industrial-age template, and there are hundreds
of old and new companies that are winning by focusing
on their core capabilities and letting partners do the rest.
For example, Siebel Systems Inc., one of the fastest-
growing software companies in America, has established
a vast and unique network of customer, supplier, and
employee relationships to deliver its products and ser-
vices. Tom Siebel claims his company’s b-web is the
most important element in its success: “We only have
8,000 people on our payroll, but more than 30,000 peo-
ple work for us,” he says. The relatively small core com-
pany creates software products and orchestrates an
extensive b-web composed of consultants, technology
providers, system implementers, suppliers, and vendors
that take its products to the global marketplace. The
result: Siebel Systems’ revenues soared more than 1,400
percent in just three years, from $118 million in 1997 to
$1.8 billion in 2000.
Yesterday’s strategy orthodoxy blinds managers to
these unprecedented corporate opportunities. The busi-
ness strategist needs new tools, including strategic
concepts and analytical methods, to comprehend and
exploit business architectures, like b-webs, that are sud-
denly possible because of the Net. I call this “business
model innovation.”
When the superiority of the vertically integrated
industrial corporation was taken for granted, it was
assumed that most resources would be internal to the
company. A business’s human-resources strategy dealt
with people on the payroll. Accounting handled cus-
tomer payments. Simple.
But in the Internet era, we know firms can profit
enormously from resources that don’t belong to them.
This is much more than what we call outsourcing today.
In the future, strategists will no longer look at the inte-
grated corporation as the starting point for creating
value, assigning functions, and deciding what to manage
inside or outside a firm’s boundaries. Rather, strategists
will start with a customer value proposition and a blank
slate for the production and delivery system. There will
be nothing to “outsource” because, from the point of
view of strategy, there’s nothing “inside” to begin with.
Instead, managers, using new tools of strategic analysis,
can identify discrete activities that create value and par-
cel them out to the appropriate b-web partners. A lead
firm in a b-web (e.g., Siebel Systems) choreographs the
process, acting as a “context provider.”
Given the Internet’s power, a reasonable person
might ask: Why can’t corporate managers simply deploy
intranets to get at the resources they need and reap the
rewards? Economics 101 tells us why: Intra-corporate
solutions fail to capture the tonic of the marketplace.
Most of what companies do is not based on their
core competencies. Instead, firms attempt to make do
with some combination of in-house design, manufac-
turing, marketing, and other capabilities that are often
not best-of-breed. Now with the Net, business functions
and large projects can be reduced to smaller components
and farmed out (often simultaneously) to more special-
ized companies around the world with virtually no
transaction costs. This captures the enormous benefits
brought on by the competitive environment. Suppliers
strive to reduce costs and increase quality and innova-
tion. They know there are other specialized workers and
companies around the world keen to replace them.
In this environment, the management of partner-
ing, corporate boundaries, distribution channels, indus-
strategy & competition
try restructuring, and strategic repositioning is suddenly
much more complex. And there are new issues, too. It
used to be that sellers simply established prices. No
longer. Transparency across the value chain, customer
power, and global real-time information make variable
pricing mechanisms far more important.
The Net and Competitive Advantage
Porter avers that “as all companies come to embrace
Internet technology…the Internet itself will be neutral-
ized as a source of [competitive] advantage.” The more
robust competitive advantages, he says, will arise instead
from traditional strengths such as unique products,
strong personal service, relationships, and sustainable
operational efficiencies.
29
This astonishing statement has two problems. First,
effectively implementing the Internet is not a binary
matter like turning a light switch on and off, buying a
T1 line, or installing an off-the-shelf application. As we
saw during the dot-com craze, there are 1,001 ways to
employ the Net, many of which make no sense whatso-
ever. Moreover, there is a continuum of business trans-
formation that occurs, from setting up a website, to
implementing radical new business models, to trans-
forming an entire industry. The Net enables many new
applications, technologies, and business innovations.
Firms that understand strategy in today’s more complex
business environment will plumb deeper into the grow-
ing pool of possibilities.
Second, Porter doesn’t see how the Net is precipi-
tating profound changes to the structures and cultures of
successful businesses. In fact, these changes enable com-

panies to compete better — precisely through deploying
resources that allow them to create better and unique
strategy & competition
products, stronger personal service, relationships, and
sustainable operational efficiencies. These three core
areas are ripe for business model innovation:
• Unique products. IBM has shifted its mentality
from vertically integrated fortress to b-web proponent
and player. In its earlier incarnation, it reaped huge prof-
its by locking customers on a treadmill of high-margin
proprietary hardware and software. Today IBM trum-
pets Linux. This year it will invest more than $1 billion
in the open source software, collaborating with its part-
ners on the Net to develop, enhance, and market Linux-
based applications and services. A typical initiative has
IBM joining 18 other companies, such as Hewlett-
Packard, Dell, and Intel, to underwrite a $24 million
Open Source Development Lab solely to support proj-
30
ects already under way in the open source community.
In 1997, IBM decided its customer relationship
management (CRM) software needed to be the best in
the world. It mothballed a massive internal development
effort and a $40 million revenue stream to partner with
Siebel Systems. Today IBM’s CRM business is over $2
billion and one of its most profitable.
Critics of partnering, such as Michael Porter, con-
demn IBM’s decision to build a PC industry based on
the Microsoft standard. Allegedly, this depressed indus-
try profitability and hurt IBM. Not true. PCs became a
commodity, leading to a vast explosion in the use of
information technology and, ultimately, networking,
which is the foundation on which the 21st-century IBM
is based. Today [in 2001], the revenue and earnings
from IBM’s software and services dwarf all hardware
sales, not just the sales of PCs.
Compare this to Apple Computer Inc., which clung
to the vertically integrated approach of designing and
building everything from chips to applications. If it had
licensed the Macintosh operating system to partners,
Apple Computer would probably be more important
today than Microsoft.
Remember, in the early 1990s, that IBM’s rivals
included half a dozen vertically integrated minicomput-
er companies such as the Digital Equipment
Corporation, Prime Computer, and Data General.
These companies failed to embrace partnering to deliv-
er the best products to their customers and exploit
industry standards. All but one, Hewlett-Packard, which
adopted the partner model, failed.
The power of business-model innovation is just as
evident in service companies. For example, eBay Inc.
doesn’t just compete well against flea markets, auction
houses, and classified ads. It has changed the rules of
competition by creating a new type of service company
that has become a leader in applying auction-based
dynamic pricing. The most important contributors to
eBay are its customers, who create the primary value of
the business web; eBay is simply the provider of the
business context. This b-web also includes companies
such as Wells Fargo, Visa, SquareTrade.com, and others
providing ancillary services that make buyers and sellers
more confident and competent.
• Operational efficiencies. Around the world, the
Internet is allowing companies to wring out waste from
their operations, differentiate themselves, and reach new
suppliers and customers. Jack Welch calls e-business ini-
tiatives “a game changer for GE” that are expanding “far
beyond our original vision.” His company’s first step was
to imitate Amazon and sell goods and services online.
This initiative was an immediate success; the $8 billion
in goods and services GE sold online in 2000 is expect-
ed to soar to $20 billion for 2001.
In procurement, reverse auctions alone are antici-
pated to save GE $600 million this year. The company
runs global auctions daily — $6 billion worth last year,
strategy + business special issue, autumn 2010
growing to an estimated $12 billion this year. The
rewards are so great that rather than cutting back on IT
spending because of the weak economy, the company
will increase spending this year by 10 to 15 percent.
• Customer service and relationships. When it
comes to customers, many pundits view the Net as sim-
ply another channel. Porter writes, “On the demand
side, most buyers will value a combination of on-line
services, personal services, and physical locations over
stand-alone Web distribution. They will want a choice
of channels.” But the Net is more than a channel. It
changes all channels. Effective competitors equip sales
agents with Net-based information and tools in the cus-
tomer’s living room. Call-center personnel with superior
Net-based customer relationship management systems
containing complete customer records deliver better
customer service. And bricks-and-mortar stores that
exploit emerging location-based services will have more
customers who find them through the Net.
No to Fundamentalism
Regrettably, many, including Porter, lament the
increased knowledge and power that customers are
acquiring in this new world. In fact, much of the com-
petition theorists’ language has disdain for customers.
It’s best when customers are “locked in.” When they are
ignorant or have no choice, profitability in an industry
can be maintained and advantages can be achieved.
Because the Net can undermine this, Porter concludes
this powerful communications technology “is not neces-
sarily a blessing.” Indeed, he writes “it tends to alter
industry structures in ways that dampen overall prof-
itability, and it has a leveling effect on business practices,
reducing the ability of any company to establish an
operational advantage that can be sustained.”
Of course the Net creates efficiencies through the
economy, intensifying rivalry between competitors and
lowering barriers to market entry. It can arm consumers
and suppliers with greater power because of their
increased access to information, enhanced ability to
communicate with each other, and greater freedom of
choice. It increases the metabolism of the economy and
reduces friction — as did, say, the telephone.
But would it have been sensible to judge the tele-
phone as “not necessarily a blessing?” Overall it
advanced the economy and benefited society enormous-
ly. It was a threat only to the firms that didn’t want to
change. This becomes even more important when you
consider that the telephone’s impact pales compared to
the Net’s.
It is good that customers will be smarter, more
active, and more powerful. Because of this, more real
value will come to the fore, and fewer businesses will try
to make garbage smell like roses. As businesses increas-
ingly deliver what their customers value, it may turn
out the capital businesses earn from customer relation-
ships will dwarf the value of physical assets or money in
the bank.
The years from 1997 to 2000 were the dog days of
strategy. A get-rich-quick mentality distorted the asser-
tion that “the Internet changes everything” (which is
true) into the hope that “all things done on the Internet
will prove lucrative” (which is rubbish). For a market
economy, it was a shameful period. We saw egregious
excesses and spectacular market capitalizations based on
absurd or nonexistent business models. Momentum
investing set in and massive damage was inevitable.
Thankfully, those times are past, and sanity is returning.
But what’s important to understand is that the headline-
grabbing dot-com machinations, be they startups or
spin-offs, were largely a distraction and represented only
a sliver of the businesses trying to harness the power of
the Internet.
Today, in the broad space between yesterday’s irra-
tional exuberance and today’s equally irrational ortho-
strategy & competition
doxy, there is a new frontier of business strategy. There
are great new possibilities for creating economic value,
customer value, shareholder value, and community
value. Business strategy is an idea whose time has come
once again. But new rules for competing require some
fresh thinking. Business fundamentals, indeed.
Fundamentalism, no. +
Reprint No. 01304
31
Resources
Lawrence M. Fisher, “From Vertical to Virtual: How Nortel’s Supplier
Alliances Extend the Enterprise,” s+b, First Quarter 2001,
www.strategy-business.com/casestudy/01113/.
Keith Oliver, Anne Chung, and Nick Samanich, “Beyond Utopia: The
Realist’s Guide to Internet-Enabled Supply Chain Management,”
s+b, Second Quarter 2001, www.strategy-business.com/special/01209/.
Michael E. Porter, “Strategy and the Internet,” Harvard Business Review,
March 2001, www.hbsp.harvard.edu/hbr.
Don Tapscott, David Ticoll, and Alex Lowy, Digital Capital: Harnessing the
Power of Business Webs (Harvard Business School Press, 2000).
David Ticoll, “Strategy and the Internet,” Letters to the Editor, Harvard
Business Review, June 2001.
For more thought leadership on this topic, see the s+b website at:
www.strategy-business.com/strategy_and_leadership.
 BY C.K. PRAHALAD AND STUART L. HART
The Fortune
at the
Bottom of the
Pyramid
global perspective
Low-income markets present a prodigious
opportunity for the world’s wealthiest
companies — to seek their fortunes and
bring prosperity to the aspiring poor.
32
With the end of the Cold War, the former Soviet
Union and its allies, as well as China, India, and Latin
America, opened their closed markets to foreign invest-
ment in a cascading fashion. Although this significant
economic and social transformation has offered vast new
growth opportunities for multinational corporations
(MNCs), its promise has yet to be realized.
First, the prospect of millions of “middle-class” con-
sumers in developing countries, clamoring for products
from MNCs, was wildly oversold. To make matters
worse, the Asian and Latin American financial crises
have greatly diminished the attractiveness of emerging
markets. As a consequence, many MNCs worldwide
slowed investments and began to rethink risk–reward
structures for these markets. This retreat could become
even more pronounced in the wake of the terrorist
attacks in the United States last September.
The lackluster nature of most MNCs’ emerging-
market strategies over the past decade does not change
the magnitude of the opportunity, which is in reality
much larger than previously thought. The real source of
market promise is not the wealthy few in the developing
world, or even the emerging middle-income consumers:
It is the billions of aspiring poor who are joining the
Illustration by Marco Ventura
market economy for the first time.
This is a time for MNCs to look at globalization
strategies through a new lens of inclusive capitalism. For
companies with the resources and persistence to com-
pete at the bottom of the world economic pyramid, the
prospective rewards include growth, profits, and incal-
culable contributions to humankind. Countries that still
don’t have the modern infrastructure or products to
global perspective
33
 C.K. Prahalad
passed away on April 16, 2010.
He was the Paul and Ruth
McCracken Distinguished
University Professor of
Strategy at the University of
Michigan’s Stephen M. Ross
School of Business and
coauthor of several significant
books, including The New Age
of Innovation (McGraw-Hill,
2008) and The Fortune at the
Bottom of the Pyramid (Wharton
School Publishing, 2005).
Stuart L. Hart Originally published First
slhart@unc.edu Quarter 2002.
is a professor of strategic
management, Sarah Graham
Kenan Distinguished Scholar,
and codirector of the Center
for Sustainable Enterprise at
the University of North
Carolina’s Kenan–Flagler
Business School.

meet basic human needs are an ideal testing ground for the rising middle classes in developing countries, the tar-
developing environmentally sustainable technologies gets of MNCs’ past emerging-market strategies.
global perspective

and products for the entire world.
Furthermore, MNC investment at “the bottom of
the pyramid” means lifting billions of people out of
poverty and desperation, averting the social decay, polit-
ical chaos, terrorism, and environmental meltdown that
is certain to continue if the gap between rich and poor
countries continues to widen.
Doing business with the world’s 4 billion poorest
people — two-thirds of the world’s population — will
require radical innovations in technology and business
models. It will require MNCs to reevaluate price–
performance relationships for products and services. It
will demand a new level of capital efficiency and new
ways of measuring financial success. Companies will be
forced to transform their understanding of scale, from a
34
“bigger is better” ideal to an ideal of highly distributed
small-scale operations married to world-scale capabilities.
In short, the poorest populations raise a prodigious
new managerial challenge for the world’s wealthiest
companies: selling to the poor and helping them
improve their lives by producing and distributing prod-
ucts and services in culturally sensitive, environmentally
sustainable, and economically profitable ways.
Now consider the 4 billion people in Tier 4, at the
bottom of the pyramid. Their annual per capita income
— based on purchasing power parity in U.S. dollars —
is less than $1,500, the minimum considered necessary
to sustain a decent life. For well over a billion people —
roughly one-sixth of humanity — per capita income is
less than $1 per day.
Even more significant, the income gap between rich
and poor is growing. According to the United Nations,
the richest 20 percent in the world accounted for about
70 percent of total income in 1960. In 2000, that figure
reached 85 percent. Over the same period, the fraction
of income accruing to the poorest 20 percent in the
world fell from 2.3 percent to 1.1 percent.
This extreme inequity of wealth distribution re-
inforces the view that the poor cannot participate in the
global market economy, even though they constitute
the majority of the population. In fact, given its vast size,
Tier 4 represents a multitrillion-dollar market. Accord-
ing to World Bank projections, the population at the
bottom of the pyramid could swell to more than 6 bil-
lion people over the next 40 years, because the bulk of
the world’s population growth occurs there.
strategy + business special issue, autumn 2010

