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Published by Booz & Company www.strategy-business.com Spring 2014 $12.95 Display until May 27, 2014 GRIT’S TRUE VALUE IN PRAISE OF EXCESS CAPACITY LEAN, MEAN, AND EUROPEAN Enroll. Re-boot. Transform: epso.stanfordtoday.com EXECUTIVE PROGRAM IN STRATEGY AND ORGANIZATION July 13 – 25, 2014 Application Deadline: June 2, 2014 Change lives. Change organizations. Change the world. In the high-stakes game of global business, the companies that win are the ones that can successfully navigate a constantly changing and complex environment. Learn how to align your organization’s strategy and structure with this environment, identify and evaluate your firm’s strategy, and execute change management initiatives with success. Learn to manage change while you learn to change the game. Less is more. Keep your eyes on the prize. Know what matters. Few or- ganizational truisms are more given to aphorism than “focus is critical.” Executives are flooded by choice. There are always too many matters that require attention and too many possible paths to the same intended outcome. The temptations of choice can be so overwhelming that a score of platitudes cannot keep us from committing the same sin time and again: We don’t choose at all. We try multiple options. We pursue every initiative that seems promising. We throw it all at the wall and see what doesn’t bounce off. The problem, as we know intellectu- ally but cannot accept emotionally, is that when you try to do too much, rarely does any one thing succeed. Consider the struggles com- panies face in managing cultural change. Organizational culture can be a vexing issue for leaders even in the calmest of times—and when they try to transform those cultures, their consternation only increases. With no clear path to follow, execu- tives mix top-down directives with multiphased change management programs and medleys of new pro- cedures. What’s missing is focus and, more specifically, focus on the factors that Jon Katzenbach, Rut- ger von Post, and James Thomas argue really matter in culture change: the core behaviors, existing cultural traits, and key individuals that make a cultural shift meaningful, tangible, and lasting. The authors call these “the critical few” (page 50). A focus on the few is equally important when it comes to manag- ing people. As Susan Cramm writes in “Align with Your Stars” (page 28), the best managers of talent know how to identify and effectively de- velop their organization’s true, and relatively few, star employees. And they make time to do so at the ex- pense of less impactful tasks. We also request your attention on several other topics of conse- quence. Siemens Corporation leaders Helmuth Ludwig and Eric Spiegel make a powerful case for the re-shor- ing of industry in “America’s Real Manufacturing Advantage” (page 38). Their optimism stems from the United States’ sustainable strengths in the three areas that underlie a technology-guided manufacturing sector: innovation, software develop- ment, and university education. Please then shift your focus to page 22, where Ramez T. Shehadi and Mounira Jamjoom describe CSR’s emergence as a driver of en- trepreneurship, economic develop- ment, and job growth in “Corporate Social Responsibility’s New Role in the Middle East.” By turning tradi- tional CSR on its ear, organizations stand to provide both the region and themselves with a new source of ad- vantage: vibrant economies. And speaking of advantage, Columbia Business School professor Rita Gunther McGrath has some news for you on page 72: It doesn’t last as long as it used to, and prob- ably not as long as you think. A wealth of other great material awaits you in these pages. And, thus, the exception to a rule: We advise you to focus on it all. On behalf of everyone at strategy+business, I hope you find this issue to be a good use of your valuable time. Paul Michelman Executive Editor paul.michelman@ strategy-business.com Illustration by Lars Leetaru The Fewer the Better comment editor’s letter 1 editor’s letter Cut the Fat but Keep Some Slack Sendhil Mullainathan and Eldar Shafir Why excess capacity leads to greater efficiency. How to Break the Cycle of CIO Turnover Richard Bhanap, Nicolai Bieber, and Martin Roets Companies benefit from strong IT leaders. The trick is developing and retaining them. Achieving Growth in a Lean Europe Richard Rawlinson With consumer spending down and investment drying up, what’s an E.U. firm to do? Angela Duckworth’s Gritty View of Success Laura W. Geller A psychologist and new MacArthur Fellow says you need employees with stamina and tenacity above all else. Scale Your Innovation Initiatives Robert C. Wolcott and Jørn Bang Andersen Five ways to boost the impact of new endeavors without adding bureaucracy or cost. s+b Trend Watch Alternative