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BUSINESS STRATEGY REVIEW INSIGHTS FOR GLOBAL BUSINESS
Volume 21 Issue 4 2010 9.50 US$16 c14.25
inside fujitsu
Shaping tomorrow with you is a new way of describing what we have always stood for. It is already in our DNA, but stating it in this way crystallises what makes us different. It is a catalyst for change.
Masami Yamamoto Learn more from Masami Yamamoto, President of Fujitsu, on page 07.
CONTENTS
COntents
Business
Editor Stuart Crainer scrainer@london.edu Contributing editors Patrick Barwise Julian Birkinshaw Rob Goffee Donald L Sull London Business School Victoria Gittins bsr@london.edu Regents Park London NW1 4SA United Kingdom Tel +44 (0)20 7000 7126 www.london.edu/bsr Subscriptions customerservices@ blackwellpublishing.com/bsr Back issues available at www3.interscience.wiley.com/ journal/118535659/toc Journal compilation 2010 London Business School Cover Image Getty Images Illustration Joe McLaren Tonwen Jones Print Wiley Blackwell Limited The jacket and front section of this Journal is printed on Howard Smith Regency paper, which is FSC (Forest Stewardship Council) certified. The cover and back section of this Journal is printed on Howard Smith think4 paper, which is Carbon Balanced Paper, 50% recycled content and FSC certified.
68% of Americans are overweight; 34% are obese Page 18
07 I NSIDE FUJITSU How the Japanese technology giant is intent on shaping tomorrow. 18 The health care quandary Beverly Goldberg reviews the big health care questions. 26 Leadership saves lives Peter Lees is a neurosurgeon and a leader. But what kind of leader? 32 Helping hospitals to improve health care Kamalini Ramdas offers new inspirations to re-invent health care. 36 healthy reading Agenda setting books.
STRATEGY
39 Profiting from CSR Ioannis Ioannou links CSR to profitability. 41 Making better risk management decisions Julian Birkinshaw and Huw Jenkins make sense of risk. 46 Good business makes poor customers good customers Understanding the fortune at the bottom of the pyramid. 52 The permanence of temporary workers Isabel Fernandez-Mateo on how the temporary issue is more important than ever. 58 strategic orchestration Donald L Sull and Alejandro Ruelas-Gossi explain how opportunities are made in emerging markets.
WHY CUSTOMER FOCUS MATTERS... ALWAYS Page 46
Review
69 ReadiNG Peeling the Onion 72 FACE VALUES Richard Hytner of Saatchi & Saatchi. 76 THINK AGAIN Why the business of economics really is business. 83 PROFILE Everything you need to know about Gary Hamel and Management 2.0. 86 ExEcutive SUMMARY New research from Nitin Bakshi, Dan Cable, Gary Dushnitsky and Louise Mors.