The perception that the bottom of the pyramid is

Four Consumer Tiers
At the very top of the world economic pyramid are 75
to 100 million affluent Tier 1 consumers from around
the world. (See Exhibit 1.) This is a cosmopolitan group
composed of middle- and upper-income people in
developed countries and the few rich elites from the
developing world. In the middle of the pyramid, in Tiers
2 and 3, are poor customers in developed nations and
not a viable market also fails to take into account the
growing importance of the informal economy among
the poorest of the poor, which by some estimates
accounts for 40 to 60 percent of all economic activity in
developing countries. Most Tier 4 people live in rural
villages, or urban slums and shantytowns, and they usu-
ally do not hold legal title or deed to their assets (e.g.,
dwellings, farms, businesses). They have little or no for-
Exhibit 1: The World Economic Pyramid
Annual per Capita Income* Tiers
More than $20,000
1 75–100
$1,500–$20,000 2&3
Less than $1,500 4 4,000
* Based on purchasing power parity in U.S. dollars.
Source: U.N. World Development Reports
mal education and are hard to reach via conventional
distribution, credit, and communications. The quality
and quantity of products and services available in Tier 4
are generally low. Therefore, much like an iceberg with
only its tip in plain view, this massive segment of the
global population — along with its massive market
opportunities — has remained largely invisible to the
corporate sector.
Fortunately, the Tier 4 market is wide open for
technological innovation. Among the many possibilities
for innovation, MNCs can be leaders in leapfrogging to
products that don’t repeat the environmental mistakes of
developed countries over the last 50 years. Today’s
MNCs evolved in an era of abundant natural resources
and thus tended to make products and services that were
resource-intensive and excessively polluting. The United
States’ 270 million people — only about 4 percent of
the world’s population — consume more than 25 per-
cent of the planet’s energy resources. To re-create those
types of consumption patterns in developing countries
would be disastrous.
We have seen how the disenfranchised in Tier 4 can
disrupt the way of life and safety of the rich in Tier 1 —
poverty breeds discontent and extremism. Although
complete income equality is an ideological pipe dream,
the use of commercial development to bring people out
of poverty and give them the chance for a better life is
critical to the stability and health of the global economy
and the continued success of Western MNCs.
The Invisible Opportunity
Among the top 200 MNCs in the world, the over-
whelming majority are based in developed countries.
U.S. corporations dominate, with 82; Japanese firms,
with 41, are second, according to a list compiled in
December 2000 by the Washington, D.C.–based
Population in Millions [2002]
1,500–1,750
Institute for Policy Studies. So it is not surprising that
MNCs’ views of business are conditioned by their
knowledge of and familiarity with Tier 1 consumers.
Perception of market opportunity is a function of the
global perspective
way many managers are socialized to think and the ana-
lytical tools they use. Most MNCs automatically dismiss
the bottom of the pyramid because they judge the mar-
ket based on income or selections of products and ser-
vices appropriate for developed countries.
To appreciate the market potential of Tier 4, MNCs
must come to terms with a set of core assumptions and
practices that influence their view of developing coun-
tries. We have identified the following as widely shared
orthodoxies that must be reexamined:
• Assumption #1. The poor are not our target con-
sumers because with our current cost structures, we can-
not profitably compete for that market.
• Assumption #2. The poor cannot afford and have
no use for the products and services sold in developed
35
markets.
• Assumption #3. Only developed markets appreci-
ate and will pay for new technology. The poor can use
the previous generation of technology.
• Assumption #4. The bottom of the pyramid is not
important to the long-term viability of our business. We
can leave Tier 4 to governments and nonprofits.
• Assumption #5. Managers are not excited by busi-
ness challenges that have a humanitarian dimension.
• Assumption #6. Intellectual excitement is in de-
veloped markets. It is hard to find talented managers
who want to work at the bottom of the pyramid.
Each of these key assumptions obscures the value at
the bottom of the pyramid. It is like the story of the per-
son who finds a US$20 bill on the sidewalk. Conven-
tional economic wisdom suggests if the bill really exist-
ed, someone would already have picked it up! Like the
 Exhibit 2: Innovation and MNC Implications in Tier 4
Drivers of Innovation
Increased access among the poor to TV and information
Deregulation and the diminishing role of governments
and international aid
Global overcapacity combined with intense competition
in Tiers 1, 2, and 3
The need to discourage migration to overcrowded urban centers
$20 bill, the bottom of the pyramid defies conventional
managerial logic, but that doesn’t mean it isn’t a large
global perspective
and unexplored territory for profitable growth. Con-
sider the drivers of innovation and opportunities for
companies in Tier 4. (See Exhibit 2.) MNCs must rec-
ognize that this market poses a major new challenge:
how to combine low cost, good quality, sustainability,
and profitability.
Furthermore, MNCs cannot exploit these new
opportunities without radically rethinking how they go
to market. Exhibit 3 suggests some (but by no means all)
areas where an entirely new perspective is required to
create profitable markets in Tier 4.
Tier 4 Pioneers
Hindustan Lever Ltd. (HLL), a subsidiary of Great
Britain’s Unilever PLC and widely considered the best-
36
managed company in India, has been a pioneer among
MNCs exploring markets at the bottom of the pyramid.
For more than 50 years, HLL has served India’s small
elite who could afford to buy MNC products. In the
1990s, a local firm, Nirma Ltd., began offering deter-
gent products for poor consumers, mostly in rural areas.
In fact, Nirma created a new business system that
included a new product formulation, low-cost manufac-
turing process, wide distribution network, special pack-
aging for daily purchasing, and value pricing.
HLL, in typical MNC fashion, initially dismissed
Nirma’s strategy. However, as Nirma grew rapidly, HLL
could see its local competitor was winning in a market it
had disregarded. Ultimately, HLL saw its vulnerability
and its opportunity: In 1995, the company responded
with its own offering for this market, drastically altering
its traditional business model.
Implications for MNCs
Tier 4 is becoming aware of many products and services
and is aspiring to share the benefits
More hospitable investment climate for MNCs entering
developing countries and more cooperation from
nongovernmental organizations
Tier 4 represents a huge untapped market for profitable
growth
MNCs must create products and services for rural populations
HLL’s new detergent, called Wheel, was formulated
to substantially reduce the ratio of oil to water in the
product, responding to the fact that the poor often wash
their clothes in rivers and other public water systems.
HLL decentralized the production, marketing, and dis-
tribution of the product to leverage the abundant labor
pool in rural India, quickly creating sales channels
through the thousands of small outlets where people at
the bottom of the pyramid shop. HLL also changed the
cost structure of its detergent business so it could intro-
duce Wheel at a low price point.
Today, Nirma and HLL are close competitors in the
detergent market, with 38 percent market share each,
according to IndiaInfoline.com, a business intelligence
and market research service. Unilever’s own analysis of
Nirma and HLL’s competition in the detergent business
reveals even more about the profit potential of the mar-
ketplace at the bottom of the pyramid. (See Exhibit 4.)
Contrary to popular assumptions, the poor can be a
very profitable market — especially if MNCs change
their business models. Specifically, Tier 4 is not a market
that allows for the traditional pursuit of high margins;
instead, profits are driven by volume and capital effi-
ciency. Margins are likely to be low (by current norms),
but unit sales can be extremely high. Managers who
strategy + business special issue, autumn 2010
focus on gross margins will miss the opportunity at the
bottom of the pyramid; managers who innovate and
focus on economic profit will be rewarded.
Nirma has become one of the largest branded deter-
gent makers in the world. Meanwhile, HLL, stimulated
by its emergent rival and its changed business model,
registered a 20 percent growth in revenues per year and
a 25 percent growth in profits per year between 1995
and 2000. Over the same period, HLL’s market capital-
ization grew to $12 billion — a growth rate of 40 per-
cent per year. HLL’s parent company, Unilever, also has
benefited from its subsidiary’s experience in India.
Unilever transported HLL’s business principles (not the
product or the brand) to create a new detergent market
among the poor in Brazil, where the Ala brand has been
a big success. More important, Unilever has adopted the
bottom of the pyramid as a corporate strategic priority.
As the Unilever example makes clear, the starting
assumption must be that serving Tier 4 involves bring-
ing together the best of technology and a global resource
base to address local market conditions. Cheap and low-
quality products are not the goal. The potential of Tier
4 cannot be realized without an entrepreneurial orienta-
tion: The real strategic challenge for managers is to visu-
alize an active market where only abject poverty exists
today. It takes tremendous imagination and creativity to
engineer a market infrastructure out of a completely
unorganized sector.
Serving Tier 4 markets is not the same as serving
existing markets better or more efficiently. Managers
first must develop a commercial infrastructure tailored
to the needs and challenges of Tier 4. Creating such an
infrastructure must be seen as an investment, much like
the more familiar investments in plants, processes, prod-
ucts, and R&D.
Further, contrary to more conventional investment
strategies, no firm can do this alone. Multiple players
must be involved, including local governmental author-
ities, nongovernmental organizations (NGOs), commu-
nities, financial institutions, and other companies. Four
elements — creating buying power, shaping aspirations,
improving access, and tailoring local solutions — are the
keys to a thriving Tier 4 market. (See Exhibit 5.)
Each of these four elements demands innovation in
technology, business models, and management process-
es. And business leaders must be willing to experiment,
collaborate, empower locals, and create new sources of
competitive advantage and wealth.
Creating Buying Power
According to the International Labor Organization’s
World Employment Report 2001, nearly a billion people
— roughly one-third of the world’s workforce — are
either underemployed or have such low-paying jobs that
they cannot support themselves or their families.
Helping the world’s poor elevate themselves above this
desperation line is a business opportunity to do well and
do good. To do so effectively, two interventions are cru-
cial — providing access to credit, and increasing the
earning potential of the poor. A few farsighted compa-
nies have already begun to blaze this trail with startling-
ly positive results.
Commercial credit historically has been unavailable
to the very poor. Even if those living in poverty had
access to a bank, without collateral it is hard to get cred-
it from the traditional banking system. As Peruvian
economist Hernando de Soto demonstrates in his path-
breaking work, The Mystery of Capital: Why Capitalism
Triumphs in the West and Fails Everywhere Else (Basic
Books, 2000), commercial credit is central to building a
market economy. Access to credit in the U.S. has
allowed people of modest means to systematically build
their equity and make major purchases, such as houses,
cars, and education.
The vast majority of the poor in developing coun-
global perspective
tries operate in the “informal” or extralegal economy,
since the time and cost involved in securing legal title for
their assets or incorporation of their microenterprises is
prohibitive. Developing countries have tried govern-
mental subsidies to free the poor from the cycle of
poverty, with little success. Even if the poor were able to
benefit from government support to start small busi-
nesses, their dependence on credit from local money-
lenders charging usurious rates makes it impossible to
succeed. Local moneylenders in Mumbai, India, charge
interest rates of up to 20 percent per day. This means
that a vegetable vendor who borrows Rs.100 ($2.08) in
the morning must return Rs.120 ($2.50) in the evening.
Extending credit to the poor so they can elevate
themselves economically is not a new idea. Consider
37
how I.M. Singer & Company, founded in 1851, pro-
vided credit as a way for millions of women to purchase
Exhibit 3: New Strategies for the Bottom of
the Pyramid
Price Performance Views of Quality
• Product development • New delivery formats
• Manufacturing • Creation of robust products
• Distribution for harsh conditions
(heat, dust, etc.)
Sustainability Profitability
• Reduction in resource • Investment intensity
intensity • Margins
• Recyclability • Volume
• Renewable energy
 sewing machines. Very few of those women could have
afforded the steep $100 price tag, but most could afford
a payment of $5 per month.
The same logic applies on a much larger scale in
Tier 4. Consider the experience of the Grameen Bank
Ltd. in Bangladesh, one of the first in the world to apply
a microlending model in commercial banking. Started
just over 20 years ago by Muhammad Yunus, then a pro-
fessor in the economics department at Chittagong
University in Bangladesh, Grameen Bank pioneered a
lending service for the poor that has inspired thousands
of microlenders, serving 25 million clients worldwide, in
developing countries and wealthy nations, including the
United States and the United Kingdom.
Grameen Bank’s program is designed to address the
problems of extending credit to lowest-income cus-
tomers — lack of collateral, high credit risk, and con-
global perspective
tractual enforcement. Ninety-five percent of its 2.3
million customers are women, who, as the traditional
breadwinners and entrepreneurs in rural communities,
are better credit risks than men. Candidates for loans
must have their proposals thoroughly evaluated and sup-
ported by five nonfamily members of the community.
The bank’s sales and service people visit the villages fre-
quently, getting to know the women who have loans and
the projects in which they are supposed to invest. In this
way, lending due diligence is accomplished without the
mountain of paperwork and arcane language common
in the West.
With 1,170 branches, Grameen Bank today pro-
vides microcredit services in more than 40,000 villages,
more than half the total number in Bangladesh. As of
38
1996, Grameen Bank had achieved a 95 percent repay-
ment rate, higher than any other bank in the Indian sub-
continent. However, the popularity of its services has
also spawned more local competitors, which has cut into
its portfolio and shrunk its profits over the past few years.
Exhibit 4: Nirma vs. HLL in India’s Detergent Market (1999)
Nirma HLL (Wheel)
Total Sales (US$ Million) 150 100
Gross Margin (%) 18 18
ROCE (%) 121 93
Source: Presentation by John Ripley, senior vice president, Unilever, at the Academy of Management Meeting,
August 10, 1999
In addition, Grameen Bank’s rate of return is not
easy to assess. Historically, the bank was an entirely
manual, field-based operation, a structure that undercut
its efficiency. Today, spin-offs such as Grameen Telecom
(a provider of village phone service) and Grameen Shakti
(a developer of renewable energy sources) are helping
Grameen Bank build a technology infrastructure to
automate its processes. As the bank develops its online
business model, profitability should increase dramatical-
ly, highlighting the importance of information technol-
ogy in the acceleration of the microcredit revolution.
Perhaps the most pertinent measure of Grameen
Bank’s success is the global explosion of institutional
interest in microlending it has stimulated around the
world. In South Africa, where 73 percent of the popula-
tion earns less than R5,000 ($460) per month, accord-
ing to a 2001 World Bank study, retail banking services
for low-income customers are becoming one of the most
competitive and fast-growing mass markets. In 1994,
Standard Bank of South Africa Ltd., Africa’s leading
consumer bank, launched a low-cost, volume-driven
e-banking business, called AutoBank E, to grow revenue
by providing banking services to the poor. Through the
use of 2,500 ATMs and 98 AutoBank E-centres, Stan-
dard now has the largest presence in South Africa’s town-
ships and other under-serviced areas of any domestic
bank. As of April 2001, Standard served nearly 3 million
low-income customers and is adding roughly 60,000
customers per month, according to South Africa’s
Sunday Times.
Standard does not require a minimum income of
customers opening an AutoBank E account, although
they must have some regular income. People who have
never used a bank can open an account with a deposit
of as little as $8. Customers are issued an ATM card
and shown how to use it by staff who speak a variety
of African dialects. A small flat fee is charged for each
ATM transaction. An interest-
bearing “savings purse” is attached
to every account to encourage
strategy + business special issue, autumn 2010
HLL (High-end Products)
poor customers to save. Interest
rates on deposits are low, but
180
superior to keeping cash in a jar.
25
The Sunday Times also reported
that Standard Bank is considering
22 a loan program for low-income
clients.
Computerization of micro-
lending services not only makes
Exhibit 5: The Commercial Infrastructure at the
Bottom of the Pyramid
Creating Buying
Power
• Access to credit
• Income generation
Improving Access Shaping Aspirations
• Distribution systems • Consumer education
• Communications • Sustainable
links development
Tailoring Local
Solutions
• Targeted product
development
• Bottom-up
innovation
the overall operation more efficient, but also makes it
possible to reach many more people — lending money
to individuals with no collateral and no formal address.
Since there is lower overhead and little paperwork,
AutoBank’s costs are 30 to 40 percent lower than those
at traditional branches.
At the 1999 Microcredit Summit, the United
Nations, in conjunction with several major MNCs, such
as Citigroup Inc. and Monsanto Company, set a goal of
making basic credit available to the 100 million poorest
families in the world by the year 2005. Unfortunately,
the success of this undertaking has been slowed by
high transaction costs, a lack of automation, and poor
information and communications infrastructures in
rural areas.
To address these issues and accelerate the develop-
ment of microlending, French banker Jacques Attali, the
founding president of the European Bank for
Reconstruction and Development and a former chief
aide of French President François Mitterrand during the
1980s, has created PlaNet Finance. Its website,
www.planetfinance.org, links thousands of microcredit
groups worldwide into a network to help microbanks
share solutions and lower costs.
Ultimately, the development of an automated solu-
tion for tracking and processing the millions of small
loans associated with microlending should be possible. If
processing and transaction costs can be reduced enough,
they can then be bundled together and sold in the sec-
ondary market to multinational financial institutions
like Citigroup. This would greatly expand the capital
available for microlending beyond the current pool from
donors and governments.
In the United States, microlending has also taken
root over the past decade in poor urban neighborhoods.
For example, the ShoreBank Corporation, formerly
South Shore Bank, has demonstrated the profitability of
banking for the poor in Chicago’s troubled South Side.
Project Enterprise, a Grameen-like program based in
New York City, is aimed at minority entrepreneurs.
Several multinational banks are beginning to offer
microbanking services in developing countries.
Citigroup, for instance, is experimenting in Bangalore,
India, with 24/7 services for customers with as little as
$25 on deposit. Initial results are very positive.
global perspective
Shaping Aspirations
Sustainable product innovations initiated in Tier 4, and
promoted through consumer education, will not only
positively influence the choices of people at the bottom
of the pyramid, but may ultimately reshape the way
Americans and others in Tier 1 live. Indeed, in 20 years,
we may look back to see that Tier 4 provided the early
market pull for disruptive technologies that replaced
unsustainable technologies in developed countries and
advanced the fortunes of MNCs with foresight.
For example, Unilever’s HLL subsidiary has tackled
the lack of practical, inexpensive, low-energy-consum-
ing refrigeration in India. HLL’s laboratories developed
a radically different approach to refrigeration that allows
ice cream to be transported across the country in stan-
39
dard nonrefrigerated trucks. The system allows quantum
reductions in electricity use and makes dangerous and
polluting refrigerants unnecessary. As a bonus, the new
system is cheaper to build and use.
Electricity, water, refrigeration, and many other
essential services are all opportunities in developing
countries. A U.S.-based NGO, the Solar Electric Light
Fund (SELF), has creatively adapted technology and
applied microcredit financing to bring electrical service
to people in remote villages in Africa and Asia who oth-
erwise would spend money to burn hazardous kerosene,
candles, wood, or dung for their light and cooking.
SELF’s rural electrification system is based on small-
scale on-site power generation using renewable
resources. A revolving loan fund gives villagers the finan-
cial means to operate these electrical systems themselves,
also creating jobs. Since its founding in 1990, SELF has
 Bringing modern IT equipment to Tier 4
villages makes possible such applications as
tele-education, telemedicine, microbanking,
and agricultural extension services.
launched projects in China, India, Sri Lanka, Nepal,
Vietnam, Indonesia, Brazil, Uganda, Tanzania, South
global perspective
Africa, and the Solomon Islands.
The success of SELF and other NGOs focused on
small-scale distributed energy solutions has begun to
attract the attention of Western companies such as the
U.S.’s Plug Power Inc. (fuel cells) and Honeywell Inc.
(microturbines). They see the logic in moving into a
wide-open market in Tier 4 rather than trying to force
their technology prematurely into applications for the
developed markets, where incumbents and institutions
stand in their way. With several billion potential cus-
tomers around the world, investments in such innova-
tions should be well worth it.
Improving Access
Because Tier 4 communities are often physically and
40
economically isolated, better distribution systems and
communication links are essential to development of the
bottom of the pyramid. Few of the large emerging-
market countries have distribution systems that reach
more than half of the population. (Hence the continued
dependence of the poorest consumers on local products
and services and moneylenders.) As a consequence, few
MNCs have designed their distribution systems to cater
to the needs of poor rural customers.
Creative local companies, however, lead the way in
effective rural distribution. In India, for instance,
Arvind Mills has introduced an entirely new delivery
system for blue jeans. Arvind, the world’s fifth-largest
denim manufacturer, found Indian domestic denim
sales limited. At $40 to $60 a pair, the jeans were not
affordable to the masses, and the existing distribution
system reached only a few towns and villages. So Arvind
introduced “Ruf & Tuf” jeans — a ready-to-make kit of
jeans components (denim, zipper, rivets, and a patch)
priced at about $6. Kits were distributed through a net-
work of thousands of local tailors, many in small rural
towns and villages, whose self-interest motivated them
to market the kits extensively. Ruf & Tuf jeans are now
the largest-selling jeans in India, easily surpassing Levi’s
and other brands from the U.S. and Europe.
MNCs can also play a role in distributing the prod-
ucts of Tier 4 enterprises in Tier 1 markets, giving
bottom-of-the-pyramid enterprises their first links to
international markets. Indeed, it is possible through
partnerships to leverage traditional knowledge bases to
produce more sustainable, and in some cases superior,
products for consumption by Tier 1 customers.
Anita Roddick, CEO of the Body Shop Inter-
national PLC, demonstrated the power of this strategy
in the early 1990s through her company’s “trade not aid”
program of sourcing local raw material and products
from indigenous people.
More recently, the Starbucks Corporation, in coop-
eration with Conservation International, has pioneered
a program to source coffee directly from farmers in the
Chiapas region of Mexico. These farms grow coffee
beans organically, using shade, which preserves songbird
strategy + business special issue, autumn 2010
habitat. Starbucks markets the product to U.S. con-
sumers as a high-quality, premium coffee; the Mexican
farmers benefit economically from the sourcing arrange-
ment, which eliminates intermediaries from the business
model. This direct relationship also improves the local
farmers’ understanding and knowledge of the Tier 1
market and its customer expectations.
Information poverty may be the single biggest road-
block to sustainable development. More than half of
humanity has yet to make a single phone call. However,
where telephones and Internet connections do exist, for
the first time in history, it is possible to imagine a single,
interconnected market uniting the world’s rich and poor
in the quest for truly sustainable economic develop-
ment. The process could transform the “digital divide”
into a “digital dividend.”
Ten years ago, Sam Pitroda, currently chairman and
CEO of London-based Worldtel Ltd., a company creat-
ed by a telecommunications union to fund telecom
development in emerging markets, came to India with
the idea of “rural telephones.” His original concept was
to have a community telephone, operated by an entre-
preneur (usually a woman) who charged a fee for the use
of the telephone and kept a percentage as wages for
maintaining the telephone. Today, from most parts of
India, it is possible to call anyone in the world.
Other entrepreneurs have introduced fax services,
and some are experimenting with low-cost e-mail and
Internet access. These communication links have dra-
matically altered the way villages function and how they
are connected to the rest of the country and the world.
With the emergence of global broadband connections,
opportunities for information-based business in Tier 4
will expand significantly.
New ventures such as CorDECT in India and
Celnicos Communications in Latin America are devel-
oping information technology and business models suit-
ed to the particular requirements of the bottom of the
pyramid. Through shared-access models (e.g., Internet
kiosks), wireless infrastructure, and focused technology
development, companies are dramatically reducing the
cost of being connected. For example, voice and data
connectivity typically costs companies $850 to $2,800
per line in the developed world; CorDECT has reduced
this cost to less than $400 per line, with a goal of $100
per line, which would bring telecommunications within
reach of virtually everyone in the developing world.
Recognizing an enormous business and develop-
ment opportunity, Hewlett-Packard Company has artic-
ulated a vision of “world e-inclusion,” with a focus on
providing technology, products, and services appropriate
to the needs of the world’s poor. As part of this strategy,
HP has entered into a venture with the MIT Media Lab
and the Foundation for Sustainable Development of
Costa Rica — led by former President Jose Maria
Figueres Olsen — to develop and implement “telecen-
ters” for villages in remote areas. These digital town cen-
ters provide modern information technology equipment
with a high-speed Internet connection at a price that is
affordable, through credit vehicles, at the village level.
Bringing such technology to villages in Tier 4 makes
possible a number of applications, including tele-educa-
tion, telemedicine, microbanking, agricultural extension
services, and environmental monitoring, all of which
help to spur microenterprise, economic development,
and access to world markets. This project, named
Lincos, is expected to spread from today’s pilot sites in
Central America and the Caribbean to Asia, Africa, and
central Europe.
Tailoring Local Solutions
As we enter the new century, the combined sales of the
world’s top 200 MNCs equal nearly 30 percent of total
world gross domestic product. Yet these same corpora-
tions employ less than 1 percent of the world’s labor
global perspective
force. Of the world’s 100 largest economies, 51 are
economies internal to corporations. Yet scores of Third
World countries have suffered absolute economic stag-
nation or decline.
If MNCs are to thrive in the 21st century, they must
broaden their economic base and share it more widely.
They must play a more active role in narrowing the gap
between rich and poor. This cannot be achieved if these
companies produce only so-called global products for
consumption primarily by Tier 1 consumers. They must
nurture local markets and cultures, leverage local solu-
tions, and generate wealth at the lowest levels on the
pyramid. Producing in, rather than extracting wealth
from, these countries will be the guiding principle.
To do this, MNCs must combine their advanced
41
technology with deep local insights. Consider packag-
ing. Consumers in Tier 1 countries have the disposable
income and the space to buy in bulk (e.g., 10-pound
boxes of detergent from superstores like Sam’s Club) and
shop less frequently. They use their spending money to
“inventory convenience.” Tier 4 consumers, strapped for
cash and with limited living space, shop every day, but
not for much. They can’t afford to stock up on house-
hold items or be highly selective about what they buy;
they look for single-serve packaging. But consumers
with small means also have the benefit of experimenta-
tion. Unburdened by large quantities of product, they
can switch brands every time they buy.
Already in India, 30 percent of personal care prod-
ucts and other consumables, such as shampoo, tea, and
cold medicines, are sold in single-serve packages. Most
are priced at Rs. 1 (about 1¢). Without innovation in
 packaging, however, this trend could result in a moun-
tain of solid waste. Dow Chemical Company and
Cargill Inc. are experimenting with an organic plastic
that would be totally biodegradable. Such packaging
clearly has advantages in Tier 4, but it could also revolu-
tionize markets at all four tiers of the world pyramid.
For MNCs, the best approach is to marry local capa-
bilities and market knowledge with global best practices.
But whether an initiative involves an MNC entering
Tier 4 or an entrepreneur from Tier 4, the development
principles remain the same: New business models must
not disrupt the cultures and lifestyles of local people. An
effective combination of local and global knowledge is
needed, not a replication of the Western system.
The development of India’s milk industry has many
lessons for MNCs. The transformation began around
1946, when the Khira District Milk Cooperative, lo-
global perspective
cated in the state of Gujarat, set up its own processing
plant under the leadership of Verghese Kurien and cre-
ated the brand Amul, today one of the most recognized
in the country.
Unlike the large industrial dairy farms of the West,
in India, milk originates in many small villages. Villagers
may own only two to three buffaloes or cows each and
bring their milk twice a day to the village collection cen-
ter. They are paid every day for the milk they deliver,
based on fat content and volume. Refrigerated vans
transport the milk to central processing plants, where it
is pasteurized. Railroad cars then transport the milk to
major urban centers.
The entire value chain is carefully managed, from
the village-based milk production to the world-scale
42
processing facilities. The Khira District cooperative pro-
vides such services to the farmers as veterinary care and
cattle feed. The cooperative also manages the distribu-
tion of pasteurized milk, milk powder, butter, cheese,
baby food, and other products. The uniqueness of the
Amul cooperative is its blending of decentralized origi-
nation with the efficiencies of a modern processing and
distribution infrastructure. As a result, previously mar-
ginal village farmers are earning steady incomes and
being transformed into active market participants.
Twenty years ago, milk was in short supply in India.
Today, India is the world’s largest producer of milk.
According to India’s National Dairy Development
Board, the country’s dairy cooperative network now
claims 10.7 million individual farmer member–owners,
covers 96,000 village-level societies, includes 170 milk-
producer unions, and operates in more than 285 dis-
tricts. Milk production has increased 4.7 percent per
year since 1974. The per capita availability of milk in
India has grown from 107 grams to 213 grams per day
in 20 years.
Putting It All Together
Creating buying power, shaping aspirations, improving
access, and tailoring local solutions — the four elements
of the commercial infrastructure for the bottom of the
pyramid are intertwined. Innovation in one leverages
innovation in the others. Corporations are only one of
the actors; MNCs must work together with NGOs,
local and state governments, and communities.
Yet someone must take the lead to make this revo-
lution happen. The question is, Why should it be
MNCs?
Even if multinational managers are emotionally
persuaded, it is not obvious that large corporations have
real advantages over small, local organizations. MNCs
may never be able to beat the cost or responsiveness of
village entrepreneurs. Indeed, empowering local entre-
preneurs and enterprises is key to developing Tier 4 mar-
kets. Still, there are several compelling reasons for
MNCs to embark on this course:
• Resources. Building a complex commercial infra-
structure for the bottom of the pyramid is a resource-
and management-intensive task. Developing environ-
mentally sustainable products and services requires
significant research. Distribution channels and commu-
nication networks are expensive to develop and sustain.
Few local entrepreneurs have the managerial or technologi-
cal resources to create this infrastructure.
• Leverage. MNCs can transfer knowledge from
one market to another — from China to Brazil or India
— as Avon, Unilever, Citigroup, and others have
demonstrated. Although practices and products have to
be customized to serve local needs, MNCs, with their
unique global knowledge base, have an advantage that is
not easily accessible to local entrepreneurs.
• Bridging. MNCs can be nodes for building the
strategy + business special issue, autumn 2010
commercial infrastructure, providing access to knowl-
edge, managerial imagination, and financial resources.
Without MNCs as catalysts, well-intentioned NGOs,
communities, local governments, entrepreneurs, and
even multilateral development agencies will continue to
flounder in their attempts to bring development to the
bottom. MNCs are best positioned to unite the range of
actors required to develop the Tier 4 market.
• Transfer. Not only can MNCs leverage learning
 New business models must not disrupt
local cultures and lifestyles. An effective
combination of local and global knowledge
is needed, not a Western system.
from the bottom of the pyramid, but they also have the
capacity to transfer innovations up-market all the way to
Tier 1. As we have seen, Tier 4 is a testing ground for
sustainable living. Many of the innovations for the bottom
can be adapted for use in the resource- and energy-intensive
markets of the developed world.
It is imperative, however, that managers recognize
the nature of business leadership required in the Tier 4
arena. Creativity, imagination, tolerance for ambiguity,
stamina, passion, empathy, and courage may be as
important as analytical skill, intelligence, and knowl-
edge. Leaders need a deep understanding of the com-
plexities and subtleties of sustainable development in the
context of Tier 4. Finally, managers must have the inter-
personal and intercultural skills to work with a wide
range of organizations and people.
MNCs must build an organizational infrastructure
to address opportunity at the bottom of the pyramid.
This means building a local base of support, reorienting
R&D to focus on the needs of the poor, forming new
alliances, increasing employment intensity, and rein-
venting cost structures. These five organizational ele-
ments are clearly interrelated and mutually reinforcing.
• Build a local base of support. Empowering the
poor threatens the existing power structure. Local oppo-
sition can emerge very quickly, as Cargill Inc. found in
its sunflower-seed business in India. Cargill’s offices were
twice burned, and the local politicians accused the firm
of destroying locally based seed businesses. But Cargill
persisted. Through Cargill’s investments in farmer edu-
cation, training, and supply of farm inputs, farmers have
significantly improved their productivity per acre of
land. Today, Cargill is seen as the friend of the farmer.
Political opposition has vanished.
To overcome comparable problems, MNCs must
build a local base of political support. As Monsanto and
global perspective
General Electric Company can attest, the establishment
of a coalition of NGOs, community leaders, and local
authorities that can counter entrenched interests is
essential. Forming such a coalition can be a very slow
process. Each player has a different agenda; MNCs have
to understand these agendas and create shared aspira-
tions. In China, this problem is less onerous: The local
bureaucrats are also the local entrepreneurs, so they can
easily see the benefits to their enterprise and their village,
town, or province. In countries such as India and Brazil,
such alignment does not exist. Significant discussion,
information sharing, the delineation of benefits to each
constituency, and sensitivity to local debates is necessary.
• Conduct R&D focused on the poor. It is necessary to
conduct R&D and market research focused on the
43
unique requirements of the poor, by region and by
country. In India, China, and North Africa, for example,
research on ways to provide safe water for drinking,
cooking, washing, and cleaning is a high priority.
Research must also seek to adapt foreign solutions to
local needs. For example, a daily dosage of vitamins can
be added to a wide variety of food and beverage prod-
ucts. For corporations that have distribution and brand
presence throughout the developing world, such as
Coca-Cola Company, the bottom of the pyramid offers
a vast untapped market for such products as water and
nutritionals.
Finally, research must identify useful principles and
potential applications from local practices. In Tier 4, sig-
nificant knowledge is transmitted orally from one gen-
eration to the next. Being respectful of traditions but
willing to analyze them scientifically can lead to new
 knowledge. The Body Shop’s creative CEO, Anita
Roddick, built a business predicated on understanding
global perspective
the basis for local rituals and practices. For example, she
observed that some African women use slices of pine-
apple to cleanse their skin. On the surface, this practice
appears to be a meaningless ritual. However, research
showed active ingredients in pineapple that cleared away
dead skin cells better than chemical formulations.
MNCs must develop research facilities in emerging
markets such as China, India, Brazil, Mexico, and Africa,
although few have made a big effort so far. Unilever is an
exception; it operates highly regarded research centers in
India, employing more than 400 researchers dedicated
to the problems of “India-like markets.”
• Form new alliances. MNCs have conventionally
formed alliances solely to break into new markets; now
they need to broaden their alliance strategies. By enter-
44
ing into alliances to expand in Tier 4 markets, MNCs
gain insight into developing countries’ culture and local
knowledge. At the same time, MNCs improve their own
credibility. They may also secure preferred or exclusive
access to a market or raw material. We foresee three
kinds of important relationships: Alliances with local
firms and cooperatives (such as the Khira District Milk
Cooperative); alliances with local and international
NGOs (like Starbucks’s alliance with Conservation
International in coffee); and alliances with governments
(e.g., Merck & Company’s alliance in Costa Rica to fos-
ter rain forest preservation in exchange for bioprospect-
ing rights).
Given the difficulty and complexity of constructing
business models dependent on relationships with
national or central governments (e.g., large infrastruc-
ture development), we envision more alliances at the
local and regional level. To succeed in such alliances,
MNC managers must learn to work with people who
may not have the same agenda or the same educational
and economic background as they do. The challenge
and payoff is how to manage and learn from diversity —
economic, intellectual, racial, and linguistic.
• Increase employment intensity. MNCs accus-
tomed to Tier 1 markets think in terms of capital inten-
sity and labor productivity. Exactly the opposite logic
applies in Tier 4. Given the vast number of people at the
bottom of the pyramid, the production and distribution
approach must provide jobs for many, as in the case of
Ruf & Tuf jeans from Arvind Mills: It employed an
army of local tailors as stockers, promoters, distributors,
and service providers, even though the cost of the jeans
was 80 percent below that of Levi’s. As Arvind demon-
strated, MNCs need not employ large numbers of peo-
ple directly on their payroll, but the organizational
model in Tier 4 must increase employment intensity
(and incomes) among the poor and groom them to
become new customers.
• Reinvent cost structures. Managers must dramat-
ically reduce cost levels relative to those in Tier 1. To cre-
ate products and services the poor can afford, MNCs
must reduce their costs significantly — to, say, 10 per-
strategy + business special issue, autumn 2010
cent of what they are today. But this cannot be achieved
by fine-tuning the current approaches to product devel-
opment, production, and logistics. The entire business
process must be rethought with a focus on functionality,
not on the product itself. For example, financial services
need not be distributed only through branch offices
open from 9 A.M. to 5 P.M. Such services can be provided
at a time and place convenient to the poor consumer —
after 8 P.M. and at their homes. Cash-dispensing
machines can be placed in safe areas — police stations
and post offices. Iris recognition used as a security device
could substitute for the tedious personal-identification
number and card for identification.
Lowering cost structures also forces a debate on
ways to reduce investment costs. This will inevitably
lead to greater use of information technology to develop
production and distribution systems. As noted, village-
based phones are already transforming the pattern of
communications throughout the developing world. Add
the Internet, and we have a whole new way of commu-
nicating and creating economic development in poor,
rural areas. Creative use of IT will emerge in these mar-
kets as a means to dramatically lower the costs associat-
ed with access to products and services, distribution, and
credit management.
A Common Cause
The emergence of the 4 billion people who make up the
Tier 4 market is a great opportunity for MNCs. It also
represents a chance for business, government, and civil
society to join together in a common cause. Indeed, we
believe that pursuing strategies for the bottom of the
pyramid dissolves the conflict between proponents of
free trade and global capitalism on one hand, and envi-
ronmental and social sustainability on the other.
Yet the products and services currently offered to
Tier 1 consumers are not appropriate for Tier 4, and
accessing this latter market will require approaches fun-
damentally different from those even in Tiers 2 and 3.
Changes in technology, credit, cost, and distribution are
critical prerequisites. Only large firms with global reach
have the technological, managerial, and financial
resources to dip into the well of innovations needed to
profit from this opportunity.
New commerce in Tier 4 will not be restricted to
businesses filling such basic needs as food, textiles, and
housing. The bottom of the pyramid is waiting for high-
tech businesses such as financial services, cellular
telecommunications, and low-end computers. In fact,
for many emerging disruptive technologies (e.g., fuel
cells, photovoltaics, satellite-based telecommunications,
biotechnology, thin-film microelectronics, and nano-
technology), the bottom of the pyramid may prove to be
the most attractive early market.
So far, three kinds of organizations have led the
way: local firms such as Amul and Grameen Bank;
NGOs such as the World Resources Institute, SELF,
The Rainforest Alliance, The Environmental Defense
Fund, and Conservation International, among others;
and a few MNCs such as Starbucks, Dow, Hewlett-
Packard, Unilever, Citigroup, DuPont, Johnson &
Johnson, Novartis, and ABB, and global business part-
nerships such as the World Business Council for
Sustainable Business Development. But to date, NGOs
and local businesses with far fewer resources than the
MNCs have been more innovative and have made more
progress in developing these markets.
It is tragic that as Western capitalists we have
implicitly assumed that the rich will be served by the
corporate sector, while governments and NGOs will
protect the poor and the environment. This implicit
divide is stronger than most realize. Managers in MNCs,
public policymakers, and NGO activists all suffer from
this historical division of roles. A huge opportunity lies
in breaking this code — linking the poor and the rich
global perspective
across the world in a seamless market organized around
the concept of sustainable growth and development.
Collectively, we have only begun to scratch the sur-
face of what is the biggest potential market opportunity
in the history of commerce. Those in the private sector
who commit their companies to a more inclusive capi-
talism have the opportunity to prosper and share their
prosperity with those who are less fortunate. In a very
real sense, the fortune at the bottom of the pyramid rep-
resents the loftiest of our global goals. +
Reprint No. 02106
Resources 45
Robert Chambers, Whose Reality Counts? Putting First Last (ITDG
Publishing, 1997).
Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in
the West and Fails Everywhere Else (Basic Books, 2000).
Thomas L. Friedman, The Lexus and the Olive Tree: Understanding
Globalization (Farrar, Straus and Giroux, 1999).
Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,”
Harvard Business Review, January–February 1997, www.hbsp.harvard.edu/
hbr/index.html.
“Is the Digital Divide a Problem or an Opportunity?” Business Week
Supplement, December 18, 2000.
C.K. Prahalad and Kenneth Lieberthal, “The End of Corporate
Imperialism,” Harvard Business Review, July–August 1998, www.hbsp
.harvard.edu/hbr/index.html.
Amartya Sen, Development as Freedom (Alfred A. Knopf, 1999).
For more thought leadership on this topic, see s+b’s website at:
www.strategy-business.com/global_perspective.
 BY GARY NEILSON, BRUCE A. PASTERNACK, AND DECIO MENDES
Trait by trait, companies
can evolve their own
Four Bases OF
THE
execution cultures.
Organizational
DNA
management
46
Every economic era has a theme. The 1960s are
still recalled as the “Go-Go” years, when Wall Street was
fueling mergers and conglomerations of unprecedented
scale. The 1990s were the “Internet Boom” years, when
a rising economic tide lifted the boat of just about any
company with a plausible business model tale to tell.
The agonizingly slow recovery since the Internet bubble
burst has inspired the latest motif. Executives no longer
believe that a strategy — consolidation, transformation,
or breakaway — is enough. “We’ve made the right
strategic decision, but my organization isn’t motivated
or set up right to get on with it,” they are saying.
“Everyone says they understand the vision, but the
businesses and functions just aren’t working together to
get results.”
Welcome to the Era of Execution.
Execution has become the new mantra for this first
decade of the new millennium. Larry Bossidy, who led
AlliedSignal Inc.’s turnaround and its merger with
Honeywell International Inc., wrote a book with Ram
Charan, titled Execution: The Discipline of Getting Things
Done (Crown Business, 2002), that’s been on the busi-
ness bestseller lists for more than a year. Former IBM
CEO Louis V. Gerstner Jr. put forth the same message
Illustration by Brian Cairns
in his memoir, Who Says Elephants Can’t Dance? Inside
IBM’s Historic Turnaround (HarperBusiness, 2002). In
it, he says flatly that the revival of the computer giant
wasn’t due to vision. “Fixing IBM,” he wrote, “was all
about execution.”
Boards of directors, increasingly impatient with
CEOs who don’t deliver, have climbed on the execution
bandwagon too. Booz & Company’s annual study of
management
47
 Gary Neilson Bruce A. Pasternack Decio Mendes Originally published Winter
gary.neilson@booz.com is a former senior partner with is a former principal with Booz 2003.
is a senior partner with Booz Booz & Company. He is now & Company. He is now at the
& Company in Chicago. He an operating partner with Boston Consulting Group.
works on the development of Venrock Associates.
new organizational models
and designs, restructuring,
and the leadership of major
change initiatives for
Fortune 500 companies
across industries.