Powertrains GLOBAL PERSPECTIVE Corporate Social Responsibility’s New Role in the Middle East Ramez T. Shehadi and Mounira Jamjoom An urgent need for job growth is spurring an innovative trend in CSR and high-minded commercial initiatives. ORGANIZATIONS & PEOPLE Align with Your Stars Susan Cramm When you connect the development of your top talent with the needs of your organization, everyone wins— and your best people stay. FINANCE Four Strategies for Wealth Managers Alan Gemes and Andreas Lenzhofer How to help close the gap between assets under management and profits. leading ideas 17 15 6 8 12 32 28 22 20 38 17 58 essays OPERATIONS & MANUFACTURING America’s Real Manufacturing Advantage Helmuth Ludwig and Eric Spiegel A new wave of software innovation is about to transform industry—and give the United States the chance for a lasting edge. ORGANIZATIONS & PEOPLE The Critical Few: Components of a Truly Effective Culture Jon Katzenbach, Rutger von Post, and James Thomas Forget the monolithic change management programs and focus on the elements of your culture that drive performance. Four Signs That Your Critical Few Behaviors Are Working MARKETING, MEDIA & SALES A Step-by-Step Guide to Winning the Customer Niraj Dawar Companies that understand the stages of consumer purchasing decisions have an outsized influence on their outcome. Competing for Low-Involvement Purchases Best of the s+b Blogs Strategy Matters in Emerging Markets After All John Jullens Why We Should Deregulate the Government Art Kleiner The Three Habits of Highly Effective Demotivators Sally Helgesen THE THOUGHT LEADER INTERVIEW Rita Gunther McGrath Theodore Kinni The Columbia Business School professor says the era of sustainable competitive advantage is being replaced by an age of flexibility. Are you ready? BOOKS IN BRIEF Working Together Apart Jon Gertner The Big Promise of Open Data Nancy Scola The Rise and Fall of Western Innovation Marc Levinson The Lion versus the Fox David K. Hurst The Trouble with Sunspots George S. Oldfield END PAGE: RECENT RESEARCH The Vicious Cycle of CEO Pet Projects Matt Palmquist Incoming leaders follow a predictable pattern of disinvesting from their predecessor’s flops and eventually investing just as unwisely. Cover illustration by Foreal features 38 68 70 Issue 74, Spring 2014Published by Booz & Company 58 63 66 50 80 82 83 85 86 88 72 54 strategy+business www.strategy-business.com Published by Booz & Company strategy+business (ISSN 1083-706X) is published quarterly by Booz & Company Inc., 101 Park Avenue, New York, NY 10178. ©2014 Booz & Company Inc. All rights reserved. “strategy+business,” “Booz & Company,” and “booz&co.” are trademarks of Booz & Company Inc. No reproduction is permitted in whole or part without written permission from Booz & Company Inc. Postmaster: send changes of address to strategy+business, P.O. Box 8562, Big Sandy, TX 75755. Annual subscription rates: United States $38, Canada and elsewhere $48. Single copies $12.95. Canada Post Publications Mail Sales Agreement No. 1381237. Canadian Return Address: P.O. Box 1632, Windsor, ON, N9A 7C9. Printed in the U.S.A. EDITORIAL Editor-in-Chief Art Kleiner kleiner_art@ strategy-business.com Associate Editor Christie Rizk rizk_christie@ strategy-business.com Art Director John Klotnia klotnia@optodesign.com Executive Editor Paul Michelman michelman_paul@ strategy-business.com Senior Editor, s+b Books Theodore Kinni info@ strategy-business.com Deputy Art Director Kira Csakany kira@optodesign.com Managing Editor Elizabeth Johnson johnson_elizabeth@ strategy-business.com Senior Consulting Editors Jeff Garigliano Rob Norton Contributing Editors Edward H. 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BOOZ & COMPANY Chairman Joe Saddi Chief Executive Officer Cesare Mainardi Managing Director, Client Centricity Joachim Rotering Chief Marketing and Knowledge Officer Thomas A. Stewart Knowledge and Market- ing Advisory Council Paul Leinwand Fernando Fernandes Rolf Fricker Hilal Halaoui Barry Jaruzelski Follow us Introducing the Best Ideas on Strategy from s+b THE EXECUTIVE GUIDE TO STRATEGY Now available on the App Store and the Kindle Store Or at strategy-business.com/executivestrategy leading ideas 6 strategy+business issue 74 surgeries performed after 3 p.m. fell by 45 percent, and revenue in- creased. And in the two years that followed, the hospital experienced a 7 and 11 percent annual increase in surgical volume. We All Need Breathing Room Many systems require slack in order to run smoothly. Old reel-to-reel tape recorders needed an extra bit of tape fed into the mechanism to en- sure that it wouldn’t rip. Your coffee grinder won’t grind if you overstuff it. And consider roadways: In prin- ciple, if a road is 85 percent full and everybody goes at the same speed, all cars can easily fit with some room between them. But