RICHARD HYTNER TALKS VALUES Page 72
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ISSUE 4 2010 BUSINESS STRATEGY REVIEW 03
contributors
Contributors
Jamie Anderson janderso@tiasnimbas.edu Anderson is Adjunct Professor in Strategic Management at TiasNimbas Business School and Fellow of the Centre for Management Development at London Business School. ROBIN BEW Bew joined the Economist Intelligence Unit in 1995. Previously, he was an economist at Her Majestys Treasury. He became the Economist Intelligence Units Chief Economist in 1997 and Editorial Director in 2006. Julian Birkinshaw jbirkinshaw@london.edu Birkinshaw is Professor of Strategic and International Management, Senior Fellow of the Advanced Institute of Management Research and Deputy Dean for Programmes at London Business School. Richard Brass richard.brass@gmail.com Brass is a business and finance journalist who has written for newspapers including the Daily Telegraph, The Times and the FT. STUART CRAINER SCRAINER@LONDON.EDU Crainer is the Editor of Business Strategy Review. DES DEARLOVE DES.DEARLOVE@SUNTOPMEDIA.COM An Associate Fellow of Sad Business School, Dearlove is a former columnist on The (London) Times and editor of The Financial Times Handbook of Management. DAVID DE CREMER DDCREMER@LONDON.EDU De Cremer is a Visiting Professor at London Business School and Professor of Behavioural Business Ethics and Scientific Director of the Erasmus Centre of Behavioural Ethics at Rotterdam School of Management. ISABEL FERNANDEZ-MATEO IFERNANDEZMATEO@LONDON.EDU Ferandez-Mateo is Assistant Professor of Strategic and International Management at London Business School. BEVERLY GOLDBERG GOLDBERG@TCF.ORG Goldberg is Senior Fellow in aging and economics at The Century Foundation in New York, and is the author of Age Works: What Corporate America Must Do to Survive the Graying of the Workforce. RICHARD HYTNER Deputy Chairman of the global advertising agency, Saatchi & Saatchi, Richard Hytner is an Executive Fellow of London Business School. He was also a co-founder of the Manchester United Supporters Trust. Ioannis Ioannou iioannou@london.edu Ioannou is Assistant Professor of Strategic and International Management at London Business School. Huw Jenkins huw.jenkins@btgpactual.com Jenkins is a Managing Partner in BTG Pactual. He was formerly CEO of UBS Investment Bank and has an MBA from London Business School. MARTIN KUPP MARTIN.KUPP@ESMT.ORG Kupp is a member of the Professional Faculty and Programme Director at the European School of Management and Technology, Berlin. PETER LEES peter.lees@ southcentral.nhs.uk Lees is Medical Director and Director of Leadership for NHS South Central, one of the 10 strategic health authorities of the National Health Service. JOHN MULLINS JMULLINS@LONDON.EDU Mullins is Associate Professor of Management Practice at London Business School and author of The New Business Road Test, now in its third edition. He is also co-author (with Randy Komisar) of Getting to Plan B: Breaking Through to a Better Business Model (Harvard Business School Press, 2009). KAMALINI RAMDAS KRAMDAS@LONDON.EDU A Professor of Management Science and Operations at London Business School, Ramdas was previously at the University of Virginia. Her current research looks at innovations in service in health care. Alejandro Ruelas-Gossi alejandro.ruelas-gossi@uai.cl Ruelas-Gossi is Professor of Strategy at the Adolfo Ibaez School of Management in Miami, Florida, and Academic Director of the Global EMBA UCLA-UAI. David Stout d.stout@ucl.ac.uk Stout was formerly Director of the Centre for Business Strategy at London Business School and headed the Economics Department at Unilever plc. He is now an Honorary Research Fellow at University College London. Donald L SULL DSULL@LONDON.EDU Sull is a Professor of Management Practice in Strategic and International Management and Faculty Director of Executive Education at London Business School. ELIZABETH TEISBERG TEISBERGE@DARDEN.VIRGINIA.EDU A tenured member of the faculty of the University of Virginia in the Darden Graduate School of Business, Teisberg is the co-author (with Michael Porter) of Redefining Health Care (Harvard Business Press, 2006). She was the keynote speaker at the London Business School Healthcare Symposium in July 2010. Sandra Vandermerwe sandra.vandermerwe @btinternet.com Vandermerwe is a Visiting Professor at the Gordon Institute for Business Studies South Africa, at ESMT Germany and at Imperial College Business School, London. LINDA YUEH LYUEH@LONDON.EDU A Visiting Senior Fellow in Economics at London Business School, Linda Yuehs new book, The Economy of China, was published in May 2010 by Edward Elgar Publishing.
04 BUSINESS STRATEGY REVIEW ISSUE 4 2010
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BUSINESS
Huge business opportunities are relatively rare; they come along only once or twice in a decade.What managers can do is prepare by managing smart during the comparative calm of business as usual.
Professor Donald L Sull, London Business School
Commonwealth shames: did India's global ambitions partially collapse when their preparation for the Games came under scrutiny?