CEO succession trends showed that forced turnover of Exhibit 1: The Hourglass Organization
underperforming CEOs at major corporations reached a
management

new high in 2002, rising a staggering 70 percent from Vice President (8 to 9 direct reports)
2001 and accounting for 39 percent of all chief execu-
tive transitions. Senior Director (6 to 8 direct reports)
But is execution simply a matter of firing the CEO
and bringing in a charismatic leader who can get on
with “getting things done”? Not at all. Underlying the Director (3 to 6 direct reports)

quest for an execution-driven enterprise is one central

question: How does a company design its organization
to execute the strategy — whatever the strategy is — and
successfully adapt when circumstances change?
Execution is woven deeply into the warp and woof
of organizations. It is embedded in the management
processes, relationships, measurements, incentives, and
beliefs that collectively define the “rules of the game” for
each company. Although we often think of companies as
48
monolithic entities, they’re not. They’re collections of
individuals who typically act in their own self-interest.
Superior and consistent corporate execution occurs only
when the actions of individuals within it are aligned
with one another, and with the overall strategic interests
and values of the company. Performance is the sum total
of the tens of thousands of actions and decisions that, at
large companies, thousands of people, at every level,
Lead Manager (4 to 6 direct reports)
Manager (5 to 7 direct reports)
Supervisor (8 to 14 direct reports)
Source: Booz & Company
pairs of four nucleotides, whose sequence spells out the
exact instructions required to create a unique organism,
we describe the DNA of a living organization as having
four bases that, combined in myriad ways, define an
organization’s unique traits. These bases are:
Structure. What does the organizational hierarchy
look like? How are the lines and boxes in the organiza-
strategy + business special issue, autumn 2010

make every day.
Because individual behaviors determine an organi-
zation’s success over time, the first step in resolving dys-
functions is to understand how the traits of an organiza-
tion influence each individual’s behavior and affect his
or her performance. We like to use the familiar meta-
phor of DNA to attempt to codify the idiosyncratic
characteristics of a company. Just as the double-stranded
DNA molecule is held together by bonds between base
tion chart connected? How many layers are in the hier-
archy, and how many direct reports does each layer have?
Decision Rights. Who decides what? How many
people are involved in a decision process? Where does
one person’s decision-making authority end and
another’s begin?
Motivators. What objectives, incentives, and career
alternatives do people have? How are people rewarded,
financially and nonfinancially, for what they achieve?
 What are they encouraged to care about, by whatever
means, explicit or implicit?
Information. What metrics are used to measure per-
formance? How are activities coordinated, and how is
knowledge transferred? How are expectations and
progress communicated? Who knows what? Who needs
to know what? How is information transferred from the
people who have it to the people who require it?
Any metaphor can be pushed too far, of course.
Although the basic comparison of corporate and human
DNA is often invoked in general discussions of institu-
tional culture and conduct, we think it provides a practi-
cal framework senior executives can use to diagnose
problems, discover hidden strengths, and modify compa-
ny behavior. With a framework that examines all aspects
of a company’s architecture, resources, and relationships,
it is much easier to see what is working and what isn’t
deep inside a highly complex organization, to understand
how it got that way, and to determine how to change it.
(See “Focus: Testing Quest Diagnostics’ DNA,” page 50.)
Structure
In principle, companies make structural choices to sup-
port a strategy (for example, the decision to organize
business units around customers, products, or geogra-
phy). In practice, however, a company’s organizational
structure and strategic intent often are mismatched. The
variance can usually be exposed by, in effect, super-
imposing the organization chart — an efficient commu-
Exhibit 2: Comparing Spans of Control
25
Average No. of Direct Reports
20
15
10 10
10
7 7
5 6
5
Co. A Co. B CG Co. Co. A
Category/Product Line Manager Vice President, Sales
Best-practice Company Consumer Goods Company
Source: Booz & Company
nicator of power and status in a firm — over a business
unit’s strategic plan.
A common structural problem impeding the execu-
tion of strategy is the existence of too many manage-
ment tiers (deep layers), with too many individuals at
each tier having too few direct reports (narrow spans).
Portrayed graphically, this structure resembles an hour-
glass. (See Exhibit 1.) Narrower spans in the middle
often result from unclear decision rights and the com-
pany’s mix of motivators. Generally, a structure shaped
this way indicates trouble.
There are many reasons a certain management posi-
tion may legitimately call for a narrower or wider span
than another position’s. Managers in complex jobs that
require them to create and maintain multiple informa-
tion linkages across individual units cannot handle the
same number of direct reports as managers with simpler
management
information aggregation roles. But it’s also easy for spans
to become too narrow for no legitimate reason.
Consider the spans of control for three senior posi-
tions at one consumer goods company with which we
have worked. As shown in Exhibit 2, the catego-
ry/product line manager had five direct reports, com-
pared with seven and 10 reports for senior managers at
two best-practice companies. The vice president of sales
had six direct reports, versus eight and 10 at the other
companies. The manufacturing manager had only seven
direct reports; in other companies, similar managers had
11 or more. We have taken this measurement at more
49
23
12
11
8
Co. B CG Co. Co. A Co. B Co. C CG Co.
Manufacturing Manager
 Focus: Testing then the newly appointed leader of Prior to the deal, revenues had typi-
Quest Diagnostics, recognized that the cally declined upward of 20 percent
Quest Diagnostics’ DNA of an enterprise formed by the following a major acquisition. In this

DNA union of so many different entities,

each born in a different time and
place, with many different parents,
could readily become a monster. So he
case, Quest Diagnostics not only didn’t
lose business, revenues grew at or
above industry growth rates during
the integration process. This was the

D NA testing can be as valuable

to corporate health as it has
become to human healthcare. An
analysis of a company’s “genetic
material” can isolate the underlying
causes of and potential solutions to
organizational dysfunctions, and even
head off problems before they start.
Consider the case of the U.S.-based
management
was determined to focus his attention
on improving organizational DNA
across the entire company.
Immediately after the spin-off,
Freeman and his top management
team took control of key decision
rights to ensure that the company’s
turnaround effort was coherent and
driven hard. When the company
first time such postmerger growth
occurred in the industry.
As Quest Diagnostics’ turnaround
progressed, decision rights were
decentralized gradually, first by plac-
ing supervisors into various units who
led change and taught employees new
behaviors, and then by empowering
frontline staff. Although many parts of

medical laboratory testing company
Quest Diagnostics. Originally a divi-
sion of Corning Inc., Quest Diagnostics
grew in the 1990s through the acquisi-
tion of hundreds of small independent
testing laboratories. Spun off from
Corning in 1997, the company was los-
ing money and battling fines for billing
fraud and other abuses in a number of
the laboratories it had bought.
Chairman and CEO Ken Freeman,
acquired SmithKline Beecham Clinical
Labs in August 1999, they again delib-
erately centralized decision rights
among a small senior team. A set of
integration teams headed by the lead-
ers of both companies methodically
worked through the long-term vision
and short-term tactics for each area
of the new company, again, to ensure
consistency across the enterprise.
The financial payoff was immediate:
the Quest Diagnostics organization
are now high performers and largely
self-directed, it has taken seven years
to get there.
Today when Quest Diagnostics
acquires a company, Mr. Freeman and
his team concentrate on two of the
four organizational bases, motivators
and information, recognizing their
interdependency and combined influ-
ence on individual and organizational

than 100 companies, and our data indicates that this
company fell well outside the range found at compara-
50
ble firms.
In our experience, numbers this far off the norm
provide strong evidence that a company’s spans are
narrower than they should be. Often this results in a
structure that has too many layers as well. This became
evident when we explored how senior managers at the
consumer goods company spent their time. About a
third of it was devoted to making plans, ensuring target
could second-guess their work. They should have been
giving more of their time to preparing action plans to
achieve the strategic and operational objectives of the
company.
This structure kept the consumer goods organiza-
tion from executing to its potential. Among specific dys-
functions we found:
• Because there were no clear standards that allowed
basic decisions to be made at lower levels, decisions re-
garding such matters as authorization for PC purchases
strategy + business special issue, autumn 2010

corporate goals were met, and dealing with exceptions
and high-impact/high-risk decisions, all appropriate
roles for these managers. But they were spending far too
much time (roughly 40 percent) justifying and reporting
performance to senior executives above them and par-
ticipating in tactical, operational decisions with their
direct reports. In other words, too much of their time
was devoted to second-guessing the work of people
below them and preparing reports so that superiors
and travel were decided too high in the organization.
• Managers and supervisors tended to discourage
their staffs from troubleshooting to resolve routine prob-
lems on their own.
• Managers rotated rapidly through jobs, reaching
senior positions without sufficient experience. Not only
did they require close supervision, but they continually
struggled to figure out what they needed to know.
• The company seemed to rapidly promote its best
behavior. Among the first “gene thera-
pies” they perform is to introduce a
comprehensive and varied set of met-
rics that go well beyond the typical
financial performance measures that
most companies use. There are
measures for customer retention, the
time it takes to pick up a call in the call
center, the time it takes to process a
specimen in the labs, employee satis-
faction and attrition rates, and more.
The system is designed so that all
employees know how they can per-
sonally influence one or more core
performance measures.
The only way this information can
Finally, the company ties these
metrics to individuals’ bonus pay-
ments so that information not only
informs, but also motivates productive
behavior. Since virtually everyone in
the company can affect customer
retention in some way, Quest Diag-
nostics uses the customer retention
metric very broadly in its perform-
ance-based compensation programs.
Ultimately, the bonuses of all 37,000
Quest Diagnostics employees depend
in some way on meeting the customer
retention target.
“If we have a shared goal that says
we’re going to reduce customer attri-
retention metrics are measured not
just organization-wide. They are di-
vided up by region, so that people are
paid on the basis of customer reten-
tion performance in their own region,
where they can have the greatest
influence.
The aligning and motivating power
of bringing information and incentives
together is reflected in the firm’s
strong financial performance. Since
Quest Diagnostics was spun off from
Corning in 1997, the company’s stock
price has increased 730 percent, com-
pared with a 41 percent increase in the
S&P 500 Index during the same

influence the day-to-day behavior and
decisions of employees throughout
the organization is if decision makers
have the information on hand when
they need it. Quest Diagnostics posts
various metrics on different time-
tables depending on the type of man-
agement issue: Customer retention
metrics are posted at least once a
month; specimen turnaround time is
posted every morning.
tion, that doesn’t mean it is only for
people in sales. It impacts people pick-
ing up the specimens, people who
draw and perform tests on the speci-
mens, and certainly people in billing. If
there are lots of complaints, the cus-
tomer is going to leave. By having
shared goals, you get speed and align-
ment,” says Freeman.
To make the motivators as specific
and powerful as possible, customer
management
period. Having successfully carried
out a classic turnaround and taken the
lead in consolidating the industry,
Quest Diagnostics is now driving
growth organically and has become
the clear leader in the U.S. medical
laboratory testing market. In 2002, the
company earned US$322 million on
$4.1 billion in revenues.
—G.N., B.A.P., and D.M.

and brightest just so it could retain them. This added
unnecessary layers to the hierarchy and created more
work at lower levels.
• Large cross-departmental meetings filled the
workday. The rationale was to have all parties “in one
room to resolve the issues.”
All of this activity is costly — these are managers
with salaries in the low six figures. Their compensation,
plus the actual cost of their activities, pushed the com-
pany’s general and administrative costs to a level that was
20 percent higher than the average of our benchmark
companies. Because each of its many layers got involved
in almost every decision, the company’s speed to market
was slowing, and it was losing share to new, more nim-
ble competitors in several categories.
The obvious structural change was to reduce layers
and increase spans — that is, to add direct reports to
each manager. We recommended a new structure that
resulted in a reduction of 10 percent of the positions
in the management ranks across all six divisions.
Ultimately, with the elimination and repositioning of
51
managers and support staff, about 2,300 management
jobs were cut, which saved the company more than
US$250 million.
Still, simply cutting layers and extending spans
would have had little long-term effect if underlying
behaviors didn’t change. One way the company could
do this was by setting clear standards (e.g., which PC to
buy and which airline to fly) so high-level managers
would not need to review every transaction and provide
approvals. With a monthly report, they could easily
track exceptions to the standards. Another solution:
Reset promotion expectations to slow the upward move-
ment of managers and encourage more horizontal
moves — use promotions not just as a reward, but to
develop a manager’s breadth of experience. Long and
cumbersome reporting processes designed to satisfy the
information preferences of each layer and the tremen-
 Executives promoted to new positions
often cling to their prior responsibilities,
burdening themselves with unnecessary
tasks and disempowering their subordinates.
dous desire for detail also had to go. In their place would
be a report on the key lagging and leading measures of
management
critical business activity, a top-down setting of targets,
and the monitoring of variances. To further dissolve the
reflexive addition of layers, the company also had to do
more managerial training and communicate better
about the change in promotion principles. Following
the restructuring and changes in management, time to
market for product introductions shrank by months,
enabling the company to regain the first-to-market
advantage it had traditionally held.
Decision Rights
Decision rights specify who has the authority to make
which decisions. Clarifying these rights puts flesh on an
organization chart and makes crystal clear where respon-
sibility lies.
52
Clear decision rights enable wider spans and fewer
layers, which translates into lower costs and speedier exe-
cution. Unarticulated decision rights are more than a
time sink; they’re a central cause of substandard per-
formance — and even of nonperformance. An employee
at a financial-services company expressed this problem
quite concretely in a focus group we conducted, saying,
“Responsibilities are blurred intentionally around here
so everyone has an excuse for not getting involved.”
At one industrial company, we found yet again that
senior executives were spending too much time review-
ing small projects. It turned out the company had not
reassessed managers’ spending-approval limits in more
than 10 years. We suggested the authorization process be
adjusted so that managers lower in the organization
could be accountable for the final approval of more proj-
ects. The capital expenditure amount requiring CEO
authorization was raised from $5 million to $15 million.
The objective was to free up senior management’s time
to focus on the longer-term issues associated with mar-
ket growth and potential acquisitions. Based on histori-
cal analysis, it was determined that raising the level at
which projects required CEO authorization to $15 mil-
lion would reduce the number of projects crossing the
CEO’s desk by 49 percent. All large projects would still
come to the CEO, so the aggregate value of projects
approved at the top would decline by only 13 percent.
Decision rights become blurred for many reasons,
not all of them intentional. After a large industrial com-
pany completed a leveraged buyout, the management of
one of its business units became the new entity’s corpo-
rate management, charged with reviewing the operating
decisions of all business units. That change required
every level of management to take on greater decision-
making responsibility — an unnatural act for executives
accustomed to hands-on involvement in operating unit
decisions. Rather than allow their general managers to
make basic decisions about product design and resource
allocation, the CEO and COO still involved themselves
deeply in these activities. Meanwhile, they were neglect-
ing other areas where their attention was expected,
notably strategic planning, long-range business portfolio
strategy + business special issue, autumn 2010
decisions, and the firm’s financial condition.
The solution was to create a process for corporate
officers to delegate decisions to the business unit’s gen-
eral managers. An executive committee was established
to review business unit decisions, and several general
managers were charged with integrating marketing,
product engineering, and manufacturing. These struc-
tures and processes made effective delegation possible.
It doesn’t take a leveraged buyout to distort a com-
pany’s decision-rights structure. People naturally lean
toward the familiar when faced with change. Executives
promoted to new positions often cling to their prior
responsibilities, burdening themselves with unnecessary
tasks and disempowering their subordinates. The press
of the urgent at the business unit level drives out the
important at the corporate level. The lesser decisions
seem concrete and knowable. Forward thinking and big
decisions regarding long-term direction seem undefined,
amorphous, and tougher to tackle.
Often the process of assigning decision rights is a
response to a crisis or a shift in political power. When
this happens, decisions can fall between the cracks. Or
they can be made twice by different parties. Or they can
be reviewed repeatedly, becoming a Sisyphean exercise
in backsliding.
It is possible to assign decision rights systematically
and rationally. At a global industrial company, we
helped create an organizational matrix of functions,
products, and geographies. The structure was under-
girded by a set of specific organizational and decision-
making principles, among them: Responsibility does
not imply exclusive authority; different units should
have joint goals and performance measures; and certain
positions need to report upward to multiple managers.
Over several months, we worked with the company
to apply these and several other principles to more than
300 critical decisions. Because we undertook this effort
explicitly while also changing the structure, the com-
pany was able to execute its new strategy faster, and with
fewer missteps. The overall change process took two
years (one less than had been anticipated). The company
returned to profitability, reduced its net debt by the tar-
geted amount, and reached several other critical finan-
cial goals a year ahead of schedule.
Making decision rights explicit in companies in
which they are not requires management to set rules
for the most common business situations — and for
each position. In effect, the company is creating a
constitution that says who will decide what and under
what circumstances.
The decision rights of groups must also be clear. At
a consumer goods company, we saw large numbers of
executives meeting frequently to resolve conflicts among
functional units. It appeared that operations, finance,
and marketing were each doing an excellent job of ana-
lyzing new factories, new products, and new business
opportunities, but they weren’t talking to one another
along the way. Operations planned the perfect factory
— without guidance from finance on the cost. In
marathon meetings, managers from each function
brought their independent analyses together. Then they
struggled to reach a joint conclusion, because each unit,
by that time, was wedded to its own recommendation.
To solve this silo problem, one top executive was
made responsible for managing a cross-functional team,
so there would always be communication across dis-
ciplines. As a result, only a few top executives were
needed to make routine decisions, and the company
reduced dedicated staff support for these efforts by more
than 30 percent.
Motivators
The third of the four bases in a company’s DNA-like
makeup involves motivation. Employees generally don’t
deliberately act counterproductively; they don’t try to
management
derail a company’s strategy. Rather, they respond quite
rationally on the basis of what they see, what they
understand, and how they’re rewarded. An exhortation
to follow the vision and pursue the strategy is only so
much air if the organization’s incentives and information
flows make it difficult for employees to understand and
do what they’re supposed to do.
An organization can send confusing signals to indi-
viduals in many ways. Think about what happens when
an appraisal system inflates performance ratings. At a
consumer goods company we once worked with,
employees were appraised on a 1 to 10 scale. Eighty per-
cent received a rating of 9 or above, and everyone felt
good. But superior employees didn’t feel they needed to
do any better. Other workers thought their performance
53
was acceptable when it wasn’t. Appraisers were avoiding
the unpleasant task of delivering bad performance rat-
ings, and the organization wasn’t giving them any reason
to be tough. For every deficient employee who stayed at
the company because the organization said he or she was
competent, the company’s execution suffered. Because
of its unwillingness to differentiate people’s contributions
through performance assessments and raises, the com-
pany lost the opportunity to send important feedback to
employees on what was relevant to executing the strat-
egy — and where their performance was unsatisfactory.
Several years ago we worked with the new CEO of
a technology company who had been the head of a busi-
ness unit and had served for several years on the execu-
tive committee that made investment decisions. The
new CEO knew from experience that the committee
wasn’t tough enough on new investment requests. They