if one driver speeds up just a bit and then needs to brake, everyone behind that car has to brake as well. Thus, at 85 per- cent there is enough road but not enough slack to absorb small shocks, and traffic grinds to a halt. Still, slack is routinely under- valued. Perhaps you used to have an amazing administrative assistant al- ways ready to do the tasks you need- ed on short notice. But he wasn’t always busy. In the interest of effi- ciency, the department was reorga- nized, and now you share the assis- Cut the Fat but Keep Some Slack Why excess capacity leads to greater efficiency. by Sendhil Mullainathan and Eldar Shafir I n 2002, the operating rooms at St. John’s Regional Health Cen- ter, an acute-care hospital in Missouri, were at 100 percent capac- ity. When emergency cases—which made up about 20 percent of the full load—arose, the hospital was forced to bump long-scheduled surgeries. As a result, according to one study, doctors often waited several hours to perform two-hour procedures and sometimes operated at 2 a.m., and staff members regularly worked un- planned overtime. The hospital was constantly behind. Administrators brought in an outside advisor, who came up with a rather surprising solution: Leave one room unused. To many, this seemed crazy. The facility was already being squeezed, and now comes a recom- mendation to take away even more capacity? Yet there was a profound logic to this recommendation, a log- ic that is instructive for the manage- ment of scarcity. On the surface, St. John’s lacked operating rooms. But what it ac- tually lacked was the ability to ac- commodate emergencies. Because planned procedures were taking up all the rooms, unplanned surgeries required a continual rearranging of the schedule—which had serious re- percussions for costs and even qual- ity of care. The key to finding a so- lution was the fact that the term unplanned surgery is a bit mislead- ing. The hospital can’t predict each individual procedure, but it knows that there will always be emergen- cies. Once a room was set aside spe- cifically for unscheduled cases, all the other operating rooms could be packed well and proceed unencum- bered by surprises. The empty room thus added much-needed slack to the system. Soon after implement- ing this plan, the hospital was able to accommodate 5.1 percent more surgical cases overall, the number of Leading Ideas leading ideas Illustration by Robert Neubecker 7 leading ideas obligations to tomorrow, except, of course, that tomorrow’s schedule is packed too, and the cost of that de- ferral ends up being high. We fail to build in slack because we focus on what must be done now with too little consideration of all the things that may arise in the fu- ture, even in the near term. When the intangible future comes face to face with the palpable present, slack feels like a luxury. What should you do? Should you leave spaces open in your schedule just in case something unexpected comes up, despite the fact that there is already so much you’d like to do in so little time? The simple answer is yes. It’s similar to al- locating 40 minutes to drive some- where a half hour away, or salting away some money from your monthly household budget for a rainy day. Cut the Fat Carefully Now, let’s look at slack through a different lens. During the 1970s and the early 1980s, there was a wide- spread perception that many corpo- rations were bloated. Some indus- tries were so awash with cash that executives spent carelessly. Because of poor cash management, in fact, several oil companies were worth less than the oil they owned; the market anticipated they would sim- ply waste their assets. The leveraged buyout wave in the 1980s was an at- tempt to solve this problem. The logic was simple: Buy these companies and impose pressure by placing them in debt. Move them from abundance to scarcity. The dis- cipline of debt—in our parlance, the focus that comes from scarcity— would improve performance. And a raft of empirical studies showed that, whatever their other conse- quences, leveraged buyouts did just that. One reason was that corporate fat gives some managers added incentive to spend poorly—even spend in ways that run counter to shareholders’ interests. After all, it’s someone else’s money. By increasing leverage and reducing what is effec- tively free money, managers spend more wisely. Leverage also had an effect be- cause of the psychology of scarcity. Companies became “lean and mean,” in part, for the same reason deadlines produce greater produc- tivity. Being a hypervigilant manag- er who keeps costs low can require a great deal of cognitive effort. Such managers must negotiate diligently tant with two other people. The office’s time-use data revealed this new system to be a success; now the assistant’s schedule is packed as tightly as yours. However, your