Photo: reuters
LEADING CHANGE INSIDE FUJITSU
The health care quandary BEVERLY GOLDBERG p18 Leadership saves lives PETER LEES p26 Helping hospitals to improve health care Kamalini Ramdas p32
Business
INSIDE FUJITSU
Fujitsu is big in Japan, but less known elsewhere. Stuart Crainer and Des Dearlove were given unique access to the Japanese technology giant to learn more about its plans for change.
In a meeting room on the 32nd floor of Fujitsu HQ in central Tokyo, a group of managers is trying to describe the company. It isnt a smart and sexy sort of place, says one. We are quiet. Quiet and confident, adds another. We never give up, ventures a third. Our DNA is based on giving it a try, just doing it. At the same time we are solid. Craftsmanship is at the core of our manufacturing. Trustworthiness is also very important because we work very closely with customers. The discussion moves from English to Japanese. There is, we are told, a word in Japanese, which describes Fujitsu perfectly dorokusai but no one is sure of the best translation. It has something to do with being pragmatic and reliable, and getting on with the job without a making fuss. After more discussion, we agree that the closest English equivalent is down-to-earth. Fujitsu is down-to-earth. This is an odd description for a high-tech company with Fujitsus pedigree: it is the third biggest player in the global IT services market, with sales of 4.6 trillion yen (US$50 billion) and 172,000 employees in 60 countries. It also has a long
LEADING CHANGE
Fujitsu Tokyo
and distinguished track record as a technology pioneer. In 1954, Fujitsu developed the first Japanese computer, and in 1976 it created the first Japanese supercomputer. Fujitsu engineers made it possible to process Japanese kanji characters, creating the first computer with Japanese language capability in 1979; and in 1992 the company introduced the worlds first 21 inch full-colour display, followed in 1995 by the first 42 inch plasma screen. Today, it leads the Japanese domestic laptop market and is involved in a range of technologies from cloud computing to the next generation of supercomputers, from simulation
It isnt a smart and sexy sort of place, says one. W e are quiet. Quiet and confident.
systems for train drivers to mobile phones. It is also closely involved in a variety of scientific projects in Japan and around the world, and in expanding the role of IT in agriculture, healthcare and education.
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And yet, Fujitsu remains grounded down-to-earth; dorokusai. In markets where it is long established such as Europe and the United States it retains a stubbornly low profile. In others, including China and India, it is barely known at all. For 75 years, Fujitsu has quietly gone about its business a quiet giant. Now, under the leadership of its new president, Masami Yamamoto, the Japanese information and communication technology company is set on change. Change, of course, is not unusual in the corporate world. But this is change with a difference. Led by the steely-eyed Yamamoto, Fujitsu is attempting to shape not just its own future but that of its customers and, perhaps, society, too. Facts of corporate life Driving the change is the same downto-earth pragmatism that is written into Fujitsus DNA. If you look at the life cycle of companies they have a period of rapid growth, a period of stability and then they start declining. Each of these periods lasts 20 years, says Yamamoto, a 34-year Fujitsu veteran. We are now 75 years old so the message is clear: we need to reinvent and reshape ourselves. The challenge for Fujitsu is to move onto the next growth stage. The danger is that if we dont we will start to decline. Yamamotos C-suite colleagues are
W e need to change things if we are to become a $100 billion company.