were a collegial group; members supported their col-
leagues’ investment requests with the understanding
their own requests would be supported in return.
The new CEO wanted a more discriminating
process that would judge investment proposals on their
merits. He also knew executive committee members
faced little downside from approving unsound invest-
ment requests. Future bonuses might suffer if company
performance wasn’t good, but that money wasn’t already
in their pockets.
So the CEO introduced a new system to change
management
this attitude: Each committee member was required to
take out a personal loan of $1 million and invest it in
company stock (the loan was guaranteed by the com-
pany, so the individuals could borrow at good rates).
Unlike an outright stock grant, this scheme ensured that
the executives had existing wealth at risk, and that they
would lose money, and perhaps the ability to repay the
debt, if they permitted poor investment decisions. With
this new incentive to scrutinize investment requests, the
committee became much tougher and more effective.
And after a few sessions, teams began bringing better-
researched and smarter investment proposals to the table
because they knew if they didn’t, the committee was
likely to turn them down.
There are other market mechanisms that can be
54
used to send more accurate signals to managers about
the cost and value of certain activities. This approach
was used successfully at a large agribusiness company
that came to us for help in improving the services of its
human resources department. The HR department’s
performance had always been judged by how well it
stayed on budget. Internal customer satisfaction was
rarely measured. Each customer was allocated a share of
the HR budget, but these figures didn’t represent the
true cost of the services. Meanwhile, customers had lit-
tle influence on the kind and amount of services they
received. Neither HR nor its customers had an incentive
to offer or ask for services tailored to the specific needs
of a division.
Working with the company, we created a scorecard
to measure HR performance on such things as call cen-
ter response time and payroll errors. Achieving scorecard
targets became a significant component of management
incentives and rewards. HR’s internal customers were
given the right to negotiate service-level agreements with
HR. The true cost of services was established using out-
side benchmarks. Once HR’s customers understood
what they were paying for and could better manage their
costs, they had an incentive to use HR services more
wisely. Today, they often decline or reduce some services
and request new ones. The market-based measurement
and incentive program improved the quality of the
company’s HR services and reduced costs by more than
15 percent.
Organizations that are ready to implement multiple
profit-and-loss statements and market-based motiva-
tional systems will find that these powerful new tools
can help them operate effectively with less command-
and-control oversight. But not all companies are ready
for these systems; it takes strong leadership, persistence,
and patience to introduce them and overcome employ-
ee resistance to using them.
Information
Underlying a company’s ability to ensure clear decision
rights and to measure and motivate people to apply
them is one critical matter: information.
Making sure high-quality information is available
and flowing where it needs to go throughout a compa-
ny, all the time, is among the most challenging tasks of
the modern corporation, and one of the most under-
appreciated contributors to high performance and com-
petitive advantage. A 2002 study of the management
and financial performance of 113 Fortune 1000 compa-
nies over the five-year period 1996 to 2000, conducted
by Booz & Company and Ranjay Gulati of the Kellogg
School of Management at Northwestern University,
found that the companies with the highest shareholder
returns were more focused on managing and enhancing
communication with their customers, suppliers, and
employees than other firms in the study.
We have seen this information–performance link-
strategy + business special issue, autumn 2010
age often in practice. A few years ago, the board of an
agricultural grower and processor became concerned
about the company’s operating efficiency. Among other
problems, farm managers were using equipment with-
out discipline — ordering a machine at will, driving it
hard, and returning it with an empty gas tank, all
because headquarters was responsible for maintenance
and replacement costs. Our benchmark data indicated
that this company’s expenses were far higher than those
of independent farms. We worked with corporate and
farm management to develop a new business model,
centered on turning each farm into an independent
business. For this to happen, farm managers needed new
information — specifically, individual farm P&Ls that
reflected, among many other things, the cost of the
equipment they used. The redesigned organization exe-
cuted more efficiently, as reflected in a 48 percent jump
in its imputed share price in the first year.
Better information flows did more than keep costs
down; they helped allocate scarce resources far more effi-
ciently than before. The company had a silo problem —
literally and figuratively. Any field ready for harvest had
a peak yield window of about 15 days. But there was
only so much mill capacity during the peak window.
Coordinating and timing the harvesting and milling
activities fell to a hapless employee at headquarters, a
central planner who relied on historical data that didn’t
reveal much about current conditions.
We showed in a simulation that if farm managers
could bid for use of the mill on particular dates, it would
strikingly improve the company’s efficiency. If a man-
ager saw that his highest-yielding acreage was ready to
harvest and couldn’t wait because rain was predicted, he
could bid more for mill time. No longer would someone
back at headquarters have to hunker down with a
spreadsheet, making educated guesses based on the pre-
vious year’s yield data and taking frantic phone calls
from farm managers. Market-based pricing of mill time
would allocate scarce resources better than a central
planner could. And with this new system, decisions
would reflect the real-time knowledge of the farmer in
the field observing the sky, testing the ripeness of the
crop, hour by hour, acre by acre.
Adaptive DNA
Although we have illustrated the four bases of organiza-
tional DNA separately to emphasize their distinct char-
acteristics, they clearly are intertwined. Changing struc-
ture requires changing decision rights; to make effective
decisions, employees need new incentives and different
information. At the agricultural grower and processor,
the new structure touched each of these elements — the
individual farm as a business required new decision
authority for farm managers, new metrics by which to
measure their performance, and new rewards based on
their individual success. This interdependency is evident
in all of these company stories.
Considering — and changing — a company’s
DNA holistically means weaving intelligence, decision-
making capabilities, and a collective focus on common
goals widely and deeply into the fabric of the organiza-
tion so that each person and unit is working smartly —
and working together. It’s one thing to achieve well-
coordinated intelligence among senior executives. It’s
another thing entirely to touch every level of an organi-
zation all the way down to the loading dock. What every
employee does every day, aggregated across the com-
pany, constitutes performance.
The best organizational designs are adaptive, are
self-correcting, and become more robust over time. But
creating such an organization doesn’t happen quickly; it
can take several years to get the basics right, and there is
always a need for fine-tuning. This may explain why
leaders of companies that are truly ailing — and who
need to reassure shareholders as fast as they can — often
management
don’t have the patience for changing decision rights,
motivators, and information flows. They’re more likely
to cut the structure and see what happens than to take
time to ensure that structural changes actually result in
sustained productivity improvements and steady gains
in shareholder value. But neglecting this hard work may
also partly explain why some of these CEOs are no
longer in charge.
No company may ever totally master the enigma of
execution. But the most resilient and consistently suc-
cessful ones have discovered that the devil is in the
details of organization. For them, organizing to execute
has truly become a competitive edge. +
Reprint No. 03406
55
Resources
Jeffrey W. Bennett, Thomas E. Pernsteiner, Paul F. Kocourek, and Steven
B. Hedlund, “The Organization vs. the Strategy: Solving the Alignment
Paradox,” s+b, Fourth Quarter 2000, www.strategy-business.com/
press/article/14114.
Michael C. Jensen, Foundations of Organizational Strategy (Harvard
University Press, 1998).
Paul F. Kocourek, Steven Y. Chung, and Matthew G. McKenna,
“Strategic Rollups: Overhauling the Multi-Merger Machine,” s+b, Second
Quarter 2000, www.strategy-business.com/press/article/16858.
Chuck Lucier, Rob Schuyt, and Eric Spiegel, “CEO Succession 2002:
Deliver or Depart,” s+b, Summer 2003, www.strategy-business.com/
press/article/21700.
Gary Neilson, David Kletter, and John Jones, “Treating the Troubled
Corporation,” s+b enews, 03/28/03, www.strategy-business.com/press/
enewsarticle/22230.
Randall Rothenberg, “Larry Bossidy: The Thought Leader Interview,” s+b,
Third Quarter 2002, www.strategy-business.com/press/article/20642.
 BY MARSHALL GOLDSMITH AND HOWARD MORGAN
Leadership
Is a Contact
management
Sport
56
Leadership is not just for leaders anymore. Top
companies are beginning to understand that sustaining
peak performance requires a firm-wide commitment to
developing leaders that is tightly aligned to organiza-
tional objectives — a commitment much easier to
understand than to achieve. Organizations must find
ways to cascade leadership from senior management to
men and women at all levels. As retired Harvard
Business School professor John P. Kotter eloquently
noted in a previous issue of strategy+business, this ulti-
mately means we must “create 100 million new leaders”
throughout our society. (See “Leading Witnesses,” s+b,
Summer 2004.)
Organizational experts Paul Hersey and Kenneth
Blanchard have defined leadership as “working with and
through others to achieve objectives.” Many companies
The “Follow-up Factor” in
Management Development
are stepping up to the challenge of leadership develop-
ment and their results are quite tangible. In Leading the
Way: Three Truths from the Top Companies for Leaders
(John Wiley & Sons, 2004), a study of the top 20 com-
panies for leadership development, Marc Effron and
Robert Gandossy show that companies that excel at
developing leaders tend to achieve higher long-term
Illustration by Robert Goldstrom
profitability.
But it sometimes seems there are as many approach-
es to leadership development as there are leadership
developers. One increasingly popular tool for developing
leaders is executive coaching. Hay Group, a human
resources consultancy, reported that half of 150 compa-
nies surveyed in 2002 said that they had increased their
use of executive coaching, and 16 percent reported using
coaches for the first time.
management
57
 Marshall Goldsmith
marshall@
marshallgoldsmith.com
is a founder of Marshall
Goldsmith Partners, a leader-
ship coaching network. He
has worked with more than
70 major CEOs and their
management teams and is the
author or coauthor of many
books on leadership and
coaching, including Mojo:
How to Get It, How to Keep It,
How to Get It Back if You Lose
It (with Mark Reiter; Hyperion,
2009).
Howard Morgan Originally published Fall 2004.
howard@howardjmorgan.com
is the founder of 50 Top
Coaches, a collective of many
of the world’s leading execu-
tive advisors. He specializes in
executive coaching as a strate-
gic change-management tool.
He is co-editor of The Art and
Practice of Leadership
Coaching: 50 Top Executive
Coaches Reveal Their Secrets
(John Wiley & Sons, 2004).

Yet even “executive coaching” is a broad category. In duration versus long duration, internal coaches versus
reviewing a spate of books on coaching in 2003, Des external coaches, and traditional classroom-based train-
management

Dearlove and Stuart Crainer identified at least three
types of coaching: behavioral change coaching, personal
productivity coaching, and “energy coaching.” (See “My
Coach and I,” s+b, Summer 2003.) Our own book, The
Art and Practice of Leadership Coaching: 50 Top Executive
Coaches Reveal Their Secrets (with Phil Harkins; John
Wiley & Sons, 2004), includes discussions about five
types of leadership coaching: strategic, organizational
change/execution, leadership development, personal/life
planning, and behavioral.
Given the increasingly competitive economic envi-
ronment and the significant human and financial capi-
tal expended on leadership development, it is not only
fair but necessary for those charged with running com-
panies to ask, “Does any of this work? And if so, how?”
58
What type of developmental activities will have the
greatest impact on increasing executives’ effectiveness?
How can leaders achieve positive long-term changes in
behavior? With admitted self-interest — our work was
described in the Crainer–Dearlove article, and is fre-
quently cited in reviews of and articles about leadership
coaching — we wanted to see if there were consistent
principles of success underlying these different
ing versus on-the-job interaction.
Rather than just evaluating “participant happiness”
at the end of a program, each of the eight companies
measured the participants’ perceived increase in leader-
ship effectiveness over time. “Increased effectiveness”
was not determined by the participants in the develop-
ment effort; it was assessed by preselected co-workers
and stakeholders.
Time and again, one variable emerged as central to
the achievement of positive long-term change: the par-
ticipants’ ongoing interaction and follow-up with col-
leagues. Leaders who discussed their own improvement
priorities with their co-workers, and then regularly fol-
lowed up with these co-workers, showed striking
improvement. Leaders who did not have ongoing dia-
logue with colleagues showed improvement that barely
exceeded random chance. This was true whether the
leader had an external coach, an internal coach, or no
coach. It was also true whether the participants went to
a training program for five days, went for one day, or did
not attend a training program at all.
The development of leaders, we have concluded, is
a contact sport.
strategy + business special issue, autumn 2010

approaches to leadership development.

We reviewed leadership development programs in
eight major corporations. Although all eight companies
had the same overarching goals — to determine the
desired behaviors for leaders in their organizations and
to help leaders increase their effectiveness by better
aligning actual practices with these desired behaviors —
they used different leadership development methodolo-
gies: off-site training versus on-site coaching, short
Eight Approaches
The eight companies whose leadership development
programs we studied were drawn from our own roster of
clients over a 16-year period. Although all are large cor-
porations, each company is in a different sector and each
faces very different competitive pressures.
Each company customized its leadership develop-
ment approach to its specific needs. Five of the eight
focused on the development of high-potential leaders,
and between 73 and 354 participants were involved in
their programs. The three other companies included
almost all managers (above midlevel), and involved
between 1,528 and 6,748 managers. The degree of inter-
national representation varied among organizations. At
two companies, almost all of the participants were
American. Non-U.S. executives made up almost half of
the participants in one company’s program. The other
five had varying levels of international participation.
Some of the companies used traditional classroom-
based training in their development effort. In each of
these companies, participants would attend an off-site
program and receive instruction on what the desired
characteristics were for leaders in their organization, why
these characteristics were important, and how partici-
pants might better align their own leadership behavior
with the desired model. Some companies, by contrast,
used continuing coaching, a methodology that did not
necessarily involve off-site training, but did rely on reg-
ular interaction with a personal coach. Some companies
used both off-site training and coaching.
Along with differences, there were commonalities
among the programs. Each company had spent exten-
sive time reviewing the challenges it believed its leaders
would uniquely face as its business evolved. Each had
developed a profile of desired leadership behaviors that
had been approved by upper management. After ensur-
ing that these desired leadership behaviors were aligned
with the company vision and values, each company
developed a 360-degree feedback process to help leaders
understand the extent to which their own behavior (as
perceived by co-workers) matched the desired behavior
for leaders in the corporation. All eight placed a set of
expectations upon participants. The developing leaders
were expected to:
management
• Review their 360-degree feedback with an inter-
nal or external consultant.
• Identify one to three areas for improvement.
• Discuss their areas for improvement with key
co-workers.
• Ask colleagues for suggestions on how to increase
effectiveness in selected areas for change.
• Follow up with co-workers to get ideas for
improvement.
• Have co-worker respondents complete a confi-
dential custom-designed “mini-survey” three to 15
months after the start of their program.
Each participant received mini-survey summary
feedback from three to 16 co-workers. Colleagues were
asked to rate the participants’ increased effectiveness in
59
the specific selected behaviors as well as participants’
overall increase (or decrease) in leadership effectiveness.
Co-workers were also asked to measure the degree of
follow-up they had with the participant. In total, we col-
lected more than 86,000 mini-survey responses for the
11,480 managers who participated in leadership
development activities. This huge database gave us the
opportunity to explore the points of commonality and
distinction among these eight very different leadership
development efforts.
Three of the organizations permitted their names to
be used in articles or conference presentations, enabling
us to reference them in this report; the rest have request-
ed anonymity, although we are able to describe their sec-
tor and activities. Two of the organizations also have
allowed their results to be published elsewhere, without
disclosure of the organization’s name. The companies
 whose programs we studied were:
• An aerospace/defense contractor: 1,528 managers
management
(ranging from midlevel to the CEO and his team)
received training for two and a half days. Each person
reviewed his or her 360-degree feedback in person with
an outside consultant. All received at least three
reminder notes to help ensure that they would follow up
with their co-workers.
• A financial-services organization: At GE Capital,
178 high-potential managers received training that last-
ed five days. Each leader was assigned a personal human
resources coach from inside the company. Each coach
had one-on-one sessions with his or her client on an
ongoing basis (either in person or by phone).
• An electronics manufacturer: 258 upper-level
managers received in-person coaching from an external
coach. They did not attend an off-site training program.
60
They were then each assigned an internal coach who had
been trained in effective coaching skills. This coach fol-
lowed up with the managers every three to four months.
• A diversified services company: 6,748 managers
(ranging from midlevel to the CEO and his team)
received one-on-one feedback from an external coach
during two training programs, each two and a half days
long, which were conducted 15 months apart. Although
there was no formal follow-up provided by the coach,
participants knew they were going to be measured on
their follow-up efforts.
• A media company: 354 managers (including the
CEO and his team) received one-on-one coaching and
feedback during a one-day program. An external coach
provided follow-up coaching every three to four
months.
• A telecommunications company: 281 managers
(including the CEO and his team) received training
for one day. Each leader was given an external coach,
who had continuing one-on-one sessions with his or
her client.
• A pharmaceutical/healthcare organization: John-
son & Johnson involved 2,060 executives and managers,
starting with the CEO and his team, in one and a half
days of leadership training. Each person reviewed his or
her initial 360-degree feedback with an outside consult-
ant (almost all by phone). Participants received at least
three reminder notes to help ensure that they would fol-
low up with their co-workers.
• A high-tech manufacturing company: At Agilent
Technologies Inc., 73 high-potential leaders received
coaching for one year from an external coach, an effort
unconnected to any training program. Each coach had
one-on-one sessions with his or her client on an ongoing
basis, either in person or by phone.
Personal Touch
The overarching conclusion distilled from the surveys in
all the programs was that personal contact mattered —
and mattered greatly.
Five of the corporations used the same measure-
ment methodologies, while three used a slightly dif-
strategy + business special issue, autumn 2010
ferent approach. All eight companies measured the
frequency of managers’ discussions and follow-up with
co-workers and compared this measure with the per-
ceived increase in leadership effectiveness, as judged by
co-workers in the mini-surveys. The first five firms —
the aerospace/defense contractor, GE Capital, the elec-
tronics manufacturer, the diversified services company,
and the media company — used a seven-point scale,
from –3 to +3, to measure perceived change in leader-
 Leadership is a relationship, not
between the coach and the “coachee,” but
between the leader and the colleague.
ship effectiveness, and a five-point scale to plot the
amount of follow-up, ranging from a low of “no follow-
up” to a high of “consistent or periodic follow-up.”
They then compared the two sets of measurements by
plotting the effectiveness scores and the follow-up tallies
on charts.
The remaining three firms used slightly different
measurement criteria. The telecommunications compa-
ny used a “percentage improvement” scale to measure
perceived increases in leadership effectiveness, as judged
by co-workers. It then compared “percentage improve-
ment” on leadership effectiveness with each level of
follow-up. Johnson & Johnson and Agilent Technol-
ogies measured leadership improvement using the same
seven-point scale employed by the first five companies,
but they did not categorize the degree of follow-up be-
yond the simple “followed up” versus “did not follow up.”
As noted earlier, follow-up here refers to efforts that
leaders make to solicit continuing and updated ideas
for improvement from their co-workers. In the two
companies that compared “followed up” with “did not
follow up,” participants who followed up were viewed
by their colleagues as far more effective than the leaders
who did not. In the companies that measured the degree
of follow-up, leaders who had “frequent” or “periodic/
consistent” interaction with co-workers were reliably
seen as having improved their effectiveness far more
than the leaders who had “little” or “no” interaction with
co-workers.
Exhibit 1 shows the results among the first five
companies, which, despite their different leadership
development programs, used the same measurement
methodology. This apples-to-apples comparison shows
strong correlations across all five companies between the
degree of follow-up and the perceived change in leader-
ship effectiveness.
management
Leadership, it’s clear from this research, is a rela-
tionship. And the most important participants in this
relationship are not the coach and the “coachee.” They
are the leader and the colleague.
Most of the leaders in this study work in knowledge
environments — in companies where the value of the
product or service derives less and less from manufac-
turing scale and, to use Peter Drucker’s formulation,
more and more from the processing and creation of
information to define and solve problems. In discussing
leadership with knowledge workers, Drucker has said,
“The leader of the past was a person who knew how to
tell. The leader of the future will be a person who knows
how to ask.” Our studies show that leaders who regular-
ly ask for input are seen as increasing in effectiveness.
61
Leaders who don’t follow up are not necessarily bad
leaders; they are just not seen as getting better.
Ask and Receive
In a way, our work reinforces a key learning from the
Hawthorne studies. These classic observations of factory
workers at suburban Chicago’s Western Electric
Hawthorne Works, which Harvard professor Elton
Mayo made nearly 80 years ago, showed that productiv-
ity tended to increase when workers perceived leadership
interest and involvement in their work, as evidenced by
purposeful change in the workplace environment. Our
studies show that when co-workers are involved in lead-
ership development, the leaders they are helping tend to
become more effective. Leaders who ask for input and
then follow up to see if progress is being made are seen
as people who care. Co-workers might well infer that
 Exhibit 1: The Impact of Follow-up
management

Combined results from five companies — with very different leadership development programs, but that measured leadership effectiveness the
same way — show how the perceived quality of leaders correlates to the frequency of their follow-up. Follow-up, here, means efforts by leaders
to solicit ideas from their coworkers about their own improvement.

TYPE OF
FOLLOW-UP Distribution of respondents

CONSISTENT

FREQUENT

SOME

A LITTLE

NONE
Much Somewhat Slightly No change Slightly more Somewhat Much
Less Less Less More More

PERCEIVED CHANGE IN LEADERSHIP EFFECTIVENESS

62

leaders who don’t respond to feedback must not care
very much.
Historically, a great deal of leadership development
has focused on the importance of an event. This event
could be a training program, a motivational speech, or
an off-site executive meeting. The experience of the eight
is not understanding the theory of working out; it is
engaging in exercise. As Arnold Schwarzenegger has
said, “Nobody ever got muscles by watching me work
out!” So, too, with leadership development. As Drucker,
Hersey, and Blanchard have pointed out, leadership
involves a reliance on co-workers to achieve objectives.
strategy + business special issue, autumn 2010

companies we studied indicates that real leadership de-
velopment involves a process that occurs over time, not an
inspiration or transformation that occurs in a meeting.
Physical exercise provides a useful analogy. Imagine
having out-of-shape people sit in a room and listen to a
speech on the importance of exercising, then watch
some tapes on how to exercise, and perhaps practice
exercising. Would you ever wonder why these people
were still unfit a year later? The source of physical fitness
Who better than these same co-workers to help the
leader increase effectiveness?
Indeed, the executive coach is, in many ways, like a
personal trainer. The trainer’s role is to “remind” the per-
son being trained to do what he or she knows should be
done. Good personal trainers spend far more time on
execution than on theory. The same seems to be true for
leadership development. Most leaders already know
what to do. They have read the same books and listened
to the same gurus giving the same speeches. Hence, our
core conclusion from this research: For most leaders, the
great challenge is not understanding the practice of leader-
ship: It is practicing their understanding of leadership.
Beyond the basic finding — that follow-up matters
— several other conclusions arise from our research. For
example, the eight-program study indicates that the
follow-up factor correlates with improved leadership effec-
tiveness among both U.S. and non-U.S. executives.
As companies globalize, many executives have
begun to wrestle with issues of cultural differences
among their executives and employees. Recent research
involving high-potential leaders from around the world
has shown that cross-cultural understanding is seen as a
key to effectiveness for the global leader. (See, for exam-
ple, Marshall Goldsmith et al., Global Leadership: The
Next Generation, Financial Times Prentice Hall, 2003.)
Our study addressed this issue as it affects leader-
ship development programs. Nearly 10,000 of the
respondents in the eight companies whose programs we
reviewed — almost 12 percent of our mini-survey sam-
ple — were located outside the United States. We found
that the degree of follow-up was as critical to changing
perceived leadership effectiveness internationally as it
was domestically. This was true for both training and
coaching initiatives.
At Johnson & Johnson, there were almost no dif-
ferences in scores among participants in Europe, Latin
America, and North America. The group seen as
improving the most was in Asia. In analyzing the find-
ings, J&J determined that the higher scores in Asia were
more a function of dedicated local management than of
cultural differences, again supporting the correlation
between a caring, contact-rich leadership and its per-
ceived effectiveness.
That follow-up works globally contravenes assump-
management
tions that different cultures will have differing levels of
receptiveness to intimate conversations about workplace
behaviors. But the universality of the follow-up principle
doesn’t imply universality in its application. Leaders learn
from the people in their own environment, particularly
in a cross-cultural context. Indeed, research by the
Center for Creative Leadership in Greensboro, N.C., has
shown that “encouraging feedback” and “learning from
those around us” are both central to success for leaders in
cross-cultural environments. Companies with successful
leadership development programs encourage executives
to adapt the universal principle of follow-up and the fre-
quency of such conversations to fit the unique require-
ments of the culture in which they working. Despite
other cultural differences, there seems to be no country
63
in the world where co-workers think, “I love it when you
ask me for my feedback and then ignore me.”
Inside and Outside
Interaction between the developing leader and his or her
colleagues is not the sole connection that counts. Also
vital is the contact between the leader and the coach. Our
third major finding concerns that relationship: Both
internal and external coaches can make a positive difference.
One reason coaching can be so effective is that it
may inspire leaders to follow up with their people.
Agilent, for one, found a strong positive correlation
between the number of times the coach followed up
with the client and the number of times the client fol-
lowed up with co-workers.
The coach, however, does not have to be part of the
company. This conclusion was readily apparent when
 we compared the two companies most distinct in the
composition of their coaching corps. Agilent used only
management
external coaches. GE Capital, by contrast, used only
internal coaches from human resources. Yet both
approaches produced very positive long-term increases
in perceived leadership effectiveness.
Given the apparent ease of accessibility to internal
coaches, firms might naturally use this finding to justify
“going inside.” But there are at least three important
variables to consider in determining whether to use an
internal HR coach: time, credibility, and confidentiality.
In many organizations, internal coaches are not
given the time they need for ongoing interaction with
the people they are coaching. In some cases, they may
not seem as credible as trained development experts. In
other cases, especially those that involve human
resources personnel filling multiple roles, there may
64
appear to be a conflict of interest between a profes-
sional’s responsibilities as coach and as evaluator. If these
perceptions exist, then external coaches may well be
preferable to internal coaches.
But internal coaches can overcome these obstacles.
At GE Capital, the internal coaches were HR profes-
sionals who were given time to work with their
“coachees.” Coaching was treated as an important part
of their responsibility to the company and was not seen
as an add-on “if they got around to it.” Moreover, the
coachees were given a choice of internal coaches and
picked coaches they saw as most credible. Finally, each
internal coach worked with a leader in a different part of
the business. They assured their coachees that this
process was for high-potential development, not evalua-
tion. As a result of this thorough screening process,
client satisfaction with internal coaches was high and
results achieved by internal coaches (as judged by co-
workers) were very positive.
Inside or outside, we discovered that the mechanics
of the coach–leader relationship were not a major limit-
ing factor. Our fourth finding was that feedback or
coaching by telephone works about as well as feedback or
coaching in person.
Intuitively, one might believe that feedback or
coaching is a very “personal” activity that is better done
face-to-face than by phone. However, the companies we
reviewed do not support this supposition. One company,
Johnson & Johnson, conducted almost all feedback by
telephone, yet produced “increased effectiveness” scores
almost identical to those of the aerospace/defense organ-
ization, which conducted all feedback in person.
Moreover, all the companies that used only external
coaches similarly found little difference between tele-
phone coaching and live coaching. These companies
made sure that each coach had at least two one-on-one
meetings with individual executive clients. Some coaches
did this in person, whereas others interacted mostly by
phone. There was no clear indication that either method
of coaching was more effective than the other.
Although sophisticated systems — involving some
combination of e-mail, intranets, extranets, and mobile
strategy + business special issue, autumn 2010
connectivity — are available, follow-up needn’t be
expensive. Internal coaches can make follow-up tele-
phone calls. New computerized systems can send
“reminder notes” and give ongoing suggestions.
However it’s done, follow-up is the sine qua non of effec-
tive leadership development. Too many companies
spend millions of dollars for the “program of the year”
but almost nothing on follow-up and reinforcement.
Companies should also take care to measure the
 Continual contact with colleagues
is so effective it can succeed even
without a formal program.
effectiveness of their leadership development initiatives,
and not just the employees’ satisfaction with them. Our
results indicate that when participants know that surveys
or other methods of measuring program effectiveness are
slated to occur three to 15 months from the date of the
program, a higher level of commitment is created
among them. This follow-up measurement creates a
focus on long-term change and personal accountability.
Although measuring outcomes would seem to be
second nature for most companies, the success of lead-
ership development programs has conventionally been
assessed through the satisfaction of the participants. This
metric is of limited relevance. Among the companies in
our study that offered leadership development training,
virtually all participants came away highly satisfied. At
the aerospace/defense contractor and Johnson &
Johnson, the average satisfaction rating among more
than 3,500 participants was 4.7 out of a possible 5.0.
Executives loved the training, but that didn’t mean they
used the training or improved because of it.
Learning to Learn
Of even greater import is this: Continual contact with
colleagues regarding development issues is so effective it
can succeed even without a large, formal program.
Agilent, for example, produced excellent results, even
though its leaders received coaching that was completely
disconnected from any training. In fact, leaders who do
not have coaches can be coached broadly by their co-
workers. The key to changing behavior is “learning to
learn” from those around us, and then modifying
our behavior on the basis of their suggestions. The
aerospace/defense contractor and the telecommunica-
tions company used very streamlined and efficient train-
ing processes and “reminder notes” to help leaders
achieve a positive long-term change in effectiveness,
management
without using coaches at all.
If the organization can teach the leader to reach out
to co-workers, to listen and learn, and to focus on
continuous development, both the leader and the organ-
ization will benefit. After all, by following up with col-
leagues, a leader demonstrates a commitment to self-
improvement — and a determination to get better. This
process does not have to take a lot of time or money.
There’s something far more valuable: contact. +
Reprint No. 04307
Resources
Diane Anderson, Brian Underhill, and Robert Silva, “The Agilent APEX
Case Study,” in Best Practices in Leadership Development — 2004, edited
by Dave Ulrich, Louis Carter, and Marshall Goldsmith (Best Practices 65
Publications, 2004).
Des Dearlove and Stuart Crainer, “My Coach and I,” s+b, Summer 2003,
www.strategy-business.com/press/article/22062.
Marshall Goldsmith, “Ask, Learn, Follow Up, and Grow,” in The Leader
of the Future: New Visions, Strategies, and Practices for the Next Era, edited
by Frances Hesselbein, Marshall Goldsmith, and Richard Beckhard (Peter
Drucker Foundation and Jossey-Bass, 1996).
Marshall Goldsmith et al., Global Leadership: The Next Generation
(Financial Times Prentice Hall, 2003).
Linda Sharkey, “Leveraging HR: How to Develop Leaders in Real Time,”
in Human Resources in the 21st Century, edited by Marc Effron, Robert
Gandossy, and Marshall Goldsmith (John Wiley & Sons, 2003).
Elizabeth Thach, “The Impact of Executive Coaching and 360 Feedback
on Leadership Effectiveness,” Leadership & Organization Development
Journal, vol. 23, no. 4, 2002; http://fiordiliji.emeraldinsight.com/
vl=2762214/cl=12/nw=1/rpsv/lodj.htm.
For more thought leadership on this topic, see the s+b website at:
www.strategy-business.com/strategy_and_leadership.
 BY KAJ GRICHNIK, CONRAD WINKLER, AND PETER VON HOCHBERG
Instead of drifting into
decline and irrelevance,
producers of goods have
a chance to seize the future.
Myopia
MANUFACTURING
management
66
During the past few decades, many industrial
companies have attempted to achieve manufacturing
excellence. They have had at their disposal any number
of methodologies and theories, quality initiatives, and
cost-reducing concepts. But few companies have made
much headway. Manufacturing strategies — decisions
related to siting, designing, and running factories — are
often the same as they were 10 or 20 years ago. Plants
often look and feel as they did then. Programs intended
to improve performance, such as “total quality manage-
ment,” “lean production,” and “Six Sigma,” seem to ebb
away, without producing the desired results. Sometimes
it seems as though the harder manufacturers try to
improve, the worse they perform.
Consider, for example, the bad news from the
Middle East that hit Household GmbH, a Europe-
based consumer goods manufacturer, in 2003. (The
company name is changed, but the details are accurate.)
Household’s market share in hygiene products, one of
its flagship divisions, had recently tumbled in such cities
as Cairo and Abu Dhabi. When Household’s regional
managers investigated, they discovered that a private-
label producer based in Egypt had begun to aggressively
undercut the shelf price of Household’s products.
Illustration by Peter Krämer
At first glance, it seemed as if Household could eas-
ily win a price war with any local private label. After all,
Household’s Middle Eastern manufacturing sites were
running at higher capacity than the competition’s sites,
with advanced proprietary technology and a highly pro-
ductive, well-trained staff. But the private-label manu-
facturer refused to go away, and its prices remained low
while its market share kept rising.
management
67
 Kaj Grichnik
kaj.grichnik@booz.com
is a partner with Booz &
Company based in Paris and
a leader of research and
practice in manufacturing.
He focuses on the pharma-
ceutical, food, aerospace,
and automotive industries.
Conrad Winkler
conrad.winkler@booz.com
is a partner with Booz &
Company based in Chicago. He
advises companies across
industries on supply chain
management improvement
and manufacturing strategies,
with a focus on the automotive
and aerospace sectors.
Peter von Hochberg
peter.vonhochberg@booz.com
is a partner with Booz &
Company based in Düsseldorf.
He has extensive experience
in consulting with clients on
manufacturing and lean
production, focusing on
automotive OEMs and
suppliers, and industrial
goods manufacturers.
Also contributing to this article
were John Potter, a Booz &
Company partner based in
London, and Georgina Grenon,
a former Booz & Company
senior associate.
Originally published Spring
2006.