last- minute requests can no longer be handled immediately. This means that with your heavy schedule, even the smallest shock sets you back. So you start to juggle, and fall further and further behind. The assistant had been an important source of slack. The fact that he was “under- used,” like that room at St. John’s, is what made his role valuable. When you have a lot to do, the standard impulse is to pack tightly to fit everything in. Otherwise, you are left feeling that you’re not doing enough—that you could be more efficient. But it’s a vicious circle. When your schedule is crammed, getting stuck in a traffic jam throws you into disarray. You are late to meeting number one, and with no time in between meetings, that de- lay pushes into meeting number two, and so on. You finally have no choice but to defer one of today’s On the surface, the hospital lacked operating rooms. But what it actually lacked was the ability to accommodate emergencies. leading ideas 8 strategy+business issue 74 scarcity and slack can reduce the firefighting mentality. Consider the lesson of how banks have tried to manage risk. Banks have long recog- nized that managers, tunneling on the bottom line, do not sufficiently take risk into account (perhaps best demonstrated by the 2008 financial crisis). Many banks have introduced “chief risk officers,” who sit apart from the rest of the management team and report directly to the CEO. They must approve financial products, loans, and other transac- tions, viewing them through the lens of risk. Other organizations can take a similar approach to “slack manage- ment.” Designate someone (or a team) to focus not on what needs to be done today but on the possible events that could disrupt your busi- ness tomorrow. This person or group can ensure that those who are focused on meeting immediate proj- ect targets are not borrowing from future projects, digging the organi- zation deeper into a bandwidth hole. It is no coincidence that the advisor who proposed the shakeup at St. John’s was an outsider, removed from the struggle for the next oper- ating room. + Reprint No. 00229 Sendhil Mullainathan mullain@fas.harvard.edu is a professor of economics at Harvard University. He is a recipient of a MacArthur Foundation “genius” grant. Eldar Shafir shafir@princeton.edu is the William Stewart Tod Professor of Psychology and Public Affairs at Princeton University. This article was adapted from Mullainathan and Shafir’s new book, Scarcity: Why Having Too Little Means So Much (Times Books, 2013). How to Break the Cycle of CIO Turnover Companies benefit from strong IT leaders. The trick is developing and retaining them. by Richard Bhanap, Nicolai Bieber, and Martin Roets I n organizations around the world, new digital tools and technologies are adding efficien- cies and enabling new business models. Chief information officers stand at the epicenter of this activ- ity: As keepers of the IT wallet and managers of the firm’s tech-savvy talent, they stand to unlock the competitive advantage of digitiza- tion. But with digitization’s promise come challenges for those who man- age how it is deployed and used. To better understand the changing role of the chief infor- mation officer, Booz & Company surveyed 60 CIOs of large multi- national corporations in a variety of sectors as part of its inaugural CIO Success(ion) Study in late 2013. These CIOs must coordinate an increasingly complicated set of internal and external resources and capabilities; oversee the develop- ment of complex new IT-enabled projects on time, on budget, and in a way that delivers the promised business value; and continually as- with suppliers and scrutinize every line item to decide whether an ex- pense is truly necessary. This kind of focus is easier to come by under scarcity and harder to come by un- der abundance. Even private com- panies, whose managers are spend- ing their own money, start acting “fat” when awash in cash. As we have seen, slack can rep- resent a source of great (though of- ten hidden) value or it can represent waste. When slashing costs and re- organizing for efficiency, it can be hard to separate useful slack from true waste, and indeed, many of the leveraged companies of three de- cades ago were left at the brink of bankruptcy. Faced with that reality, they tunneled—they neglected ev- erything besides the emergency at hand. Cut too much fat, remove too much slack, and you are left with managers who will mortgage the fu- ture to make ends meet today. Fighting Fire with Slack When organizations find themselves facing scarcity, executives become firefighters, focused on battling the immediate threat. Meanwhile, new fires are constantly popping up be- cause nothing is being done to pre- vent them. As a result, structural problems—“important, but they can wait”—don’t get fixed. When the Microsoft Corporation shipped its Windows 2000 software, it went out with 28,000 known bugs. The project team knew they were ship- ping a product with lots of prob- lems, but they had already missed the deadline. As a result, they im- mediately began working on a first patch, which was intended to fix all the bugs they knew they had shipped out. Not a good place to be when reports of new bugs start coming in. Understanding the logic of [...]