01 Masahiko Yamada, President of Technical Computing Solutions Unit: Customers rule 02 Fujitsu Workplace Receives 6 Star Green Star Certified Rating 03 A receptionist awaits visitors at Fujitsu's showroom in Tokyo 04 Chiseki Sagawa: Philosophy meets technology 05 Hideyuki Saso: Intelligent traffic lights
similarly frank. We need to change things if we are to become a $100 billion company, says corporate senior executive vice president (EVP) Hideyuki Saso matter-of-factly. For example, there are a lot of processes in our product development and there is the danger that, as time passes, people focus on the processes. It is like when people wont cross the road until the light turns green even if there are no cars approaching. What we need in the organisation are intelligent traffic lights. We have to continually revisit what we do and figure out the best way. Corporate senior executive vice president and director, Kazuo Ishida, warns: If we want to globalise,
Photo: Emma Cross
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a focus for the company and its managers for decades. Beating IBM is a common refrain when Fujitsu executives recount why they joined the company in the first place. IBM is still Fujitsus largest competitor. But, under Yamamoto, Fujitsu is intent on moving out of Big Blues shadow. In our minds we still tend to see IBM as the big competitor, but there are others like HP, he observes. It is also clear that the journey that Fujitsu is embarking on is a different kind of transformation. Big Blue was going broke and faced extinction unless it changed. Fujitsu faces no such crisis. Indeed, its 2009 operating income was just over $1 billion with more than $3 billion available in cash. And yet the urge to change is strong. Higher ambitions Avoiding decline is an understandable goal, of course, but Fujitsus ambition goes beyond simply ensuring its own survival. The company has declared its intent to use technology to contribute to society. At the heart of its vision is the notion that computing should be configured around human beings and not the other way round. So while rival IBM trumpets its Smarter Planet concept, Fujitsu talks about using technology to enrich peoples lives. This will involve collecting data on the behavioural patterns of people and organisations that mobile phones and other ubiquitous products generate, and taking advantage of cloud computing, supercomputers, and other technology infrastructure to analyse the data, explains Yamamoto. This data has the potential to revolutionise all aspects of human life from healthcare to transportation, and education to agriculture. Fujitsu predicts a big shift in the role of technology in business and in society. While other IT providers tout a world view that sees an increased role for computing solutions to existing problems, Fujitsu emphasises how quality of life can be enhanced by technology. In this view of the future, technology is more than just an enabler; it is a journey, a dialogue with
Making History 1935

Fuji Tsushinki Manufacturing Corporation (currently Fujitsu Limited) established as an offshoot of Fuji Electrics Communications Division (capitalised at 3 million yen with 700 employees).
1940
Delivers Japans first domestically produced T-type automatic switching system to Japanese Ministry of Communications and Transportation.
1954
Unveils Japans first relay type, electronic computer, the FACOM 100.
we must change. If we are to bring in truly global standards and our knowledge and experience from throughout the world, there is not much time. This could be the last chance for Fujitsu to change. Fujitsus Yamamoto and his senior management team are not the first to appreciate and lament the shortlived nature of corporate success. In his book Living Company, the former Shell executive Arie de Geus pointed out that only a handful of companies last beyond a century. Reminders of corporate mortality are easily found. Look at Jim Collins and Jerry Porras business bestseller, Built to Last, and you will quickly discover that many of the companies have struggled since being held up as benchmarks of longevity. Equally, examples of companies that have reinvented themselves are few and far between. Think of Nokias move from being a timber company to mobile phone giant. Famously, too, IBM transformed itself from a computer hardware company to a business solutions firm under Lou Gerstner. Fujitsu is setting out on its own journey. Yet, in conversations with Fujitsus executives, it is clear that IBM looms large in its world view. Historically, IBM was the giant and Fujitsu the pesky upstart. The rivalry goes back a long way and has provided
1964 1980
Delivers Japans first data communications system, FACOM 323, to Nikko Securities Co., Ltd.
Becomes largest computer company in Japan. Introduces Japanese word processor, OASYS 100.
1995
Commercialises worlds first 42-inch colour plasma display.
2005
Launches globally PalmSecure contactless palm vein authentication equipment business.
Sales of universal designed mobile phones surpass the 12 million unit mark.