Household’s managers had assumed that their com- ous in manufacturing than it was in marketing four
petitor was selling under cost. But gradually it became decades ago. Like marketing myopia, manufacturing
management

clear that despite Household’s scale and technological
edge, the competitor spent less to make most hygiene
products, without any sacrifice in quality — at least as
perceived by customers. In short, Household’s ostensible
manufacturing advantage — its distinctive technology
— had become its biggest disadvantage. To make mat-
ters worse, Household had nearly completed a new fac-
tory in Ukraine, which had been intended, in part, to
add capacity to serve the Mideast, but which now would
simply add to Household’s manufacturing costs.
There are many such stories in manufacturing
today. Executives do all the right things to improve oper-
ations, but somehow get outperformed on cost, quality,
or delivery. They may turn to benchmarking exercises,
but those are rarely meaningful. Low-cost competitors
68
appear with prices that can’t be completely explained by
lower wages. Rising warranty costs or dramatic product
recall levels indicate the ongoing erosion of quality.
As a last resort, companies outsource production,
and thus erode their own company’s competence in it.
Gradually, manufacturing is treated more and more as an
outcast, and plant communities become disenfranchised.
We call this condition “manufacturing myopia.” It
myopia is caused by isolation; it is the inevitable out-
come of keeping manufacturing strategies contained to
the functional or even plant level, with little or no con-
nection to enterprise-wide strategies. As the factories
and supply chain oversight functions are cut off from
the rest of the executive decision makers, the manufac-
turing focus grows narrower, and overall competence can
atrophy. This compels companies to cut costs even more
blindly and irresponsibly, often by setting company-
wide targets determined by financial fiat rather than by
competitive or customer insights. (See Exhibit 1.)
Building Awareness
Surprisingly few major multinational or large-scale man-
ufacturing companies have been able to break free of this
trap. Household GmbH was one of them. The Middle
East episode prodded its senior executives into a multi-
year, systematic endeavor to rethink the company’s oper-
ations and to glean and use better information about its
manufacturing costs. Today, rather than a few state-of-
the-art plants, Household operates a variety of plants that
are designed for flexibility and can be moved or revamped
as customer needs and the competitive climate change.
strategy + business special issue, autumn 2010

is akin to the “marketing myopia” that Harvard Business
School lecturer Theodore Levitt identified in the 1960s.
Levitt argued that companies made themselves vulnera-
ble when they defined their brands too narrowly.
Railroads are not in the passenger-train business, he
argued; they’re in transportation. Every business should
define itself through the interests of its market, not its
own production priorities.
Today, myopia is even more prevalent and danger-
The cure for manufacturing myopia is 20/20 vision
— that is, the cultivation of awareness about manufac-
turing costs and means. Companies can sharpen their
own ability, as Household did, to see their operations
more clearly and redesign them more flexibly. For com-
panies that achieve this kind of manufacturing prowess,
the manufacturing function is no longer seen primarily
as a cost center, ripe for cutbacks or outsourcing. Instead,
the ability to produce higher-quality goods at lower
prices in a more flexible manner is a key component of
their long-term competitive strategy and a central,
dependable part of their identity.
This involves two major commitments: first, dedi-
cation of resources to building awareness. Leaders can
peel back the layers of their own manufacturing opera-
tions and those of their competitors so that processes,
advantages, and disadvantages can be viewed more
clearly. This means becoming more aware of a com-
pany’s unique technological capabilities, the unfulfilled
potentials of each plant (for reaching the appropriate
markets), and the specific drivers responsible for their
costs. Many manufacturers look at cost data primarily
as justification and leverage for continually trimming
expenses, rather than as a source of insights about scale,
capital spending, labor deployment, technology, logis-
tics, and supply chain efficiency — all critical factors in
manufacturing competence, widely admired for many
years, stems in large part from the company’s insistence
on building fine-grained awareness of every facet of pro-
duction, at all levels of the company.
The second commitment is patience, demonstrated
by investing the time and resources to address manufac-
turing productivity as a long-term, organization-wide
strategic imperative and not as an isolated operational or
functional issue. Plant managers are often expected to
show the same fast pace of change as marketing, finance,
and procurement, where six- to 18-month transforma-
tions are feasible. But those metrics don’t apply to man-
ufacturing efforts, where improving results requires a
very different set of time frames. A new manufacturing
program frequently involves motivating, as well as hiring
or moving, thousands of employees; new construction;
new technology deployment; and perhaps the closing of

management
measuring how well a company’s manufacturing a plant or two, which takes years rather than months.
processes stack up against the competition. Toyota’s That time is well invested if it is used to develop an

Exhibit 1: The Anatomy of a Manufacturer’s Dilemma

Companies facing manufacturing pressure can seek to solve the problem in one of two ways: cost reduction, mandated from the top, or strategic
realignment of manufacturing resources. This diagram shows four possible decisions as they play out in the manufacturing system and the
real-world results they produce.

Who chooses the cost What guides the What are the
reductions? decision? results?

Option #1 Consultation with local 2%–4% cost reduction;

team, perhaps with evolutionary changes;
Locally controlled:
shop floor workers. no strategic shift in
Plant reduction targets
process or product.
are voluntary.

“We need 10% cost Option #2 69

reduction across all Targets considered
plants.” Company-wide rules unfair; plants object.
and uniform reduction Excuses, “passive-
Centrally controlled: targets are applied to aggressive” resistance.
Top executives and all plants. No strategic shift in
central staff establish
process or product.
the process for a 10%
cost reduction.
Option #3
KPIs do not reflect
Reduction is based leverage in reducing
on selected key product complexity or
performance indicators, designing cross-plant
Option #4 or KPIs (such local strategies. Few
Top executives and metrics as costs, etc.). long-term gains. No
“We need a
manufacturing strategic shift in
comprehensive
managers look at the process or product.
manufacturing
constellation of plants Cost data (shows
strategy.”
and priorities opportunities and
together. limitations in the Strategic changes
system), strategic (probably) lead to cost,
objectives, competitive quality, speed, and
position. service advantages.
 A manufacturer of air conditioning
supplies built its factories on freighter ships
that can be moved from port to port as the
seasonal marketplace changes.
effective, flexible manufacturing capability, unique to
the business and its customers, as a platform for more
management
rapid change once it is established.
How does one go about building this kind of aware-
ness? At most companies, there are four dimensions of
manufacturing in which highly visible data and analysis,
projected farther into the future, can yield both short-
term gains and long-term advantage: technological
distinctiveness, network sophistication, in-plant trans-
formation, and labor modernization.
Technological Distinctiveness
One of the first places to eliminate myopia is in the
design, engineering, or purchasing of manufacturing
technology. (We call this the “inherent” dimension of
manufacturing, because it involves the physical nature of
the products and the processes that create them.) There
70
is a staggering level of underinvestment in business
process innovation as compared with product innova-
tion. In 2004, according to Booz & Company analysis,
only 10.2 percent of the R&D budgets at the top 500
industrial companies was set aside for process innova-
tion, down from 15 percent in 1980. Because they’ve
neglected this essential activity, manufacturers tend to
rely on machine builders and other vendors to fill in the
gap. In most cases, this is counterproductive. Equip-
ment manufacturers do not generally have a strong track
record for innovation, particularly for the kinds of cre-
ative and customized solutions that would enable indi-
vidual companies to overcome their manufacturing
shortcomings. And even when equipment providers are
innovators, their technology is unlikely to give manufac-
turers a competitive edge, because it generally can be
freely purchased by any of their rivals.
Moreover, in many organizations, there is little
patience for process innovation, which in manufactur-
ing is by its very nature a long-term event. After the pro-
duction technology is replaced, it could take two to
three years before the capital investment bears fruit in
the semiconductor sector, five years in major manufac-
turing, and as much as 20 years in process industries,
such as petrochemicals and electricity production.
Additionally, to improve processes, companies have to
train entire plant communities in dozens of different
tools and techniques and completely different ways of
working. All of that consumes time and resources.
Some extremely successful manufacturers, such as
packaging giant Tetra Pak, Procter & Gamble, and
Toyota, have bucked the trend and used in-house
machine development and internal process innovation
to protect their competitive advantages. P&G has long
been a pioneer of novel factory floor environments; for
example, letting shop floor employees not just lay out
the flow of machinery but design the machines them-
selves. This approach began at P&G in the early 1960s
and has developed in scope, efficiency, and sophistica-
tion ever since. In one celebrated example at a P&G
plant in Lima, Ohio, a team of shop floor “technicians,”
as hourly workers were called, designed a machine for
strategy + business special issue, autumn 2010
placing detergent bottles into position on the assembly
line — a mechanical feat that P&G’s professional engi-
neers had said was impossible. The team commissioned
a machine-tool supplier to produce the device, and put
it successfully into operation.
But for every P&G, there are dozens of companies
faced with an equivalent to Household’s dilemma in the
Middle East: Their state-of-the-art factories, more capa-
ble than those of competitors on a worldwide basis, are
not flexible enough to respond to local conditions.
Sometimes, a promising process innovation effort is
disbanded because top management changes or because
the sponsoring executives lose interest, even though they
have known all along about the nature of the investment
they’ve been making. As a result, outmoded technologi-
cal principles may endure for 30 or 40 years while the
company cycles through a series of half-realized quality-
improvement or plant-restructuring initiatives. Other
times, process innovation is consigned to the plant level
only. When approached in this way, companies become
little more than multiple small organizations with no
scale, unable to harness process technology as a compet-
itive advantage.
Myopia also afflicts efforts to modify existing man-
ufacturing processes. For example, there has been a lot
of excitement in the last 15 years about design for man-
ufacturing (DFM), an approach by which companies
engineer products not just for their intrinsic qualities
but also for how efficiently they can be manufactured.
But despite the allure of DFM, the relationship between
engineering and manufacturing groups at most compa-
nies is chilly or nonexistent. The shop floor community
is often excluded from direct communication about
the manufacturability of products with the engineering/
design function. Even if the two groups are allowed to
communicate, manufacturing companies may not have
the budget to cover the engineers’ internal rates and
therefore may lose contact.
Network Sophistication
Most companies organize their production and supply
operations on a project-by-project basis. As market
conditions change, they move plants from Detroit to
Mexico, and a few years later they shift subassembly to
Asia. They do not envision their manufacturing system
management
for what it must be: A global, flexible supply chain net-
work that can be reconfigured anywhere in the world as
market conditions change. (We think of this dimension
as “structural,” because it involves such infrastructure-
oriented features as the location and size of plants and
the supply chain flow among them.)
Companies that realize this and design their plants
accordingly gain a tremendous time advantage. It can
take two years to close down a factory — and that’s typ-
ically after several years of wavering over the decision to
shutter it in the first place. It is far better to design the
configuration of individual plants so that it is easy to
enlarge, shrink, or reconfigure them based on the busi-
ness landscape. Then fewer factories ever have to be
abandoned and the manufacturing network needn’t be
71
completely overhauled. There’s also an expense advan-
tage as the one-time cost penalty of moving plants from
one place to another is reduced.
This approach, known as flexible footprints, is prac-
ticed with great success by a few dozen large organiza-
tions — among them, the U.S. Army, which constantly
and proactively reassigns military bases to fresh uses. In
an extremely novel implementation, a European manu-
facturer of specialized air conditioning supplies built its
factories on large freighter ships that can be moved from
port to port as the seasonal marketplace changes. The
company chooses not to broadcast this manufacturing
innovation publicly, perceiving it as a competitive
advantage. A Qatari company, Cement International,
has recently begun similar operations, putting a cement
factory onboard a ship that docks in ports around the
Persian Gulf, wherever building materials are needed.
 The Roots of said, it would help if sales provided
reliable forecasts “and didn’t ask us
Myopia for last-minute changes for important
clients.” And finance would be less of
a hindrance if the CFO would finally
approve funding for new machines to
unsustainable status quo of rising
fixed costs and a widening gap
between projected and actual profits.
Manufacturing companies are usu-
ally not set up with the kinds of incen-
tives and decision rights that would

H ow did manufacturing myopia

become so prevalent? There
are several roots. Probably most per-
nicious was the separation of manu-
facturing, marketing, and finance in
corporate structures that date back to
the mid-20th century. “Turf wars”
often unconsciously reinforce those
divisions, particularly when the stakes
are high.
management
simplify operational bottlenecks.
The company’s vice president of
sales responded that manufacturing
needed to eliminate its oversized
workforce and sharply curtail labor
costs by shifting more of the produc-
tion to low-cost countries. Only then
could his team sell significantly more.
The vice president of R&D ex-
pressed the opinion that manufactur-
encourage executives to review plant
operations with a full understanding
of the company’s competitive cost
drivers. Consequently, a narrow, self-
interested view of plant performance
tends to prevail, even when everyone
involved has the best interests of the
whole company at heart.
Business education reinforces the
division. Students interested in manu-

Here’s one typical story we recently
encountered in a consumer products
company: The vice president of manu-
facturing stated at a meeting that his
factories could deliver at lower costs,
“but only if R&D can come up with a
better factory blueprint and reduce
the number of product parts.” Also, he
ing still had not managed to suffi-
ciently operate the existing production
technology. “We’re simply not up to
world-class standards,” he said.
Later, the CEO said privately that he
was fed up with all these points of
view. None of them had much to do
with the problem as he saw it: an
facturing are tracked into a “ghetto” in
many business schools; they don’t
share many classes or associate
much with their counterparts in
finance and strategy. Nor do they
expect to cross over to other positions
when they enter the working world.
“Once a plant manager, always a plant

Unfortunately, we observe that there is little coop-
eration among companies within a supply chain to
jointly optimize plant networks, another potentially
lucrative example of flexible footprints. In the outdoor
equipment industry and in basic chemicals, some com-
72
panies have shared parts of their production capacity,
sometimes spinning off manufacturing. But capacity
pooling is a rarity outside those two industries.
In-plant Transformation
It is now more than 30 years since the notion of manu-
facturing excellence — variously attributed to the
Toyota production system, socio-technical systems,
be designed into the factory from the beginning. The
competitive advantage of process optimization remains
high, in part, because of the woefully poor record of the
manufacturing industry in general.
We think of in-plant transformation as “systemic,”
because it takes place when people see the processes on
the shop floor as interrelated parts of a whole system.
Why has this kind of in-plant transformation lagged so
badly, even though its successes are so visible? Manu-
facturing myopia is the primary reason. Typically,
process improvement is seen by company executives as a
“go ahead, just do it” manufacturing issue managed sole-
ly by the plants.
strategy + business special issue, autumn 2010

quality management, lean manufacturing, and high-
performance systems — became widely known in
Europe and the United States. By now, practically every
manufacturing manager can tell you about pokayoke,
kanban, or self-steering teams. But plants that have suc-
cessfully implemented the manufacturing practices that
produce efficient and optimal operations are few and far
between. And most of these are greenfield sites: previ-
ously undeveloped locations where elite processes could
This isolation contributes to the lack of patience
among decision makers, who feel pressured to show
results before the systemic change is ready. By contrast,
a well-designed manufacturing change initiative is delib-
erately set up like a developmental path, with a menu of
results expected in the short term, medium term, and
long term. Some systemic drivers can have an effect on
costs almost instantly (e.g., changing maintenance con-
tractor purchasing procedures); some take a bit longer
manager,” people say. Manufacturing
functions consequently suffer in the
“war for talent”; they recruit from a
smaller pool. The result is often an
unnecessary tension between manu-
facturing and finance; manufacturing
executives may have far more contact
with, and feel more loyalty to, employ-
ees than shareholders. And finance
executives may not appreciate the
strategic importance of manufacturing
talent, particularly on the shop floor.
This tendency was exacerbated
during the service boom of the 1990s,
when it became fashionable to assert
that mere manufacturing was not
Sunbeam. After being acquired by
Allegheny International in the early
1980s, the company’s manufacturing
division was “starved of capital to
update its factories and refresh its
product line,” as management writer
John Byrne put it. This ultimately
led the shareholders to appoint cost-
cutting turnaround artist Al Dunlap as
CEO in 1996; manufacturing capacity
suffered even more erosion during
Dunlap’s time as CEO. In his book
Chainsaw: The Notorious Career of Al
Dunlap in the Era of Profit-at-Any-Price
(HarperBusiness, 1999), Byrne de-
scribes how Sunbeam shut down a
with the rest of the enterprise. Toyota
sends manufacturing employees and
managers on sales calls — to areas
including those where their products
have low penetration. ASML, a Dutch
company that is a leading producer of
lithography and semiconductor man-
ufacturing equipment, went from a 10
percent to a 70 percent market share
in its product categories, in part by
bridging this gap. ASML’s head of
manufacturing started as an account-
ant, then led a finance function, and
only then moved into production. This
perspective recently helped the com-
pany reduce lead times and generally

strategically important. Some compa-
nies followed cost-cutting strategies
that downplayed the importance of
their long-standing manufacturing
knowledge, and then found them-
selves needing to rebuild it. This was
one of the key components of the
decline of the American manufacturer
management
high-quality, efficient hair-clipper improve the integration of manufac-
plant in McMinnville, Tenn., and moved turing with other functions.
production to a chaotic, money-losing, —K.G., C.W., and P.V.H.
poorly managed new facility near
Mexico City.
To counterbalance all these trends,
some companies now make deliber-
ate efforts to integrate manufacturing

(e.g., installing “pull” systems, in which the production
line sets its own pace, to replace the top-down controls
of a manufacturing resource planning approach). Even
in full-scale manufacturing transformation initiatives, it
should not take more than two years for the first visible
effects to appear. The leaders of many manufacturing
projects stop paying attention after that. But in a well-
designed initiative, those first results become a base for
continuous improvement.
In a so-called brownfield site (an established factory
with a long-standing workforce), one may often find
high fixed costs or blatant overstaffing. Installing “intel-
ligent tools,” “lean solutions,” or “high-performance sys-
tems” will not solve these problems. If there are already
more workers than work to do, improving production
speed or throughput will not lead to higher levels of pro-
ductivity, in part because overcapacity breeds “process
creep,” in which workers and managers merely overlay
the new work rules and practices on top of their old rou-
tines. Despite knowing this, all too often, manufacturers
myopically push a “lean” program through plants that
are overstaffed and have a high share of non-value-added
work. We call this the fat ballerina syndrome: Only
slimmed-down organizations stand a chance of perform-
ing smart moves.
Companies also are often greedy or formulaic when
it comes to assigning improvement objectives to plants.
73
It’s not atypical for a factory manager to be told to save
10 percent of fixed costs, while improving output and
quality by 20 percent. Often a basic analysis will reveal
that enhancing a plant’s productivity dwarfs the value
of firing a group of maintenance technicians and engi-
neers, and more importantly that increasing productiv-
ity and cutting personnel are not mutually compatible
objectives. For one thing, plant communities often resist
cooperating with management to alter their work
methods and increase output while their colleagues are
being let go.
Labor Modernization
Let’s face it: In most plants, industrial relations and
treatment of the workforce are reminiscent of the 19th
century. This statistic illustrates the point: From 1999
to 2004, there were more strikes in most western
 European countries than occurred between 1950 and
1975. In one German aerospace plant, where three gen-
management
erations have worked on the shop floor, absenteeism and
illness rates have risen a steady 3 percent per generation.
Overall, Western companies made few strides in align-
ing factory workers more closely to the companies that
employ them. Only 20 percent of production workers in
western Europe and the U.S. receive compensation
linked to performance, and more than 75 percent work
under a compensation system that is so rigid it uninten-
tionally drives people to take overtime.
We use the term realized because the modernization
of a labor force takes place only in the real-world dimen-
sion of the community around each manufacturing
location. The principles of effective workforce manage-
ment are universal: The improvement of labor practices
and customization of human resource policies are essen-
74
tial to developing creative, innovative, and motivated
employees. But the most appropriate methods for
accomplishing those things are decidedly local. Labor
issues vary significantly from one place to another.
Workforces in different locales have their own particular
cultures, holidays, workdays, family structures, commu-
nity resources, demographics, education levels, and as-
sumptions about the type of work they will do. Pro-
ductivity can also deviate dramatically among regions.
Over the years, effective manufacturers have exper-
imented with a wide variety of means for engaging shop
floor employees. Some companies establish worker-
focused principles. At one Dutch chemical company,
the budget line for work space and plant maintenance
and modernization was sacrosanct and could not be cut.
This was important because workers perceived the com-
pany as a reliable protector of their safety. A cosmetics
manufacturer demonstrated the same kind of commit-
ment by installing an on-site health spa, free to employ-
ees. We have seen plants in which windows and skylights
are carefully placed to make the most of natural light,
the architecture fits local styles, and social spaces reflect
the way employees naturally interact.
These types of factories, which fit their social and
physical environment so well, are usually owned by
companies that realize the value of an inspired workforce
to the finished product. Such companies often make
concerted efforts to link employees with more in-depth
knowledge of the company and the product. Danone,
Procter & Gamble, Harley-Davidson, and Mercedes-
Benz are all known for plant communities that take part
in word-of-mouth and face-to-face sales campaigns and
provide testimonials for marketing and public relations
programs. Mercedes, for example, encourages customer-
to-factory interaction by suggesting that car buyers pick
up their new vehicles at, say, the Sindelfingen plant,
where they can talk to plant workers about quality and
other issues pertaining to the making of their automo-
biles. Very successful companies create products that
command an emotional premium, and they make cer-
tain that their manufacturing employees are among the
first to emotionally promote them. Ultimately, how can
strategy + business special issue, autumn 2010
your product be loved by your customers if thousands of
your own employees who make the product don’t love
producing it?
In a brownfield site, labor modernization often rep-
resents a daunting challenge. Managers may believe that
they can employ greenfield policies (those applicable to
a new factory) in a brownfield plant, but this assump-
tion is flawed. The brownfield workforce is generally
older; they may have already lived through shutdowns,
Exhibit 2: A Framework for Building Awareness

Dimension Definition Commitment Time Frame

Inherent Technological distinction: the
machines and production
techniques that either allow for
unique combinations of features
or reduce costs.
Maintaining command over Capital investment requires a
technological adeptness; five- to 10-year outlook.
continuing to improve and
increase quality; reducing
complexity.