... based in Munich He specializes in IT strategies, application architectures, and large transformation programs, with a focus on the public sector, financial services, and telecommunications Martin Roets martin.roets@booz.com is a principal with Booz & Company based in London He focuses primarily on the financial-services industry, specializing in IT strategy, operating model design, and IT and business... leadership role by earning PDUs in Six Sigma, Contract Management and other fast-growing fields Experience the Villanova Difference Online! Live instructor-led virtual classes | Interactive animations and simulations | Streaming audio and video for mobile learning 80 0-9 4 4-6 090 VillanovaU.com/SB_PM 22 Corporate Social Responsibility’s New Role in the Middle East An urgent need for job growth is spurring... Library Giza, designed to offer testing, support, and training for startups In a similar vein, the Abdul Latif Jameel Community Initiatives has committed to supporting the MIT Arab Business Plan Competition for the next five years to ensure the initiative’s sustainability The competition received 1,852 applications from 13 Arab countries It requires entrepreneurs to work in teams and to present their business... an innovative trend in CSR and high-minded commercial initiatives by Ramez T Shehadi and Mounira Jamjoom I n most developed nations, corporate social responsibility (CSR) initiatives center on issues such as environmental sustainability, alternative energy, clean technology, and social welfare Driving these activities, more often than not, is a company’s desire to appeal to strong consumer sentiment... various product categories and geographies and were selected for their acumen and interest in enhancing innovation at Kraft In addition to contributing insights, this diverse group built a Kraft split into two companies in 2011 4 Nurture internal and external ecosystems Innovation initiatives require resources, people, and organizations in order to grow Unfortunately, many innovation teams operate in... angel investment networks (by city, country, and sector); investing in and supporting venture capital funds, private equity funds, and other investment tools; partnering with banks to develop SME-friendly debt services; and investing in micro-venture funds and microfinance institutions Some of these activities will, ideally, result in profit, but the core driver is creating and sustaining a legitimately... This provides affirmation, but it also presents the innovation team with two challenges: scalability and funding First, many innovation initiatives cannot be scaled in a linear fashion Adding more people often adds complexity and bureaucracy, and often impairs the communication and creativity of the original successful innovation initiative At BP, for example, Daru Darukhanavala, the company’s chief... compliance capabilities Besides taxation and transparency issues, new regulations designed to reduce conflicts of interest and improve customer “suitability” are changing traditional distribution, compensation, and pricing models across the wealth management industry In the past, financial players paid banks handsome distribution fees known as retrocessions for distributing their products to clients... opportunities to the sweet spot, you strengthen the developmental partnership and position high potentials for greater contributions while fostering their inherent motivation to make an impact Crafting the Right Challenges In a hypercompetitive business climate, it’s relatively easy to identify challenging opportunities that tap into the goals and motivators of high potentials As a leadership coach, I rarely... growth, greater increases in cost-to-income ratios, and a faster decline in profit margins than large and medium-sized organizations This has driven a wave of acquisitions and consolidation, which is expected to continue At the same time, many international universal banks are looking continues apace, however, we are seeing a rise in independent wealth managers that are unaffiliated with large banks . 4955 customerservice@ strategyandbusiness .info www .strategy- business. com/ subscribe strategy+ business P.O. Box 8562 Big Sandy, TX 75755 strategy+ business magazine. Foreal features 38 68 70 Issue 74, Spring 2014Published by Booz & Company 58 63 66 50 80 82 83 85 86 88 72 54 strategy+ business www .strategy- business. com Published