2008
BUSINESS
society that allows people to shape their own future. It is the shaping element that distinguishes the Fujitsu point of view from its competitors. For Fujitsu there are three pillars to this strategy. First, you have to get close enough to customers and end-users to see the world through their eyes. Second, you have to have a truly global perspective and reach, to offer local solutions anywhere in the world (a variation on the think global, act local dictum). And third, you have to be committed to a sustainable future. The third prong, in turn, has two elements: the greening of IT products; but also the opportunities to use new technology to tackle environmental issues for example, using a supercomputer simulation to model global warming. Underpinning all of it is the idea that technology has an essential role to play in the evolution of civilization. Says corporate senior EVP and director, Masami Fujita: People used to see us as a mobile phone or PC company. Now, they see that we are contributing to society we are shaping tomorrow, as our branding puts it and that is very attractive to young people. Such higher aspirations are made real when you meet Aiichirou Inoue, president of the Next Generation Technical Computing Unit. Inoue worked three years at another company and then joined Fujitsu where he was a driving force behind the companys mainframe computer business for 27 years. Given his long service, Inoue could be forgiven for possessing an air of ennui. In reality, he is a ball of creative energy, excited and under pressure in equal measure. In my previous roles, I couldnt do the things I wanted to do. I wanted to build something by myself, not just to use it, but to build it, he explains. Now, his creativity and passionate leadership are about to bring a change in the world of the supercomputer. Inoue is charged with developing Fujitsus new supercomputer, collaborating with Japans Institute of Physical and Chemical Research, known as Riken. It is nicknamed the K Computer by Riken. K is a play on the Japanese word kei for the number 10 to the power of 16. It is a big number and a big build with a $1 billion total development budget and Fujitsus development group numbering some 1,000 people. Development of the K Computer began in 2007 and is scheduled to finish in 2012.
01 Fujitsus flexible electronic paper features an image memory function. This enables continuous display of the same image even when electricity is turned off 02 The OASYS 100: Fujitsus first Japanese-language word processor 03 View from Fujitsu HQ 04 The Fujitsu Group Malaysia Eco-Forest Park in Sabah State 05 Hands off: The world's first contactless personal identification method
I want the young engineers working on this project to be excited and to enjoy their work, says Inoue. But, lets be clear: the K Computer will make the future for Fujitsu, Japan and for human beings. It will give us the ability to look at the weather of the future and there are a huge number of healthcare uses. Thats what I mean about its power to change humanity. A computer is just a big box; whats interesting is to see it as a tool to help mankind and societies around the world. On the offensive While the bold ambitions of the K computer are alluring, any sort of organisational change is hard. The older you get, the harder it becomes for companies as well as people. Sprightly septuagenarians are rare though less so in Japan. So how do you convince a 75-yearold company that it needs to change and then convert it into reality?
W ere being more proactive with customers. If we dont change our business will shrink.
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Chiseki Sagawa, 29 years with the company, is the president of Fujitsus platform strategic planning unit. We need to have more confidence to go to the next stage. Everyone inside Fujitsu knows we need to change. We need to move from optimising industrialisation to optimising how people live, it is a mix of philosophy and technology, he says. Reconnecting with its DNA If changing the tone is the first element, the second in kick-starting change at Fujitsu was to gather the ammunition to back the need for change. Engineers and that is primarily what Fujitsus people are respond to data. Research by Fujitsus corporate brand office found that understanding of what the company did and stood for was often very limited in the global marketplace. Only a small percentage in some key markets outside of Japan identified Fujitsu as an IT company. This was exacerbated by a lack of coherence between its various global operations. It looked muddled and confused, an assemblage of companies, ventures, cultures, products and brands. To better understand its employees, as well as its customers, Fujitsu surveyed 85,000 of its employees in Japan. It also surveyed customers and employees outside of Japan. The research identified three key characteristics of its brand: responsive, ambitious and genuine. Says Masahiro Terauchi, general manager of the Fujitsu corporate brand office: The brand promise is what we want to be known for; the brand attributes
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The answer from Fujitsu is that, first, you change the tone. Masami Yamamoto took over as president in April 2010 after the controversial and, for Japan, highly unusual departure of his predecessor. Yamamoto, the youngest president of the company for 30 years, brings a more modern style of leadership and a new perspective to Fujitsus business. He talks about going on the offensive and observes that the company has tended to be defensive. It is a point backed by other senior leaders at the company. Were being more proactive with customers, says corporate senior EVP Kenji Ikegai. We asked Ikegai about his future hopes for the company. I want the company to be a global IT player in products and services. If we dont change, our business will shrink. Such frankness is unusual among senior leaders in any corporation. And it is a constant refrain as we talk to Fujitsus leadership team.