Structural Network sophistication: Continuing willingness to adapt Up-front investment in greenfields

recognizing that a company’s
manufacturing competence
depends on its total supply and
production chain, not on individual
components of that chain.
factory networks to new products
and markets as conditions
demand; design for flexible
footprints and capabilities.
may require slightly more time
than converting old plants to this
way of thinking; structural change
gradually becomes ingrained,
taking place on an ongoing basis.

Systemic In-plant transformation: The adoption of lean production With comprehensive, long-term
continuous improvement of techniques, self-organizing teams, initiatives, some initial results can
process quality and effectiveness. and many of the other process be seen within months. Efforts
innovations of the past 30 years. begin to pay off in one to two years

management
and continue to produce gains
thereafter.

Realized Labor modernization: recognition
of each plant’s unique community
and workforce needs, and the
ability to meet those needs more
than halfway.
Policies and plant designs that
attract workers, engage local
governments, and enhance
communities; executive recruiting
and training practices oriented
toward these goals.
This requires immediate moves,
but it may be five years or more
before a cynical community is
willing to admit that the plant is
actually worthy of their respect
and commitment.

layoffs, and closures. Moreover, unions don’t usually for-
get the bitter relations they had with the prior plant
management and are less willing to forge alliances with
the new factory team. In some locations, sophisticated
lean production concepts, implemented in a one-size-
fits-all pattern, have been viewed by the cynical, dispir-
ited workforce as micromanagement and paternalism.
For a brownfield renewal to succeed, the surround-
ing community has to be fundamentally remotivated
and more closely tied to the enterprise through new
compensation systems and governance roles. The
German agricultural equipment maker Claas demon-
strated the value that can be unlocked if the right formu-
la is found. In the midst of substantial growth and as
part of a constant drive to improve flexibility, Claas spun
off a large part of the factory through a management
buyout and made the newly independent plant a pri-
mary supplier. The newly formed business unit was able
to secure quality standards and to better balance its
capacity, signing up additional customers besides Claas.
Meanwhile, employee motivation improved in the fac-
tory as managers used the space they had reclaimed to
fundamentally reengineer activities, aiming at a one-
piece-flow philosophy. The plant’s positive development
defied the long slump in commodity machining and
metalworking factories in the region.
Manifesto for Manufacturers
A company seeking to overcome its manufacturing
75
myopia may find the task daunting at first, but easier
over time. The goal is not to “fix” manufacturing, but to
build the capacity for long-term and medium-term
manufacturing management among engineers, suppli-
ers, and staff (including unionized staff), and to redesign
the technology to take advantage of these capabilities
and augment them.
There are no universal rules for doing this because
each manufacturer has a unique combination of in-
house capabilities, labor histories, supply chain relation-
ships, market demands, and technological innovations.
A holistic manufacturing strategy emerges only from an
analysis that assesses the critical operational data buried
in the four dimensions of manufacturing design: inher-
ent, structural, systemic, and realized. (See Exhibit 2.)
Consider the recent case of a European auto manu-
facturer. The company was desperate for a way to cut
 costs per car, which had risen to almost 30 percent above
those of its nearest competitor. The carmaker’s initial
management
inclination was to close plants and implement flexible
manufacturing lines that could produce multiple models
in remaining factories. Pressure from unhappy unions
convinced the company to think twice about this plan.
Analysis of the automaker’s cost drivers found that
the gains from minimizing inherent costs (by increasing
plant flexibility) and structural-level costs (by eliminat-
ing plants) would do little to close the gap between its
manufacturing costs and those of its closest competitor.
In fact, the only way that the company could catch up
to its rival was by systemic improvements (adopting lean
processes), a category that accounted for 65 percent of
the cost gap. The automaker would never have learned
this had it relied only on traditional analyses and not
exposed the interconnections among all of the critical
76
components of its manufacturing operations. To address
its shortcomings, the company appointed experienced
managers from outside the region to critical posts in
its European plants, retooled its production system, and
began to implement those lean manufacturing processes.
By separating manufacturing operations into their
four dimensions and exploring the way they are inter-
related, management can accurately measure manu-
facturing costs and perfect “what if?”–style decision
making. This is not possible with a conventional cost
accounting approach. Even the most advanced cost
accounting systems are usually designed for only two
tasks: calculating product costs to provide marketing
with a basis for pricing, and tracking actual and forecast-
ed results in individual cost centers.
In addition, accountants at most companies do not
have the experience in operations to spell out the finan-
cial consequences of manufacturing decisions. For
example, they cannot estimate the overall cost position
of a plant that would result if more automated equip-
ment were installed, specific processes were farmed out
to a low-cost nation, the demand for a product doubled,
the number of SKUs were reduced, or the competition
opened two new plants in eastern Europe using the lat-
est manufacturing technology.
Even in the best of circumstances, it is tricky to dis-
tinguish the effects of individual manufacturing drivers.
For instance, how much advantage does a competitor
gain from operating continuous instead of batch pro-
cesses, and how does that balance out the disadvantage
it has maintaining smaller plants with greater indirect
and overhead requirements? Manufacturing, finance,
and research and development executives can’t answer
such questions in isolation from one another; they need
regular opportunities to think and strategize together.
Companies that are willing to invest in a long-term
change cycle discover that the learning curve in manu-
facturing is nonlinear. Even though the investment may
be steady, measurable improvement is typically slow at
first and accelerates over time. It may take five years to
cross the initial threshold of a new production system,
but after that first experience, the capacity for changing
strategy + business special issue, autumn 2010
technology grows rapidly — in part because the tech-
nologies themselves become more flexible, and in part
because employees develop the skills and knowledge to
deploy new production machines more efficiently.
The candy and chocolate manufacturer Cadbury
[since acquired by Kraft Foods] grasped this particularly
well. When the company installed a new production
system, it assumed it would take up to five years for the
plant to reach maturity. Cadbury measured this evolu-
 Computer technology, materials
science, and energy innovation have progressed
dramatically, but few companies are trying to
realize their potential.
tion by how well employees responded to the new sys-
tem. As the plant matured and its capabilities grew, pro-
ductivity was expected to increase. Management
assumed that either head count would decrease or pro-
duction quality would increase during the first five
years, depending on the level of sales and scope of the
plant’s market. Indeed, as employees became more
familiar with the processes, the cost of production
dropped and quality stayed high.
This type of approach represents an alternative to
the prevailing despondent mood at many manufactur-
ing companies. Indeed, perhaps the most tragic result of
manufacturing myopia, for many companies, is the lost
opportunity for manufacturing leadership. Computer
technology, materials science, and energy innovation
have progressed dramatically over the past 20 years.
There are many futuristic manufacturing options avail-
able. They include “instant” and “inkjet” manufactur-
ing, where computer-based molding machines turn out
individually customized plastic components with the
speed of mass fabrication; biomimicry, in which indus-
trial processes reproduce the cell-by-cell process by
which, for example, a seashell is formed; and environ-
mentally friendly fermentation-based fabrication meth-
ods that eschew toxic chemicals and reuse waste more
effectively. In many industries, there exists great unful-
filled potential for moving beyond commoditization by
rethinking manufacturing prowess as part of the com-
pany’s identity. Few companies today are trying to real-
ize that potential; there are few 21st-century equivalents
to the original Ford Motor Company, with its break-
throughs in assembly-line manufacturing, or even to the
1990s-era Intel. We believe that manufacturing myopia
helps explain why.
Over the past 20 years, manufacturing managers
have learned that even the most effective supply chain
management
management will not lead to results unless these capabil-
ities are implemented — not just within the function,
but at the level of the executive suite. In a confrontation-
al, competitive environment, the choice is engaging in
manufacturing competence as the core of your corporate
identity — or continuing to pay the price of myopia. +
Reprint No. 06105
Resources
John A. Byrne, Chainsaw: The Notorious Career of Al Dunlap in the Era of
Profit-at-Any-Price (HarperBusiness, 1999): Myopia and its consequences
at the formerly competent manufacturer Sunbeam.
Neil Hopkinson, Richard Hague, and Philip Dickens, editors, Rapid
Manufacturing: An Industrial Revolution for the Digital Age (John Wiley &
Sons, 2006): Flexible and customized manufacturing, grounded in
computer-based prototyping techniques.
77
Bill Jackson and Conrad Winkler, “Building the Advantaged Supply
Network,” s+b, Fall 2004, www.strategy-business.com/press/article/04304:
Focused, flexible, and lower-cost manufacturing through supply chain
network innovations.
Art Kleiner, The Age of Heretics: Heroes, Outlaws, and the Forerunners of
Corporate Change (Doubleday, 1996): History of socio-technical systems
and Procter & Gamble’s manufacturing innovations.
Art Kleiner, “Leaning Toward Utopia,” s+b, Summer 2005, www.strategy-
business.com/press/article/05208: Profile of “lean” experts James P.
Womack and Daniel T. Jones.
Jeffrey Liker, The Toyota Way: 14 Management Principles from the World’s
Greatest Manufacturer (McGraw-Hill, 2003): Comprehensive, accessible
look at a company with renowned production awareness.
Josh Whitford, The New Old Economy: Networks, Institutions, and the
Organizational Transformation of American Manufacturing (Oxford
University Press, 2005): Myopia in the U.S. Rust Belt.
James P. Womack and Daniel T. Jones, Lean Solutions: How Companies
and Customers Can Create Value and Wealth Together (Free Press, 2005):
Evokes a world of customer-oriented manufacturing foresight.
 BY A.G. LAFLEY, WITH AN INTRODUCTION BY RAM CHARAN

P & G ’S
INNOVATION
strategy & competition

CULTURE How we built a world-class

organic growth engine
by investing in people.
78
THE HEART OF A COMPANY ’ S BUSINESS MODELshould be game-changing
innovation. This is not just the invention of new products and
services, but the ability to systematically convert ideas into new
offerings that alter the very context of the business.
As they lead to repeat purchases, these offerings porting behaviors that enable it to play that role.
reshape the market, so that the company is playing an Consider the case of Procter & Gamble
entirely new (and profitable) game to which others must Company. Since A.G. Lafley became chief execu-
Illustrations by Michael Klein

adapt. A number of game-changing innovators are oper-
ating today, including such household-name enterprises
as Procter & Gamble, Nokia, the Lego Group, Apple,
Hewlett-Packard, Honeywell, DuPont, and General
Electric. Wherever you see a steady flow of noteworthy
innovations from one company, you can probably
assume that it is a game-changing innovator, with the
distinctive kinds of social connections, culture, and sup-
tive officer in 2000, the leaders of P&G have
worked hard to make innovation part of the daily
routine and to establish an innovation culture.
Lafley and his team preserved the essential part of
P&G’s research and development capability —
world-class technologists who are masters of the
core technologies critical to the household and
personal-care businesses — while also bringing
strategy & competition
79
 A.G. Lafley
editors@
strategy-business.com
was the chairman and CEO of
Procter & Gamble Company
when this article was
published. He was named
Executive of the Year by the
Academy of Management in
2007. He is the coauthor, with
Ram Charan, of The Game-
Changer: How You Can Drive
Revenue and Profit Growth
with Innovation (Crown
Business, 2008).
Ram Charan Also contributing to this article Originally published Autumn
www.ram-charan.com was Geoffrey Precourt. 2008.
is a Dallas-based advisor to
boards and CEOs of Fortune
500 companies and the author
or coauthor of 14 books,
including the bestsellers
Execution (with Larry Bossidy;
Crown Business, 2002),
Confronting Reality (with Larry
Bossidy; Crown Business,
2004), and Know-How (Crown
Business, 2007).

W
more P&G employees outside R&D into the inno- hen I became CEO of Procter & Gamble
vation game. They sought to create an enterprise- in 2000, we were introducing new brands
strategy & competition

wide social system that would harness the skills and
insights of people throughout the company and
give them one common focus: the consumer.
Without that kind of culture of innovation, a strat-
egy of sustainable organic growth is far more diffi-
cult to achieve.
A.G. Lafley and I coauthored The Game-
Changer: How You Can Drive Revenue and Profit
Growth with Innovation (Crown Business, 2008) to
explain how to make game-changing innovation
drive growth on a consistent, well-paced basis. The
critical factors that we cover in the book include
keeping a laser-sharp focus on the customer; estab-
lishing a disciplined, repeatable, and scalable inno-
vation process; creating organizational and funding
80
mechanisms that support innovation; and demon-
strating the kind of leadership necessary for prof-
itable top-line growth as well as cost reduction.
One aspect of building an innovation culture
deserves more attention than we could give it in
The Game-Changer: designing a social system that
would spark new ideas and enable critical deci-
and products with a commercial success rate
of 15 to 20 percent. In other words, for every six new
product introductions, one would return our invest-
ment. This had been the prevailing ratio in our industry,
consumer packaged goods, for a long time.
Today, our company’s success rate runs between 50
and 60 percent. About half of our new products suc-
ceed. That’s as high as we want the success rate to be. If
we try to make it any higher, we’ll be tempted to err on
the side of caution, playing it safe by focusing on inno-
vations with little game-changing potential.
The decision to focus on innovation as a core
strength throughout the company has had a direct influ-
ence on our performance. P&G has delivered, on aver-
age, 6 percent organic sales growth since the beginning
of the decade, virtually all of it driven by innovation.
Over the same period, we’ve reduced R&D spending as
a percentage of sales; it was about 4.5 percent in the late
1990s and only 2.8 percent in 2007. In that year, we
spent US$2.1 billion on innovation, and received $76.5
billion in revenues. We’re getting more value from every
dollar we invest in innovation today.
The focus on innovation has also had a direct effect
strategy + business special issue, autumn 2010

sions. In the article that follows, A.G. explains the

human factors that fostered innovation at Procter
& Gamble. It could be thought of as the “missing
chapter” to The Game-Changer; a vital component
that isn’t always obvious, even to experts, precisely
because it is so fundamental.
—Ram Charan
on our portfolio of businesses. The Game-Changer de-
scribes how we sold off most of P&G’s food and bever-
age businesses so we could concentrate on products that
were driven by the kinds of innovation we knew best. As
it turns out, with this narrower mix of businesses, we can
more easily devote the resources and attention needed to
build a broad-scale innovation culture.
We also focused on creating a practice of open inno-
vation: taking advantage of the skills and interests of
 The days of achieving automatic growth
by entering new markets are over. We can grow in
these countries only with new products,
processes, and forms of community presence.
people throughout the company and looking for part-
nerships outside P&G. This was important to us for sev-
eral reasons.
First, we needed to broaden our capabilities. Each
of our businesses was already practicing some form of
innovation improvement, but they were not all improv-
ing at the same rate. As the CEO, I could lead and
inspire the company as a whole, but I could not substi-
tute my judgment for that of other leaders who knew
and understood their specific businesses far better than I
could. The decision makers in each business would have
to examine their competitive landscape and their own
capabilities to figure out what kinds of innovation
would work best and win with consumers.
Second, building an open innovation culture was
critical for realizing the essential growth opportunity
presented by emerging markets. During the next 10
years, between 1 billion and 2 billion people in Asia,
Latin America, eastern Europe, and the Middle East will
move from rural, subsistence living to relatively urban
and increasingly affluent lives. They will have more
choices, a greater connection with the global economy,
and the ability to realize more aspirations. Along the
way, they will become, for the first time, regular con-
sumers of branded products in categories such as per-
sonal care, fabric care, and prepared food.
It would seem relatively simple to execute a strategy
for reaching these new consumers. But the days of
achieving automatic growth by entering new markets
are essentially over. Just as retailers often reach a level of
saturation — where it doesn’t make sense to open any
more stores in a particular market — many mature con-
sumer products companies are rapidly running out of
the so-called white space in new regions. P&G, for
example, already has a market presence in more than
160 countries, with large operations on the ground in
strategy & competition
more than 80 of them. We can grow our business in
these countries only by consistently developing new
products, processes, and forms of community presence.
And to do that, we need to involve people, inside the
company and out, who are comfortable and familiar
with the values and needs of consumers in these parts of
the world.
A third reason for focusing on open innovation had
to do with fostering teams. The kinds of innovation
needed at Procter & Gamble must be realized through
teams. The idea for a new product may spring from the
mind of an individual, but only a collective effort can
carry that idea through prototyping and launch. If inno-
vation is to be integrated with both business strategy and
work processes, as we believe it should be, it requires a
81
broad network of social interactions.
Moreover, our experience suggests that many of the
failures of innovation are social failures. Promising ideas,
with real potential business value, often get left behind
during the development process. Some innovations are
timed too early for their market; others are lost in exe-
cution. Often, the root cause is poor social interaction;
the right people simply don’t engage in productive dia-
logue frequently enough.
For all these reasons, we consciously set in place a
series of measures for building an open innovation cul-
ture at P&G.
“The Consumer Is Boss”
Procter & Gamble is known for its highly capable and
motivated workforce. But in the early 2000s, our people
were not oriented to any common strategic purpose. We
 had a corporate mission to meaningfully improve the From the ideation stage through the purchase of a
everyday lives of the customers we served. If 15 seconds product, the consumer should be “the heart of all we
strategy & competition

with a deodorant or two minutes with a disposable dia- do” at P&G. I talked about it that way at dozens of com-
per have made a small part of your life a little bit better, pany town hall meetings during my first months as
then we’ve made a difference. CEO. More and more people began thinking about
But we hadn’t explicitly or inspira- how to apply the “consumer is boss” con-
tionally enrolled enough of our cept to their work. Resources were
100,000-plus people around the still scarce, and there were fierce
world in our mission; it was debates about which ideas
neither fully embraced deserved the most attention
by employees nor fully and where to deploy
leveraged by the com- money and people. But
pany’s leadership. Our this concept came to
innovation efforts suf- matter more than those
fered accordingly. other concerns. People
So we expanded became more willing to
our mission to in- subjugate their egos to
82
clude the idea that the greater good —
“the consumer is boss.” to improving consum-
In other words, the peo- ers’ lives.
ple who buy and use It’s natural for a
P&G products are valued mature company to become
not just for their money, more insular. So we explicit-
but as a rich source of in- ly tried to build better con-
formation and direction. If nections with the people who
strategy + business special issue, autumn 2010

we can develop better ways of learn-
ing from them — by listening to them,
observing them in their daily lives, and even living with
them — then our mission is more likely to succeed.
“The consumer is boss” became far more than a slogan
to us. It was a clear, simple, and inclusive cultural prior-
ity for both our employees and our external stakehold-
ers, such as suppliers and retail partners.
We also linked the concept directly to innovation.
bought our products. For example,
in the early 1990s, we had acquired the
Max Factor and Ellen Betrix cosmetic and fra-
grance lines from Revlon Inc. Innovation in fine fra-
grances had always been driven by fashion. With slow
growth of 2 to 3 percent a year, low margins, and weak
cash flow, fine fragrances didn’t seem to be an attrac-
tive business for P&G. But we saw a chance to change
the game.
 We began by clearly and precisely defining the tar-
get consumer for each fragrance brand, and identifying
subgroups of consumers for some brands. We didn’t
walk away from the traditional approaches of the fine
fragrance business. We still maintained partnerships
with established fashion houses, such as Dolce &
Gabbana, Gucci, and Lacoste. But we also made the
consumer our boss. We focused on a few big launches
and on innovation that was meaningful to consumers,
including fresh new scents, distinctive packaging,
provocative marketing, and delightful in-store experi-
ences. We also took advantage of our global scale and
supply chain to reduce complexity and enable a signifi-
cantly lower cost structure.
The result? Our team turned a small, underper-
forming business into a global leader. In 2007, P&G
became the largest fine fragrance company in the world,
with more than $2.5 billion in sales — a 25-fold
increase in 15 years.
Elsewhere in our company, we experimented with
new ways to build social connections through digital
media and other forms of direct interaction. We
designed websites to reinforce consumer connections, to
better understand consumers’ needs, and to experiment
with prototypes. For example, we used to hand-make
baby diapers for a product test. Now, we show people
digitally created alternatives in an onscreen virtual
world. If the consumers we’re talking to have an idea, we
can redesign it immediately and ask them, “Do you like
that better? How would you use it?” It allows
us to iterate very quickly. In effect, we are building a
social system with the purchasers (and potential pur-
chasers) of our products, enabling them to codesign and
co-engineer our innovations.
Integrating Innovation
We are constantly innovating how we innovate. We keep
strategy & competition
refining our product-launch model — from idea to pro-
totype, to development, to qualification, to commercial-
ization. Applying this sequential practice on a large
scale, and making it replicable, does not mean eliminat-
ing judgment. In fact, there’s still a fair amount of judg-
ment that’s applied along the way. That’s why we need
active leaders and a strong innovation culture.
Scalability is critical at a company the size of Procter
& Gamble. If we can’t scale our processes, they don’t
have much value for us. In fact, scalability is often the
justification for our existence as a multinational, diversi-
fied company. Our innovation practices are thus
designed for deliberate learning, across all our functions,
product categories, and geographic locations. Once peo-
ple understand a particular process, they can replicate it
83
and train others. It soon becomes a part of normal deci-
sion making.
P&G had not treated innovation as scalable in the
past. We had always invested a great deal in research and
development. When I became CEO, we had about
8,000 R&D people and roughly 4,000 engineers, all
working on innovation. But we had not integrated these
innovation programs with our business strategy, plan-
ning, or budgeting process well enough. At least 85 per-
cent of the people in our organization thought they
weren’t working on innovation. They were somewhere
else: in line management, marketing, operations, sales,
or administration. We had to redefine our social system
to get everybody into the innovation game.
Today, all P&G employees are expected to under-
stand the role they play in innovation. Even when you’re
operating, you’re always innovating — you’re making
 Becoming a will contribute to them. They deter-
mine which projects to accelerate or
Great Innovation cut on the basis of resource consump-
tion as well as market potential. They
Team Leader don’t hesitate to pull the plug on proj-
ects that don’t clear the hurdles or
that simply consume more time or
for example, technologists, marketing
people, and those responsible for
commercializing a new product.
Inevitably, trade-offs will be required
among these groups. Leaders thus
must ensure that communication
channels are open from the start and

A s you read about Procter &

Gamble’s social system and
innovation culture, you may be think-
ing, “There are some good ideas
here…for someone else. In my shop,
we can barely keep the trains running
on time. How am I supposed to do all
this?”
Leaders of innovation take their
strategy & competition
money than the business can afford.
• Concentrate on possibility. The
process of innovation is inherently
uncertain. Innovation leaders live with
ambiguity as ideas are shaped and
reimagined; they don’t let ideas die
before they’re fully formed or under-
stood. Once a project is selected,
these leaders inspire the team to keep
that facts and sound judgment prevail.
They must be prepared to break dead-
locks and resolve conflicts by keeping
individuals focused on their common
goal: the customer.
• Reward effort and learning.
Failure is a fact of life for companies
that pursue innovation seriously, and a
leader’s response to it has a huge

game to another level through a par-
ticular set of practices:
• Establish clear criteria and don’t
hesitate to shift resources. Great
innovation leaders keep a sharp eye
on their short-term and long-term
business goals and think through how
and when various innovation projects
going even as they encounter obsta-
cles and go through iterations. At the
same time, leaders are vigilant for
indications that the project’s market
potential has diminished.
• Cross boundaries and help oth-
ers do the same. Innovation becomes
riskier when there are gulfs between,
effect on company culture and there-
fore on future projects. Innovation
leaders know that failures represent
opportunities to learn. They keep peo-
ple energized by publicly recognizing
their earnest efforts and willingness to
venture from the tried and true.
—Ram Charan

the cycles shorter, or developing new commercial ideas,
or working on new business models. And all innovation
is connected to the business strategy.
In fostering this approach and building the social
system to support it, the P&G leadership has had to
be very disciplined. For instance, we are now set up to
84
see many more new ideas. Our external business de-
velopment group is very small; all it does is meet with
individuals, groups, research labs, and other potential
collaborators, including (as we noted in The Game-
Changer) P&G’s competitors on occasion. Any of these
may propose new technologies, new product prototypes,
or new ways to connect us to our consumer base. In
2007, the business development group reviewed more
Latin America, and some African countries have become
part of our social system. Their presence has made us
more open, and this helps compensate for our natural
tendency to become more insular.
We maintain open work systems in a lot of places
around the world. Executives’ offices don’t have doors.
Leaders don’t have a secretary cordoning them off. All
the offices on the executive floor at Procter & Gamble
are open; the conference room is an open, round space.
We made it round as a small symbol of the new
approach. We’re seeing indications that this new social
process is catching on all over the world.
The Talent Component
strategy + business special issue, autumn 2010

than 1,000 external ideas. In 2008, they saw 1,500. We
tend to act on about 5 to 7 percent of them.
We are also open to ideas from more regions than in
the past. Innovation used to travel primarily from devel-
oped markets to developing markets. When new tech-
nology appeared in Japan, Germany, or the U.S., it
flowed across the regions and down the hierarchy.
Today, more than 40 percent of our innovation comes
from outside the United States. People in India, China,
P&G used to recruit for values, brains, accomplishment,
and leadership. We still look for these qualities, but we
also look for agility and flexibility. We believe the “soft”
skills of emotional intelligence — fundamental social
skills such as self-awareness, self-fulfillment, and empa-
thy — are needed to complement the traditional IQ
skills. (See “Tea and Empathy with Daniel Goleman,”
by Lawrence M. Fisher, s+b, Autumn 2008.) Maybe
“soft” isn’t the right word: These skills are every bit as
 Once people see the simplicity,
durability, and sustainability of an innovation
mind-set, it continually reinforces itself.
hard to master as some tough analytical skills. People
just learn them in a different way.
Some people at Procter & Gamble have struggled
with this new approach, but most of our best people
have done really well with it. Curiosity, collaboration,
and connectedness are easy to talk about but difficult to
develop in practice. We have tried to careful-
ly identify and ease out people who
are controlling or insecure, who
don’t want to share, open up,
or learn — who are not curi-
ous. And in the process, we
have discovered that most
of our people are natu-
rally collaborative.
We also try to de-
velop people by giving
them new stimulation
and greater challenges.
As they move through
their careers, we deliber-
ately increase the com-
plexity of their assign-
ments. That might mean
entering a market that’s not
developed yet or a market with a
competitor already firmly established.
Whatever the challenge, it stretches them.
We give our most promising people time in both
functional and line positions, because we think our best
leaders are great operating leaders and great innovation
leaders. We also move people around geographically. We
bring people into our Cincinnati headquarters from
around the world, and we make a point of moving our
headquarters people to our global businesses. Almost all
of us have worked outside our home region. Almost all
strategy & competition
of us have worked in developing or emerging markets.
And almost all of us have worked across the businesses.
We track that progress very carefully.
We’ve been fortunate that some of this flexible,
multifaceted ethic exists in our heritage. For
example, Procter & Gamble pio-
neered a technician-based sys-
tem in its manufacturing
plants during the 1960s
and ’70s. In this system,
we avoided the ap-
proach in which one
person was assigned
to do only one job.
The technician sys-
85
tem still operates to-
day: To get the highest
evaluation rating in a
P&G factory, you learn
how to do all the jobs on
the line. And, once you have
that rating, we expect you to
be capable of problem identifi-
cation, problem solving, and in-
novation. This background has made it
easier for us to plug manufacturing and engineer-
ing into the innovation culture.
Once people have succeeded at innovation, you
can see the energy in the company changing. People
routinely say, “We can do this. This is feasible.” The atti-
tude changes are incredible to watch; once people see
the simplicity, durability, and sustainability of an inno-