BUSINESS
The art of Fujitsu management
For me the excitement lies in turning technology into profitable technology, says Kazuo Ishida. Along the way we make mistakes. Over my time with the company I have run 28 projects with teams ranging from 50 to 800. Some were a year long. At the end you hand over and move on to another project. But, I was never happy with how things had gone. I always looked back and identified where, when and how it could have been done better. Fujitsu is a technology company built on engineering expertise. Its senior executives typically started their careers as engineers. An appetite for detail is part of their training. Fujitsu engineers prefer doing to theorising and have an elevated view of the likely impact of innovations on broader society: they see engineering as a route to improving the world. Dreams and detail are in unusually close alignment.
Dreams and detail
Grow with customers
The fashionable business ideas of our time suggest that customers are unreliable guides. Simply, they do not know what the technology is capable of, so how can they tell you what they want or would like? As a result, the emphasis of recent years has been on retaining talented individuals rather than attracting and retaining high spending customers. Fujitsu is old-fashioned in its adherence to the edict that customers come first. All Fujitsu executives talked about the vital importance of staying close to customers. Thirty-six years with the company and now a corporate senior executive vice president and director, Kazuo Ishida told us of his first day working as a systems engineer. I went to work with a banking client. It felt as though I had become a banker, such was the identification we had with the customer. That stuck with me and I still spend half of my time with customers.
Customer first
Says Richard Christou: You dont shape the future by simply selling technology. There has to be a dynamic, proactive interchange with customers. Customers are not static. Fujitsu regards them as a growth opportunity. But this does not mean trying to screw more sales out of each account. The win-win hope is that as customers grow, Fujitsu will grow alongside them. We have a track record of working with Japanese companies and there is an opportunity to grow with them and our other customers as they globalise. As companies expand they need to use systems which are consistent, which they are familiar with, and which can receive high levels of support worldwide, says Kenji Ikegai. Masahiko Yamada, president of the companys Technical Computing Solutions Unit, is an engaging Fujitsu veteran. At one stage, I remember thinking that we need to really focus on costs and technology. I was wrong: relationships with customers are more important, says Yamada. Many companies focus on contracts, Fujitsu emphasises genuine relationships and growing with customers.
the same products, services and culture worldwide. This was the largely American multinational model of the 1960s and 1970s. Then, in the 1980s and 1990s, the cry was for globalising companies to be global and local, to combine global strength with local sensitivities witness McDonalds offering localised menus throughout the world. Now, a new generation of globalisation is occurring as, in particular, companies from India expand globally. The emphasis of these organisations and of Fujitsu is to combine a clear sense of having roots while also having the open mindedness to embrace different business and national cultures. At Fujitsu, emphasis is put on the company being a global organisation with Japanese roots. It is multicultural but clear in its origins; globalisation with an open mind.
does things differently. As it deploys the concept, Fujitsu works seamlessly alongside its customers to create value for them by defining and visualising management challenges with customers. At the same time, Fujitsu has always recognised the importance of being at technologys cutting edge. Visit its Technology Hall in Kawasaki City on the outskirts of Tokyo and you are struck by the sheer range of its interests from cloud computing to electronic medical record systems, plasma displays and point of sale displays at supermarkets. The range of products gives it a balanced portfolio and a radar for converging technologies and new innovations that can be transferred across products.