vative mind-set, it continually reinforces itself.
On average, younger managers and younger
strategy & competition
masking it. Febreze started out as a fabric refresher. Now
it’s also an air freshener in the U.S. and elsewhere.
Not long ago we took the Febreze package, product,
and brand name to Japan. We tested it on a small scale
with Japanese consumers. They rejected it. As interpret-
ed by the P&G team (a relatively junior-level group), the
gut reaction of the Japanese was: “Here’s another Western
product that’s not going to work in our country.”
But we persisted. “Were there any Japanese house-
holds or consumers who really liked the product?” we
asked. The team didn’t know, but they went back and

employees are more open to fresh, innovative thinking. looked at the research. Lo and behold, 20 percent of the
Since 2000, we’ve lowered the average age of our people first survey group absolutely loved the product.
by almost 10 years because of our acquisitions and our Personally, I wasn’t surprised. I had spent eight years
moves in emerging markets. We have also recently living and working in Japan and I knew that
brought in people from outside to Japanese people can be hypersen-
enable and stimulate creative sitive to malodors. A man can
thinking. This was unprece- smoke cigarettes outside or in
dented for a company that a subway station, but many
has traditionally hired only Japanese women won’t let
entry-level people and their husbands smoke in
promoted from within. the house. When the
Virtually every lead- husband comes home,
ing practitioner of our he may have to take his
new design capability smoky clothes off and
came from the outside wash them before he
86
as a mid-career hire. can sit down.
They arrived from BMW, So we resolved to
Nike, and some of the try again. The P&G
best design shops in the team changed the viscos-
world. We probably have ity of the product. They
150 to 200 such people and, changed the fragrance from
although it’s not a huge pro- high profile to a very low
portion of the P&G staff, it’s big profile scent. They changed
strategy + business special issue, autumn 2010

enough to make a difference. They the bottle to a much more delicate

bring us not just the art and science and practice
of design, but an integrative way of thinking.
Integrative Thinking
One of our favorite examples of integrative thinking
involves Febreze, a very successful odor-control product.
One of the active ingredients in Febreze surrounds a
malodor and removes it, as opposed to covering it up or
design that more Japanese people felt com-
fortable having visible in their homes. They changed the
spray pattern to a mist. They changed everything but the
core technology of the product, and it became a phe-
nomenal success in Japan.
This is a story we tell ourselves at P&G to drive
home the need for integrative thinking. The project
started with a consumer-centric concept. It involved
people in a variety of functions and at least two regions.
It opened our team members’ eyes to other possibilities.
And it came to fruition because we were skilled at hav-
ing the kinds of processes and conversations that would
lead people to synthesize their ideas.
Our long-standing middle managers, people who
have grown up in the P&G system (as I did), are start-
ing to recognize that better innovation processes can
expand their personal and leadership skills. They’ve all
been through cost-cutting and productivity exercises.
But that’s not the same as creating top-line opportuni-
ties that can earn kudos from consumers. Nobody is
telling them they have to be the geniuses who invent an
idea. They will get credit for turning ideas into replica-
ble processes and learning from their mistakes. In
operating cross-functionally, they are also moving away
naturally from the old silos.
The result of P&G’s focus on innovation has been
reliable, sustainable growth. Since the beginning of the
decade, P&G sales have more than doubled, from $39
billion to more than $80 billion; the number of billion-
dollar brands, those that generate $1 billion or more in
sales each year, has grown from 10 to 24; the number of
brands with sales between $500 million and $1 billion
has more than quadrupled, from four to 18. This
growth is being led by energized managers — innova-
tion leaders — who continually learn new ways to grow
revenues, improve margins, and avoid commoditization.
Our culture of innovation is helping P&G leaders be
more effective, and in the process, they’re renewing our
company every day.
Once people have succeeded at a game-changing
innovation, the level of energy in the company elevates.
Even people who weren’t directly involved are affected
through the social networks. It becomes easier for them
to expand their idea of what is feasible. Building this sort
strategy & competition
of capability often has the rhythm of, say, skilled basket-
ball practice: a group of people who gradually learn
seamless teamwork, reading one another’s intentions
and learning to complement other team members, ulti-
mately creating their own characteristic, effective, and
uncopyable style of successful play. +
Reprint No. 08304
Resources
Daniel Goleman, Emotional Intelligence: Why It Can Matter More Than IQ
(Bantam Books, 1996): Developing individual maturity for an organiza-
tional innovation culture.
Larry Huston and Nabil Sakkab, “P&G’s New Innovation Model,” 87
Harvard Business Review, March 2006: Anatomy of an open approach for
attracting ideas and consumer insights from around the world.
A.G. Lafley and Ram Charan, The Game-Changer: How You Can Drive
Revenue and Profit Growth with Innovation (Crown Business, 2008):
Guide for giving large, mature companies the sustainable capacity for
breakthrough innovation.
Roger Martin, The Opposable Mind: How Successful Leaders Win through
Integrative Thinking (Harvard Business School Press, 2007): Gaining the
ability to overcome the limits of partisan thinking, to enhance innovation
or anything else.
Steven Wheeler, Walter McFarland, and Art Kleiner, “A Blueprint for
Strategic Leadership,” s+b, Winter 2007, www.strategy-business
.com/press/article/07405: Context for chief executives, drawing on A.G.
Lafley’s example, among others.
Procter & Gamble website, www.pg.com: Includes Connect + Develop, a
portal for engaging innovation partners, and Everyday Solutions, through
which the company connects with consumers.
For more thought leadership on this topic, see the s+b website:
www.strategy-business.com/innovation.
 BY DAVID ROCK
Neuroscience research is
revealing the social nature of the
high-performance workplace.
Managing
management
with the Brain in Mind
88
Naomi Eisenberger, a leading social neuroscience
researcher at the University of California at Los Angeles
(UCLA), wanted to understand what goes on in the
brain when people feel rejected by others. She designed
an experiment in which volunteers played a computer
game called Cyberball while having their brains scanned
by a functional magnetic resonance imaging (fMRI)
machine. Cyberball harks back to the nastiness of the
school playground. “People thought they were playing a
ball-tossing game over the Internet with two other peo-
ple,” Eisenberger explains. “They could see an avatar
that represented themselves, and avatars [ostensibly] for
two other people. Then, about halfway through this
game of catch among the three of them, the subjects
stopped receiving the ball and the two other supposed
players threw the ball only to each other.” Even after
they learned that no other human players were involved,
the game players spoke of feeling angry, snubbed, or
judged, as if the other avatars excluded them because
they didn’t like something about them.
This reaction could be traced directly to the brain’s
responses. “When people felt excluded,” says Eisen-
berger, “we saw activity in the dorsal portion of the ante-
rior cingulate cortex — the neural region involved in the
distressing component of pain, or what is sometimes
Illustration by Leigh Wells
referred to as the ‘suffering’ component of pain. Those
people who felt the most rejected had the highest levels
of activity in this region.” In other words, the feeling of
being excluded provoked the same sort of reaction in the
brain that physical pain might cause. (See Exhibit 1.)
Eisenberger’s fellow researcher Matthew Lieberman,
also of UCLA, hypothesizes that human beings evolved
SPECIAL REPORT: THE TALENT OPPORTUNITY

management
89
 David Rock Originally published Autumn
davidrock@ 2009.
workplacecoaching.com
is the founding president of
the NeuroLeadership Institute
(www.neuroleadership.org). He
is also the CEO of Results
Coaching Systems and the
author of Your Brain at Work
(HarperBusiness, 2009) and
Quiet Leadership: Six Steps to
Transforming Performance at
Work (Collins, 2006).
this link between social connection and physical dis-
comfort within the brain “because, to a mammal, being
management
socially connected to caregivers is necessary for survival.”
This study and many others now emerging have made
one thing clear: The human brain is a social organ. Its
physiological and neurological reactions are directly and
profoundly shaped by social interaction. Indeed, as
Lieberman puts it, “Most processes operating in the
background when your brain is at rest are involved in
thinking about other people and yourself.”
This presents enormous challenges to managers.
Although a job is often regarded as a purely economic
transaction, in which people exchange their labor for
financial compensation, the brain experiences the work-
place first and foremost as a social system. Like the
experiment participants whose avatars were left out of
the game, people who feel betrayed or unrecognized at
90
work — for example, when they are reprimanded, given
an assignment that seems unworthy, or told to take a pay
cut — experience it as a neural impulse, as powerful and
painful as a blow to the head. Most people who work in
companies learn to rationalize or temper their reactions;
they “suck it up,” as the common parlance puts it. But
they also limit their commitment and engagement.
They become purely transactional employees, reluctant
to give more of themselves to the company, because the
social context stands in their way.
Leaders who understand this dynamic can more
effectively engage their employees’ best talents, support
collaborative teams, and create an environment that fos-
ters productive change. Indeed, the ability to intention-
ally address the social brain in the service of optimal
performance will be a distinguishing leadership capabil-
ity in the years ahead.
Triggering the Threat Response
One critical thread of research on the social brain starts
with the “threat and reward” response, a neurological
mechanism that governs a great deal of human behavior.
When you encounter something unexpected — a
shadow seen from the corner of your eye or a new col-
league moving into the office next door — the limbic
system (a relatively primitive part of the brain, common
to many animals) is aroused. Neuroscientist Evian
Gordon refers to this as the “minimize danger, maximize
reward” response; he calls it “the fundamental organiz-
ing principle of the brain.” Neurons are activated and
hormones are released as you seek to learn whether this
new entity represents a chance for reward or a potential
danger. If the perception is danger, then the response
becomes a pure threat response — also known as the
fight or flight response, the avoid response, and, in its
extreme form, the amygdala hijack, named for a part of
the limbic system that can be aroused rapidly and in an
emotionally overwhelming way.
Recently, researchers have documented that the
threat response is often triggered in social situations, and
it tends to be more intense and longer-lasting than the
reward response. Data gathered through measures of
brain activity — by using fMRI and electroencephalo-
strategy + business special issue, autumn 2010
graph (EEG) machines or by gauging hormonal secre-
tions — suggests that the same neural responses that
drive us toward food or away from predators are trig-
gered by our perception of the way we are treated by
other people. These findings are reframing the prevailing
view of the role that social drivers play in influencing
how humans behave. Matthew Lieberman notes that
Abraham Maslow’s “hierarchy of needs” theory may
have been wrong in this respect. Maslow proposed that
humans tend to satisfy their needs in sequence, starting
with physical survival and moving up the ladder toward
self-actualization at the top. In this hierarchy, social
needs sit in the middle. But many studies now show that
the brain equates social needs with survival; for example,
being hungry and being ostracized activate similar neu-
ral responses.
The threat response is both mentally taxing and
deadly to the productivity of a person — or of an organ-
ization. Because this response uses up oxygen and glu-
cose from the blood, they are diverted from other parts
of the brain, including the working memory function,
which processes new information and ideas. This
impairs analytic thinking, creative insight, and problem
solving; in other words, just when people most need
their sophisticated mental capabilities, the brain’s inter-
nal resources are taken away from them.
The impact of this neural dynamic is often visible
in organizations. For example, when leaders trigger a
threat response, employees’ brains become much less
efficient. But when leaders make people feel good about
themselves, clearly communicate their expectations, give
employees latitude to make decisions, support people’s
efforts to build good relationships, and treat the whole
organization fairly, it prompts a reward response. Others
in the organization become more effective, more open to
ideas, and more creative. They notice the kind of infor-
mation that passes them by when fear or resentment
management
91
 Neuroscience has discovered that
the brain is highly plastic.
Even the most entrenched behaviors
can be modified.
makes it difficult to focus their attention. They are less
susceptible to burnout because they are able to manage
management
their stress. They feel intrinsically rewarded.
Understanding the threat and reward response can
also help leaders who are trying to implement large-scale
change. The track record of failed efforts to spark
higher-perfomance behavior has led many managers to
conclude that human nature is simply intractable: “You
can’t teach an old dog new tricks.” Yet neuroscience has
also discovered that the human brain is highly plastic.
Neural connections can be reformed, new behaviors can
be learned, and even the most entrenched behaviors
can be modified at any age. The brain will make these
shifts only when it is engaged in mindful attention. This
is the state of thought associated with observing one’s
own mental processes (or, in an organization, stepping
back to observe the flow of a conversation as it is hap-
92
pening). Mindfulness requires both serenity and con-
centration; in a threatened state, people are much more
likely to be “mindless.” Their attention is diverted by the
threat, and they cannot easily move to self-discovery.
In a previous article (“The Neuroscience of
Leadership,” s+b, Summer 2006), brain scientist Jeffrey
Schwartz and I proposed that organizations could mar-
shal mindful attention to create organizational change.
They could do this over time by putting in place regular
routines in which people would watch the patterns of
their thoughts and feelings as they worked and thus
develop greater self-awareness. We argued that this was
the only way to change organizational behavior; that the
“carrots and sticks” of incentives (and behavioral psy-
chology) did not work, and that the counseling and
empathy of much organizational development was not
efficient enough to make a difference.
Research into the social nature of the brain suggests
another piece of this puzzle. Five particular qualities
enable employees and executives alike to minimize the
threat response and instead enable the reward response.
These five social qualities are status, certainty, autono-
my, relatedness, and fairness: Because they can be
expressed with the acronym SCARF, I sometimes think of
them as a kind of headgear that an organization can
wear to prevent exposure to dysfunction. To understand
how the SCARF model works, let’s look at each charac-
teristic in turn.
Status and Its Discontents
As humans, we are constantly assessing how social
encounters either enhance or diminish our status. Re-
search published by Hidehiko Takahashi et al. in 2009
shows that when people realize that they might compare
unfavorably to someone else, the threat response kicks
in, releasing cortisol and other stress-related hormones.
(Cortisol is an accurate biological marker of the threat
response; within the brain, feelings of low status provoke
the kind of cortisol elevation associated with sleep dep-
rivation and chronic anxiety.)
Separately, researcher Michael Marmot, in his book
The Status Syndrome: How Social Standing Affects Our
strategy + business special issue, autumn 2010
Health and Longevity (Times Books, 2004), has shown
that high status correlates with human longevity and
health, even when factors like income and education are
controlled for. In short, we are biologically programmed
to care about status because it favors our survival.
As anyone who has lived in a modest house in a
high-priced neighborhood knows, the feeling of status is
always comparative. And an executive with a salary of
US$500,000 may feel elevated. . .until he or she is

assigned to work with an executive making $2.5 million.
A study by Joan Chiao in 2003 found that the neural
circuitry that assesses status is similar to that which
processes numbers; the circuitry operates even when the
stakes are meaningless, which is why winning a board
game or being the first off the mark at a green light feels
so satisfying. Competing against ourselves in games like
solitaire triggers the same circuitry, which may help
explain the phenomenal popularity of video games.
Understanding the role of status as a core concern
can help leaders avoid organizational practices that stir
counterproductive threat responses among employees.
For example, performance reviews often provoke a
threat response; people being reviewed feel that the ex-
ercise itself encroaches on their status. This makes
360-degree reviews, unless extremely participative and
well-designed, ineffective at generating positive behav-
ioral change. Another common status threat is the cus-
tom of offering feedback, a standard practice for both
managers and coaches. The mere phrase “Can I give you
some advice?” puts people on the defensive because they
perceive the person offering advice as claiming su-
periority. It is the cortisol equivalent of hearing footsteps
in the dark.
Organizations often assume that the only way to
raise an employee’s status is to award a promotion. Yet
status can also be enhanced in less-costly ways. For
example, the perception of status increases when people
are given praise. Experiments conducted by Keise Izuma
in 2008 show that a programmed status-related stimu-
lus, in the form of a computer saying “good job,” lights
up the same reward regions of the brain as a financial
windfall. The perception of status also increases when
people master a new skill; paying employees more for
the skills they have acquired, rather than for their
seniority, is a status booster in itself.
Values have a strong impact on status. An organiza-
tion that appears to value money and rank more than a
basic sense of respect for all employees will stimulate
threat responses among employees who aren’t at the top
of the heap. Similarly, organizations that try to pit peo-
ple against one another on the theory that it will make
them work harder reinforce the idea that there are only
winners and losers, which undermines the standing of
people below the top 10 percent.
A Craving for Certainty
When an individual encounters a familiar situation, his
or her brain conserves its own energy by shifting into a
kind of automatic pilot: it relies on long-established
neural connections in the basal ganglia and motor cor-
management
tex that have, in effect, hardwired this situation and the
individual’s response to it. This makes it easy to do what
the person has done in the past, and it frees that person
to do two things at once; for example, to talk while driv-
ing. But the minute the brain registers ambiguity or
confusion — if, for example, the car ahead of the driver
slams on its brakes — the brain flashes an error signal.
With the threat response aroused and working memory
diminished, the driver must stop talking and shift full
attention to the road.
Uncertainty registers (in a part of the brain called
the anterior cingulate cortex) as an error, gap, or tension:
something that must be corrected before one can feel
comfortable again. That is why people crave certainty.
Not knowing what will happen next can be profoundly
93
debilitating because it requires extra neural energy. This
diminishes memory, undermines performance, and dis-
engages people from the present.
Of course, uncertainty is not necessarily debilitat-
ing. Mild uncertainty attracts interest and attention:
New and challenging situations create a mild threat
response, increasing levels of adrenalin and dopamine
just enough to spark curiosity and energize people to
solve problems. Moreover, different people respond to
uncertainty in the world around them in different ways,
depending in part on their existing patterns of thought.
For example, when that car ahead stops suddenly, the
driver who thinks, “What should I do?” is likely to
be ineffective, whereas the driver who frames the inci-
dent as manageable — “I need to swerve left now
because there’s a car on the right” — is well equipped to
respond. All of life is uncertain; it is the perception of
 too much uncertainty that undercuts focus and per-
formance. When perceived uncertainty gets out of
hand, people panic and make bad decisions.
Leaders and managers must thus work to create a
perception of certainty to build confident and dedicated
teams. Sharing business plans, rationales for change, and
accurate maps of an organization’s structure promotes
this perception. Giving specifics about organizational
restructuring helps people feel more confident about a
plan, and articulating how decisions are made increases
trust. Transparent practices are the foundation on which
the perception of certainty rests.
Breaking complex projects down into small steps
can also help create the feeling of certainty. Although it’s
highly unlikely everything will go as planned, people
function better because the project now seems less
ambiguous. Like the driver on the road who has enough
management
information to calculate his or her response, an employ-
ee focused on a single, manageable aspect of a task is
unlikely to be overwhelmed by threat responses.
The Autonomy Factor
Studies by Steven Maier at the University of Boulder
show that the degree of control available to an animal
confronted by stressful situations determines whether or
not that stressor undermines the ability to function.
Similarly, in an organization, as long as people feel they
can execute their own decisions without much oversight,
stress remains under control. Because human brains
evolved in response to stressors over thousands of years,
they are constantly attuned, usually at a subconscious
level, to the ways in which social encounters threaten or
94
support the capacity for choice.
A perception of reduced autonomy — for example,
because of being micromanaged — can easily generate a
threat response. When an employee experiences a lack of
control, or agency, his or her perception of uncertainty
is also aroused, further raising stress levels. By contrast,
the perception of greater autonomy increases the feeling
of certainty and reduces stress.
Leaders who want to support their people’s need for
autonomy must give them latitude to make choices,
especially when they are part of a team or working with
a supervisor. Presenting people with options, or allowing
them to organize their own work and set their own
hours, provokes a much less stressed response than forc-
ing them to follow rigid instructions and schedules. In
1977, a well-known study of nursing homes by Judith
Rodin and Ellen Langer found that residents who were
given more control over decision making lived longer
and healthier lives than residents in a control group who
had everything selected for them. The choices them-
selves were insignificant; it was the perception of auton-
omy that mattered.
Another study, this time of the franchise industry,
identified work–life balance as the number one reason
that people left corporations and moved into a franchise.
Yet other data showed that franchise owners actually
worked far longer hours (often for less money) than they
had in corporate life. They nevertheless perceived them-
selves to have a better work–life balance because they
had greater scope to make their own choices. Leaders
who know how to satisfy the need for autonomy among
their people can reap substantial benefits — without los-
ing their best people to the entrepreneurial ranks.
Relating to Relatedness
Fruitful collaboration depends on healthy relationships,
which require trust and empathy. But in the brain, the
ability to feel trust and empathy about others is shaped
by whether they are perceived to be part of the same
social group. This pattern is visible in many domains: in
sports (“I hate the other team”), in organizational silos
(“the ‘suits’ are the problem”), and in communities
(“those people on the other side of town always mess
things up”).
Each time a person meets someone new, the brain
automatically makes quick friend-or-foe distinctions
and then experiences the friends and foes in ways that
are colored by those distinctions. When the new person
is perceived as different, the information travels along
neural pathways that are associated with uncomfortable
feelings (different from the neural pathways triggered by
people who are perceived as similar to oneself).
Leaders who understand this phenomenon will find
many ways to apply it in business. For example, teams of
diverse people cannot be thrown together. They must be
deliberately put together in a way that minimizes the
potential for threat responses. Trust cannot be assumed
strategy + business special issue, autumn 2010
or mandated, nor can empathy or even goodwill be
compelled. These qualities develop only when people’s
brains start to recognize former strangers as friends. This
requires time and repeated social interaction.
Once people make a stronger social connection,
their brains begin to secrete a hormone called oxytocin
in one another’s presence. This chemical, which has
been linked with affection, maternal behavior, sexual
arousal, and generosity, disarms the threat response and
 We now have reason to believe
that economic incentives are effective
only when people perceive
them as supporting their social needs.
further activates the neural networks that permit us to
perceive someone as “just like us.” Research by Michael
Kosfeld et al. in 2005 shows that a shot of oxytocin
delivered by means of a nasal spray decreases threat
arousal. But so may a handshake and a shared glance
over something funny.
Conversely, the human threat response is aroused
when people feel cut off from social interaction.
Loneliness and isolation are profoundly stressful. John T.
Cacioppo and William Patrick showed in 2008 that
loneliness is itself a threat response to lack of social con-
tact, activating the same neurochemicals that flood the
system when one is subjected to physical pain. Leaders
who strive for inclusion and minimize situations in
which people feel rejected create an environment that
supports maximum performance. This of course raises a
challenge for organizations: How can they foster relat-
edness among people who are competing with one
another or who may be laid off?
Playing for Fairness
The perception that an event has been unfair generates
a strong response in the limbic system, stirring hostility
and undermining trust. As with status, people perceive
fairness in relative terms, feeling more satisfied with a
fair exchange that offers a minimal reward than an
unfair exchange in which the reward is substantial.
Studies conducted by Matthew Lieberman and Golnaz
Tabibnia found that people respond more positively to
being given 50 cents from a dollar split between them
and another person than to receiving $8 out of a total of
$25. Another study found that the experience of fairness
produces reward responses in the brain similar to those
that occur from eating chocolate.
The cognitive need for fairness is so strong that
some people are willing to fight and die for causes
management
they believe are just — or commit themselves whole-
heartedly to an organization they recognize as fair. An
executive told me he had stayed with his company for 22
years simply because “they always did the right thing.”
People often engage in volunteer work for similar rea-
sons: They perceive their actions as increasing the fair-
ness quotient in the world.
In organizations, the perception of unfairness cre-
ates an environment in which trust and collaboration
cannot flourish. Leaders who play favorites or who
appear to reserve privileges for people who are like them
arouse a threat response in employees who are outside
their circle. The old boys’ network provides an egregious
example; those who are not a part of it always perceive
their organizations as fundamentally unfair, no matter
95
how many mentoring programs are put in place.
Like certainty, fairness is served by transparency.
Leaders who share information in a timely manner can
keep people engaged and motivated, even during staff
reductions. Morale remains relatively high when people
perceive that cutbacks are being handled fairly — that
no one group is treated with preference and that there is
a rationale for every cut.
Putting on the SCARF
If you are a leader, every action you take and every
decision you make either supports or undermines the
perceived levels of status, certainty, autonomy, related-
ness, and fairness in your enterprise. In fact, this is why
leading is so difficult. Your every word and glance is
freighted with social meaning. Your sentences and
gestures are noticed and interpreted, magnified and

combed for meanings you may never have intended.
The SCARF model provides a means of bringing
conscious awareness to all these potentially fraught
interactions. It helps alert you to people’s core concerns
(which they may not even understand themselves) and
shows you how to calibrate your words and actions to
better effect.
Start by reducing the threats inherent in your com-
pany and in its leaders’ behavior. Just as the animal brain
is wired to respond to a predator before it can focus
attention on the hunt for food, so is the social brain
management
wired to respond to dangers that threaten its core con-
cerns before it can perform other functions. Threat
always trumps reward because the threat response is
strong, immediate, and hard to ignore. Once aroused,
it is hard to displace, which is why an unpleasant
encounter in traffic on the morning drive to work can
distract attention and impair performance all day.
Humans cannot think creatively, work well with others,
or make informed decisions when their threat responses
are on high alert. Skilled leaders understand this and
act accordingly.
A business reorganization provides a good example.
Reorganizations generate massive amounts of uncertain-
ty, which can paralyze people’s ability to perform. A
leader attuned to SCARF principles therefore makes
96
reducing the threat of uncertainty the first order of busi-
ness. For example, a leader might kick off the process by
sharing as much information as possible about the rea-
sons for the reorganization, painting a picture of the
future company and explaining what the specific impli-
cations will be for the people who work there. Much will
be unknown, but being clear about what is known and
willing to acknowledge what is not goes a long way
toward ameliorating uncertainty threats.
Reorganizations also stir up threats to autonomy,
because people feel they lack control over their future.
An astute leader will address these threats by giving peo-
ple latitude to make as many of their own decisions as
possible — for example, when the budget must be cut,
involving the people closest to the work in deciding
what must go. Because many reorganizations entail
information technology upgrades that undermine peo-
ple’s perception of autonomy by foisting new systems on
them without their consent, it is essential to provide
continuous support and solicit employees’ participation
in the design of new systems.
Top-down strategic planning is often inimical to
SCARF -related reactions. Having a few key leaders come
up with a plan and then expecting people to buy into it
is a recipe for failure, because it does not take the threat
response into account. People rarely support initiatives
they had no part in designing; doing so would under-
mine both autonomy and status. Proactively addressing
these concerns by adopting an inclusive planning
process can prevent the kind of unconscious sabotage
that results when people feel they have played no part in
a change that affects them every day.
Leaders often underestimate the importance of
addressing threats to fairness. This is especially true
when it comes to compensation. Although most people
are not motivated primarily by money, they are pro-
foundly de-motivated when they believe they are
being unfairly paid or that others are overpaid by com-
parison. Leaders who recognize fairness as a core con-
cern understand that disproportionately increasing
compensation at the top makes it impossible to fully
engage people at the middle or lower end of the pay
scale. Declaring that a highly paid executive is “doing a
great job” is counterproductive in this situation because
those who are paid less will interpret it to mean that they
are perceived to be poor performers.
For years, economists have argued that people will
change their behavior if they have sufficient incentives.
But these economists have defined incentives almost
exclusively in economic terms. We now have reason to
believe that economic incentives are effective only when
people perceive them as supporting their social needs.
Status can also be enhanced by giving an employee
greater scope to plan his or her schedule or the chance
to develop meaningful relationships with those at differ-
ent levels in the organization. The SCARF model thus
provides leaders with more nuanced and cost-effective
strategy + business special issue, autumn 2010
ways to expand the definition of reward. In doing so,
SCARF principles also provide a more granular under-
standing of the state of engagement, in which employ-
ees give their best performance. Engagement can be
induced when people working toward objectives feel
rewarded by their efforts, with a manageable level of
threat: in short, when the brain is generating rewards in
several SCARF-related dimensions.
Leaders themselves are not immune to the SCARF
dynamic; like everyone else, they react when they feel
their status, certainty, autonomy, relatedness, and fair
treatment are threatened. However, their reactions have
more impact, because they are picked up and amplified
by others throughout the company. (If a company’s
executive salaries are excessive, it may be because others
are following the leader’s intuitive emphasis, driven by
subconscious cognition, on anything that adds status.)
If you are an executive leader, the more practiced
you are at reading yourself, the more effective you will
be. For example, if you understand that micromanaging
threatens status and autonomy, you will resist your own
impulse to gain certainty by dictating every detail.
Instead, you’ll seek to disarm people by giving them lat-
itude to make their own mistakes. If you have felt the
hairs on the back of your own neck rise when someone
says, “Can I offer you some feedback?” you will know it’s
best to create opportunities for people to do the hard
work of self-assessment rather than insisting they
depend on performance reviews.
When a leader is self-aware, it gives others a feeling
of safety even in uncertain environments. It makes it eas-
ier for employees to focus on their work, which leads to
improved performance. The same principle is evident in
other groups of mammals, where a skilled pack leader
keeps members at peace so they can perform their func-
tions. A self-aware leader modulates his or her behavior
to alleviate organizational stress and creates an environ-
ment in which motivation and creativity flourish. One
great advantage of neuroscience is that it provides hard
data to vouch for the efficacy and value of so-called soft
skills. It also shows the danger of being a hard-charging
leader whose best efforts to move people along also set
up a threat response that puts others on guard.
Similarly, many leaders try to repress their emotions
in order to enhance their leadership presence, but this
only confuses people and undermines morale. Exper-
iments by Kevin Ochsner and James Gross show that
when someone tries not to let other people see what he
or she is feeling, the other party tends to experience a
threat response. That’s why being spontaneous is key to
creating an authentic leadership presence. This approach
is likely to minimize status threats, increase certainty,
and create a sense of relatedness and fairness.
Finally, the SCARF model helps explain why intelli-
gence, in itself, isn’t sufficient for a good leader. Matthew
Lieberman’s research suggests that high intelligence
often corresponds with low self-awareness. The neural
networks involved in information holding, planning,
and cognitive problem solving reside in the lateral, or
outer, portions of the brain, whereas the middle regions
support self-awareness, social skills, and empathy. These
regions are inversely correlated. As Lieberman notes, “If
you spend a lot of time in cognitive tasks, your ability to
have empathy for people is reduced simply because that
part of your circuitry doesn’t get much use.”
Perhaps the greatest challenge facing leaders of busi-
ness or government is to create the kind of atmosphere
that promotes status, certainty, autonomy, relatedness,
and fairness. When historians look back, their judgment
of this period in time may rise or fall on how organiza-
tions, and society as a whole, operated. Did they treat
people fairly, draw people together to solve problems,
promote entrepreneurship and autonomy, foster certain-
ty wherever possible, and find ways to raise the perceived
status of everyone? If so, the brains of the future will
management
salute them. +
Reprint No. 09306
Resources
John T. Cacioppo and William Patrick, Loneliness: Human Nature and the
Need for Social Connection (W.W. Norton, 2008): A scientific look at the
causes and effects of emotional isolation.
Naomi Eisenberger and Matthew Lieberman, “The Pains and Pleasures of
Social Life,” Science, vol. 323, no. 5916, February 2009, 890–891:
Explication of social pain and social pleasure, and the impact of fairness,
status, and autonomy on brain response.
Naomi Eisenberger and Matthew Lieberman, with K.D. Williams, “Does
Rejection Hurt? An fMRI Study of Social Exclusion,” Science, vol. 302,
no. 5643, October 2003, 290–292: Covers the Cyberball experiment.
Michael Marmot, The Status Syndrome: How Social Standing Affects Our
Health and Longevity (Times Books, 2004): An epidemiologist shows that 97
people live longer when they have status, autonomy, and relatedness, even
if they lack money.
David Rock, “SCARF: A Brain-based Model for Collaborating with and
Influencing Others,” NeuroLeadership Journal, vol. 1, no. 1, December
2008, 44: Overview of research on the five factors described in this article,
and contains bibliographic references for research quoted in this article.
David Rock, Your Brain at Work: Strategies for Overcoming Distraction,
Regaining Focus, and Working Smarter All Day Long (HarperBusiness,
2009): Neuroscience explanations for workplace challenges and dilemmas,
and strategies for managing them.
David Rock and Jeffrey Schwartz, “The Neuroscience of Leadership,” s+b,
Summer 2006, www.strategy-business.com/press/article/06207: Applying
breakthroughs in brain research, this article explains the value of neuro-
plasticity in organizational change.
NeuroLeadership Institute website, www.neuroleadership.org: Institute
bringing together research scientists and management experts to explore
the transformation of organizational development and performance.
For more thought leadership on this topic, see the s+b website at:
www.strategy-business.com/strategy_and_leadership.
 BY THEODORE KINNI
ESSENTIAL READING
HIGHLIGHTS FROM
15Years OF S+B BOOK REVIEWS
best business books 1995–2010
A select shelf of books that not only
expanded the corporate lexicon, but still
have the power to change the way
we see the world and do business.
98
In its premier issue in 1995, strategy+business
reviewed five books. One of them was the fifth anniver-
sary edition of Peter M. Senge’s The Fifth Discipline:
The Art and Practice of the Learning Organization
(Doubleday Currency, 1990), which introduced the
concept of the learning organization to a broader audi-
ence. This book remains as relevant today as it was when
it was first published. That’s no mean feat, given the
changes that have occurred in the past 20 years.
Some of the most far-reaching of these changes have
occurred in publishing, which has become digital and
migrated online. This has created a sea change in the
ways that ideas are communicated, the likes of which
hasn’t been seen since Johannes Gutenberg invented the
printing press 550 years ago.
Some observers are concerned that this change is
fundamentally altering not only how we write and read,
but how we think — and not altering it for the better.
In his new book, a polemic titled The Shallows: What the
Internet Is Doing to Our Brains (W.W. Norton, 2010),
Nicholas Carr describes how the skimming and skipping
that characterize online information gathering actually
reroute the neural pathways in our brains. Carr warns
that this could cause us to lose the capacity for the kind
Illustration by Craig Frazier
of mind-focusing “deep reading” that books engender,
and the reflection and creativity that result from it.
Whatever the prevailing trend in reading may turn
out to be, it is clear from 15 years of book coverage in
s+b, written by a host of distinguished reviewers, that
there is much to be thoughtful about. Executives who go
back to the best books that s+b has covered over the
years would gain a valuable source of information and
best business books 1995–2010
99
 Theodore Kinni
tedkinni@cox.net
is senior editor for books at
strategy+business. He has
written or collaborated on 13
business books.
insight. These are the rare books that have expanded the
corporate lexicon and changed the way we do business.
best business books 1995–2010
Seminal Ideas
Peter M. Senge’s The Fifth Discipline is surely one of the
most influential management works of the past two
decades. Senge, who founded the Center for Organiza-
tional Learning at MIT’s Sloan School of Management,
pegged the problems that companies commonly en-
counter to the inability to adapt to changing circum-
stances — in his words, to learning disabilities. He
asserted (borrowing a theme from Arie de Geus) that
organizations that are capable of learning possess a valu-
able competitive advantage, and went on, in the core
chapters of the book, to lay out the now-familiar five
components necessary to create such organizations: sys-
tems thinking, personal mastery, mental models, shared
100
visions, and team learning.
Paul Idzik, then a Booz & Company partner,
reviewed The Fifth Discipline on the occasion of the
book’s fifth anniversary. “Senior executives are devoting
more of their time these days to fostering a culture of
learning within their organizations,” wrote Idzik. “They
realize that many of the recurring problems they deal
with would be more quickly and productively resolved if
they managed and belonged to a learning organization.”
That is still true; the organizational learning disabilities
that Senge noticed (such as a fixation on short-term
events that obscures the big picture) are still very much
with us, and the learning disciplines still provide a rem-
edy when practiced.
The list of seminal books that s+b reviewed must
also include The Fortune at the Bottom of the Pyramid:
Eradicating Poverty through Profits (Wharton School
Publishing, 2005), a paean to the uplifting effect of
capitalism on the human condition, by the late
University of Michigan professor C.K. Prahalad. (See
page 32 for his article on the same theme.) This book is
so compelling that it was featured as one of the year’s
best business books in 2005 in two categories, strategy
and globalization.
Prahalad tallied up the 4 billion people who lived
on incomes of less than US$1,400 per year, and posited
the original idea that they make up a largely untapped
market valued at trillions of dollars in aggregate. In their
essay on the best business books on strategy, former
Booz & Company Partners Chuck Lucier and Jan Dyer
picked the book as “essential reading” for four reasons:
the emerging market business models it described; the
crucial new source of corporate growth it identified; the
competitive threat that companies serving the bottom of
the pyramid represented; and the likelihood that the
low-cost, high-volume models would eventually migrate
to developed markets. The Fortune at the Bottom of the
Pyramid, they wrote, provided “a rare glimpse into the
future — for those with eyes to see — of the extraordi-
nary opportunities waiting in uncharted and seemingly
impassable waters.”
A third seminal book covered in s+b’s pages is one
strategy + business special issue, autumn 2010
whose relevance grows along with the ecological impact
of our industrial society. In Cradle to Cradle: Remaking
the Way We Make Things (North Point Press, 2002),
William McDonough and Michael Braungart, an archi-
tect and chemist, respectively, identified the convention-
al “take, make, and waste” product cycle as a major con-
tributor to our environmental problems. They proposed
that human industry be redesigned to echo nature, in
which every major nutrient is endlessly recycled.
 If books were to morph into shallow,
short-form online works, we would miss those
titles that take deep dives into the new trends
that are shaping and reshaping our world.
“Consider this thought experiment, which appears
in [the book]: What would it take to run your company
the way the Menominee tribe of Michigan runs their
forest?” wrote Joe Flower, a regular s+b contributor, who
reviewed Cradle to Cradle in his Knowledge Review essay
on sustainability in the Spring 2009 issue. “In 1870, the
Menominee counted 1.3 billion board feet of standing
timber on their 235,000 acres of land. Over the last 138
years, they have harvested 2.3 billion board feet, and
now they have 1.7 billion board feet. Neat trick. Maybe
you’re not in a resource-extraction industry; maybe your
capital doesn’t grow on trees. But isn’t there an equiva-
lent potential achievement in your sector?”
A Global Trend
If books were to morph into shallow, short-form online
works, we would miss those titles that take deep dives
into the new trends that are shaping and reshaping our
world. One of the most far-reaching and implication-
laden of these trends has been globalization, and during
s+b’s publishing tenure, a library’s worth of books on the
topic have appeared. Among the most influential and
widely read of them was Thomas L. Friedman’s The
World Is Flat: A Brief History of the Twenty-First Century
(Farrar, Straus and Giroux, 2005), which Howard
Rheingold, a leading observer of the social changes stim-
ulated by technology, chose as the best business book of
2005 in the future category.
Friedman, the foreign affairs columnist for the New
York Times, argued that globalization entered a new
phase around the turn of the millennium. Whereas
Globalization 1.0 was fueled by the drive for empire by
nation-states beginning in 1492 and Globalization 2.0
was driven by the international expansion of enterprises
starting around 1800, Globalization 3.0 was driven by
“the newfound power of individuals to collaborate and
best business books 1995–2010
compete globally.” This power derived from 10 “flatten-
ers,” according to Friedman, which were all directly
related to digital technologies and networks.
Friedman’s flat world explained many of the chal-
lenges that companies were facing in a global economy,
but business readers had to wait for the publication of
Pankaj Ghemawat’s Redefining Global Strategy: Crossing
Borders in a World Where Differences Still Matter
(Harvard Business School Press, 2007) for a measured,
strategic response. In it, the author, a professor of global
strategy at IESE business school in Barcelona, takes issue
with Friedman’s boundaryless “flat” world. Ghemawat
points out that there are still plenty of speed bumps for
companies that rush into the global fray with a one-
world strategy that doesn’t account for the myriad dif-
101
ferences between nations.
The core of the book is devoted to Ghemawat’s
CAGE framework, a means of understanding the cul-
tural, administrative, geographic, and economic dimen-
sions of nations and making sure they are reflected in
companies’ business strategies. “With its combination of
solid data, illuminating case studies, and helpful con-
cepts, this book is an effective antidote to both millen-
nial and apocalyptic visions of globalization,” wrote
s+b’s longtime Books in Brief reviewer David Hurst in
the Spring 2008 issue.
Managerial Art and Craft
Although many management books might benefit from
a shorter format, we wouldn’t want to lose a word of the
best of them. The books of Henry Mintzberg, McGill
University’s iconoclastic professor of management stud-
 ies, are terrific examples of the latter category and the
career-expanding insights such works can stimulate,
especially the concisely titled Managing (Berrett-
Koehler, 2009).
Mintzberg has always been more interested in the
realities of managing than its theories. In his first book,
The Nature of Managerial Work (Harper and Row,
1973), he shadowed five CEOs to see how their daily
work jibed with the various theories of management in
vogue at the time. In writing Managing some 30 years
later, he bookended his body of work with a similar
project — this time following 29 managers. This exer-
cise confirmed Mintzberg’s conviction that managers are
facilitators, who leverage “the natural propensity of peo-
ple to cooperate in communities.”
“Management books often make me feel like I
should head back to boot camp. But reading Managing,
best business books 1995–2010
. . . I found my own managerial insecurities melting
away,” wrote Judith Samuelson, the executive director of
the Aspen Institute Business and Society Program, who
featured the book in her best business books essay in
Winter 2009. “Mintzberg reminds us that most man-
agers are prey to events and demands they do not con-
trol, and that a wide range of styles can work well for a
boss. Balance is the key: keeping up with the hectic pace
of business yet making time for reflection; driving
change yet maintaining stability; leading and collaborat-
ing; leavening analysis with judgment.”
Larry Bossidy, former chairman of Honeywell
International, and Ram Charan, a prolific consultant,
are also great proponents of the realist school. In their
book Execution: The Discipline of Getting Things Done
102
(Crown Business, 2002), they assert that CEOs have
three primary responsibilities: analyzing the business
environment and their companies, closing the gap
between desired outcomes and actual performance, and,
especially, ensuring execution.
In choosing Execution as a 2002 best business book
of the year in the leadership category, Bruce A.
Pasternack, then a senior partner at Booz & Company,
and James O’Toole, a professor at the University of
Denver’s Daniels College of Business, noted the book’s
emphasis on practical advice on everything from strategy
making to plant inspections. “We ended up making
pages of useful notes,” they wrote, “and in discussions
about the book with clients and colleagues, we noted
they are doing the same.”
MIT management professor emeritus Edgar Schein
has written a perfect companion volume to the two pre-
vious books. In Helping: How to Offer, Give, and Receive
Help (Berrett-Koehler, 2009), Schein deconstructed the
act of helping, and in doing so created a valuable guide
to a task that many managers face, but few truly under-
stand and effectively execute.
“We often ignore [Schein’s] principles amid the
daily course of life, taking for granted relationships and
exchanges that may not be what they seem. We get lazy,”
wrote Charles Handy, a noted management observer, in
his review of the best business books on leadership in the
Winter 2009 issue. “I found this little book a salutary
reminder of too many lapses on my part, while it also
explained why some of my well-intentioned attempts to
help only led to worsening relationships. Any aspiring
leader would do well to review his or her own behavior
in the light of this very useful guide.”
Best Cases
Two closely related business book genres that require
long-form writing are corporate histories and the biog-
raphies and memoirs of leaders. Books of this sort can
be sanitized to the point that they become cures for
insomnia, but when driven by a spirit of open and hon-
est inquiry, they have the power to compel and inspire.
David Packard’s memoir, The HP Way: How Bill
Hewlett and I Built Our Company (HarperBusiness,
1995), traces how the now-famous business partners
founded an electronic instrument business in a garage
in Palo Alto, Calif., with $538 in capital; their startup
grew into a $100 billion global corporation. Published
just a year before Packard’s death, the book illuminates
a leader’s role in creating and transmitting a perfor-
mance culture.
The Hewlett-Packard culture was a direct reflection
of the pragmatic philosophies of the company’s
founders. The cofounders believed in participative goal
setting, decentralized authority, and a humane form of
accountability that moved employees up until they
reached their limits and then moved them around until
they found their niches. Neither Hewlett nor Packard
strategy + business special issue, autumn 2010
had any vision: They just wanted to make a profit mak-
ing innovative and high-quality machines that addressed
their customers’ needs.
And so they did. “Balancing the goals of the com-
pany with the realities of the marketplace and the needs
of both stockholders and employees is what HP has
achieved. It has done this while also producing a series
of innovative products, which contributed mightily to
business and the country,” wrote Robert Cranny in s+b’s
second issue. “The HP Way should be kept in a corner of
every office and den. It’s good just to know it’s there.”
Louis V. Gerstner Jr. is another leader who famous-
ly eschewed the “vision thing” for pragmatic manage-
ment — and saved IBM in the process. In Who Says
Elephants Can’t Dance? Inside IBM’s Historic Turnaround
(HarperBusiness, 2002), Gerstner explains in detail how
to restructure a massive organization — radically chang-
ing its business model, cutting costs, and reengineering
its processes — and remake its culture without flying it
into an unrecoverable tailspin.
“There are a few good leaders, and a few good new
leadership books,” wrote Pasternack and O’Toole on
naming Who Says Elephants Can’t Dance? one of 2003’s
best business books in the leadership category. “Louis V.
Gerstner Jr. gets the nod on both counts.”
And finally, there is Alice Schroeder’s monumental
biography of Warren Buffett, The Snowball: Warren
Buffett and the Business of Life (Bantam, 2008), which
successfully undertook the delicate task of ferreting out
what makes the Oracle of Omaha tick, with his permis-
sion. Schroeder’s portrait is especially compelling
because she never sidesteps the real Buffett for easy
answers. Instead, wrote O’Toole, who selected the book
as one of 2009’s best business books in biography,
“Schroeder offers us a nuanced portrait of a surprisingly
complex and insecure man whose life is full of paradox-
es and contradictions.” It’s good to know that even the
most successful businessperson of our time is more man
than mogul.
Disruptive Technologies
For greater insight into how technology will change
publishing in the years to come, Clayton Christensen’s
The Innovator’s Dilemma: When New Technologies Cause
Great Firms to Fail (Harvard Business School Press,
1997) is a good place to turn. The book, which David
Hurst reviewed in the spring of 2001, introduced
Christensen’s seminal theory of disruptive technologies
and described their cyclical effect on industries.
Christensen, a professor at Harvard Business
School, says that successful companies in a given indus-
try are almost always focused on improving their prod-
ucts and the technologies that underlie them. This cre-
ates innovation races in which the industry’s offerings
outpace the needs and desires of customers. New com-
petitors inevitably arise, deploying disruptive technolo-
gies to serve customers in more effective ways, but the
incumbent industry leaders ignore them as inconse-
quential. Eventually, the new competitors eclipse the
industry leaders, and the cycle starts again. How does
this relate to publishing? Well, one hint comes from
Amazon, which announced that its e-book sales had
overtaken hardcover sales as I wrote this article.
Disruptive technologies bring us full circle to
Nicholas Carr. Before the publication of his current vol-
ume, Carr generated controversy with Does IT Matter?
Information Technology and the Corrosion of Competitive
Advantage (Harvard Business School Press, 2004). In it
Carr suggested that IT was well on its way to becoming
a “commodity technology.” The idea that IT had
become merely an ante in the game of business, rather
than a winning hand, understandably outraged many
denizens within this sector. They were, after all, still reel-
ing from the tech-led recession in 2001 and 2002 when
the book arrived.
best business books 1995–2010
When Steve Lohr, a technology reporter for the
New York Times, looked at the book in his Knowledge
Review in the Summer 2004 issue, he found flaws, say-
ing that “Carr’s desire to fit everything neatly into his
thesis leads him astray” and his “thesis is often the same
kind of straitjacket of standardization that packaged
software, as he says, is for companies.” But Lohr found
Carr’s indictment of “faith-based investment in technol-
ogy” spot on. “The value is not in the bits and bytes,”
concluded Lohr, “but up a few levels in the minds of the
skilled businesspeople using the tools. Large chunks of
the technology may be commoditizing, but how you use
it isn’t. That is where competitive advantage resides.”
The same can be said for books. Books probably
won’t disappear anytime soon, but their real value is not
103
in their pages. It is in the minds of managers and how
they put what they read to use. The best insights being
codified in the best business books and then deployed
thoughtfully is the way that management knowledge
develops these days — and books are therefore one of
the great vehicles of progress in our world. +
BY ART KLEINER
Articles of Significance
Of strategy+business’s many classic articles over the years,
here are a few of the editor’s favorites.
How to Manage Creative People: The Case of Industrial
Light and Magic
Lawrence Fisher, Second Quarter 1997, www.strategy-business
.com/article/15151: The special effects shop that George Lucas
founded builds its success on good relationships.
Are There Limits to Total Quality Management?
Arthur M. Schneiderman, Second Quarter 1998, www.strategy-
business.com/article/16188: Yes, as you go up the hierarchy,
problems grow too complex for continuous improvement.
The Last Mile to Nowhere: Flaws and Fallacies in Internet
Home-Delivery Schemes
Tim Laseter, Pat Houston, Martha Turner, et al., Third Quarter
2000, www.strategy-business.com/article/19594: The failure of
Webvan shows the trade-off between delivery speed and variety.
Money Isn’t Everything: Innovation’s Big Spenders
Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, Winter 2005,
www.strategy-business.com/article/05406: First of our ongoing
studies of global corporate R&D spending — and its complex
link to performance.
Love Your “Dogs”
Harry Quarls, Thomas Pernsteiner, and Kasturi Rangan, Spring
2006, www.strategy-business.com/article/06107: The
conventional wisdom about portfolio management is wrong;
foster poor performers to gain value.
City Planet
Stewart Brand, Spring 2006, www.strategy-business.com/
article/06109: Suddenly, half the world’s human population is
urban. Get ready for cosmopolitan, thriving new cities.
The Future of Advertising Is Now
Christopher Vollmer, John Frelinghuysen, and Randall
Rothenberg, Summer 2006, www.strategy-business.com/
article/06204: After years of overhype, the digital revolution
finally came — and marketers learned to adapt.
The Neuroscience of Leadership
David Rock and Jeffrey Schwartz, Summer 2006, www.strategy-
business.com/article/06207: Change is pain, behaviorism
doesn’t work, focus is power, and attention changes the brain.
The Flatbread Factor
Alonso Martinez and Ronald Haddock, Spring 2007, www
.strategy-business.com/article/07106: Emerging markets, from
China to Brazil, have strikingly similar life cycles.
Lights! Water! Motion!
Viren Doshi, Gary Schulman, and Daniel Gabaldon, Spring 2007,
www.strategy-business.com/article/07104: The world’s energy,
water, and transportation infrastructure needs a US$40 trillion
makeover.
The Empty Boardroom
Thomas Neff and Julie Hembrock Daum, Summer 2007,
www.strategy-business.com/article/07206: Corporate board
recruits with CEO experience are in short supply — and that’s
good news.
Oasis Economies
Joe Saddi, Karim Sabbagh, and Richard Shediac, Spring 2008,
www.strategy-business.com/article/08105: Open, diversified
economics is a new force for stability in the Middle East.
The Next Industrial Imperative
Peter Senge, Bryan Smith, and Nina Kruschwitz, Summer 2008,
www.strategy-business.com/article/08205: The industrial era is
bursting like a bubble; climate change is just the advance signal.
The Library Rebooted
Scott Corwin, Elisabeth Hartley, and Harry Hawkes, Spring 2009,
www.strategy-business.com/article/09108: These critically
important institutions are redesigning their business models for
the digital age.
The Best Years of the Auto Industry Are Still to Come
Ronald Haddock and John Jullens, Summer 2009, www
.strategy-business.com/article/09204: Millions of new
automobiles will be sold in emerging markets.
Too Good to Fail
Ann Graham, Spring 2010, www.strategy-business.com/
article/10106: India’s Tata, a giant and diverse conglomerate,
bases its global strategy on social entrepreneurship.
Why We Hate the Oil Companies
John Hofmeister, Summer 2010, www.strategy-business.com/
article/10207: How corporate leaders create their reputations for
arrogance, by a former CEO of Shell Oil.