Quiet confidence
The fruits of experience
Multicultural and global

If you think about where future market expansion will occur, you can only conclude that our future growth will depend on how successful we are in developing our global business, says company president Masami Yamamoto. His thoughts are echoed with even greater emphasis by Richard Christou: I think we have a two-year window to become more global in outlook. We have to move decisively. If we do not become more global, we will shrink. The initial ethos of globalising companies was to try to export
Respect and humility are deeply entrenched in Japanese culture. Similarly, they inform Japanese business culture and corporations. Gung-ho competitiveness is uncharacteristic. Rather, collective aspirations are the focus whether they are for the team, the company or society. The emphasis of Fujitsus research is not on creating sexy, must-have technological fripperies. Instead, it regards improvements in technology as integral to improvements in how we live and how societies are organised and behave. This belief runs deep, but quietly.
Fujitsu has a cadre of highly experienced managers. They know the company and its customers inside out. Many of the senior leaders have worked with the company all their working lives. As engineers they have a constant urge for improvement. They are like mechanics tinkering with a car engine in search of a slight but significant performance enhancement. Things can always be improved. Always.
Co-innovation rather than domination
Technology companies place huge store in innovation. But at Fujitsu the emphasis is on co-innovation with customers. This is exemplified by the companys concept of Field Innovation. This is a concrete example of how Fujitsu
are how we deliver the brand promise; and the brand positioning is who we are and what makes us special we are the Japanese global information and communication technology (ICT) company with a commitment to local service. Armed with a clear idea of what it stood for, in 2010 the company announced a new brand promise: shaping tomorrow with you. It is the first truly global branding exercise ever undertaken and implemented by Fujitsu and is intended to provide a rallying point as the company changes. The phrasing may be new, but people within the company agree that what it describes is quintessentially Fujitsu. The companys brand promise shaping tomorrow with you is a new way of describing what we have always stood for, says president Yamamoto. It is already in our DNA, but stating it in this way crystallises what makes us different. It is a catalyst for change. And change is something that Fujitsu cannot ignore because the world it inhabits is changing. The role of technology in society is changing and with it the role of technology providers. Of course, the high-tech sector is always a vortex of change. It goes with the territory. But from time to time, there are big shifts. Examples include the switch from mainframe computers to client servers in the early 1980s; and more recently the move towards ubiquitous devices such as smartphones and tablet devices like the iPad. Allied to this latest development, the industry is now entering a new era characterised by cloud computing. Cloud computing uses the internet to provide resources, software and information on demand. People will no longer need to store large quantities of data or software on their personal devices because they will be able to access them from anywhere. For users, cloud computing holds out the promise of just-in-time computing; they will no longer have the need for expertise in, or control over, the technology infrastructure. For many users and businesses, this is a liberating development. But for established IT providers, such as Fujitsu, it represents a radical departure. Three years ago we made a major announcement on cloud computing and it felt like an exciting new
direction. IT will be increasingly a utility, accessed on demand, predicts Kazuo Ishida, a 36-year Fujitsu veteran. This has the capacity to change everything about how, when and where we access technology and the uses we put to technology. Challenge on two fronts On a commercial level, change is necessary says Yamamoto because Fujitsu faces two big challenges: the need for global expansion and the need to develop a new business model fit for the cloud computing era. Like many companies, Fujitsu is extremely strong in its domestic market and is active globally but without the same level of success or dominance. The company operates through more than 500 group companies in 60 countries around the world. A total of 37% of its sales and around 70,000 of its 172,000 employees are now accounted for by overseas markets. Its target is to generate more sales outside Japan. While global in scope, until now Fujitsu has lacked coherence to its operations. The companys slogan in the 1960s was infinite growth. The result was that Fujitsu amassed a sprawling array of subsidiaries and joint ventures. Among other things, in the late 1990s, for example, it acquired Amdahl in the United States and ICL in the UK. It also had a joint venture with Siemens in Europe. The moves were often successful as stand alone ventures but were too loose to provide any critical mass. In short, the whole was not greater than the sum of its parts. A big problem was that the subsidiaries operated under a variety of different names, failing to leverage the Fujitsu global brand. We have suffered from a lack of gravity in Europe and elsewhere. In those places, it seems as if we just happen to be a global company, laments Chiseki Sagawa. There is a need to create a gravitational force to pull things together. Acquiring gravity takes time. Over recent years, Fujitsu has worked hard at renaming and reclaiming subsidiaries, to make more sense of what it does and where it does it. In 2002 it brought ICL and Amdahl under the Fujitsu brand. In 2009 Siemens stake in the joint venture was bought out to create Fujitsu Technology Solutions. In the United
Shaping tomorrow with you is a new way of describing what we have always stood for. It is already in our DNA.
States, Fujitsu merged three of its independently operating businesses in 2009. One name, of course, does not necessarily mean one culture. We want to create a different sort of global company, says company president Yamamoto. All of our companies have their own cultures so we are creating a multi-cultural global company. All these companies work closely with their customers so, as their customers develop globally, we can help and develop with them. We can help them globalise their businesses. In the past there was a tendency to leave our global business to the independent discretion of our subsidiaries outside of Japan, each of which differ in terms of their origin and subsequent development. In response, Fujitsu has reorganised its global businesses along regional lines with Richard Christou, corporate senior EVP (the only Westerner in the companys management team) in charge. There has been a fragmented approach but whatever we do now has to be done globally, says Christou, who estimates that Fujitsu is half way in its globalisation journey. Companies like IBM or Oracle offer exactly the same experience wherever you encounter them throughout the world. We cannot do that. What we can achieve is consistency of values and objectives rather than consistency of action. Responding to customers has to be done locally and individually. We want to be a transnational organisation which shares experiences and knowledge between regions but which has a light centre.
BUSINESS
While aiming to globalise alongside its customers, Fujitsu is also clear that it remains a Japanese company. We still need a base to hold this global company together and that is in Tokyo. Thats why we talk about a global Japanese company, says head of R&D Kazuo Murano. A new business model The second big challenge facing Fujitsu is changing its business model. Big IT providers have already felt the pain of an economic downturn, the banking crisis and the arrival of a new era of computing. Fujitsu is no exception. A decline in its solutions business has led to sweeping reductions since 2008 in costs and expenses across the company. Key operations have been restructured. In 2009, for example, the company completed the transfer of its hard-disk drive business to Toshiba. Fujitsus LSI business also shifted to a so-called fab-lite business model whereby the company minimises its own production scale by outsourcing to external foundries. More fundamental structural changes can be anticipated, but there are signs that the worst may be over. The company raised its operating income from 68.7 billion yen in 2008 to 94.3 billion yen in 2009. It also set an ambitious target of 185 billion yen for 2010. Financial discipline is the first step. But Fujitsu needs to renew itself. Renewal comes from the roots and the roots of Fujitsu have always been firmly anchored in innovation. As president Yamamoto explains: Computing is going through a transformation. IT used to be in a finite area. Now, we see that through cloud computing there is an opportunity to expand its role. Think of areas such as agriculture. These are the new areas we are exploring. These applications of technology are revolutionary. What was unthinkable is now possible so we have to develop in what were uncharted areas. Shaping tomorrow with you Fujitsu itself is entering uncharted territory. To simultaneously globalise and be at the vanguard of an expanded role for technology in society is a big ask. The company believes it is achievable if it stays true to one of its fundamentals: staying
close to its customers. This is the with you component of its brand promise. To emphasise the point, Masami Yamamoto visited more than 100 corporate customers within the first three months of being president. Says Chiseki Sagawa, president of Fujitsus platform strategic planning unit: We are more humble than some other companies. We have tended to be the follower rather than the visionary company. There are three routes to success. You can either be a visionary company, compete on cost or you can focus on customers. We are the third. We emphasise that we understand customer issues and we always finish the project. Staying close to customers is one thing; helping them shape tomorrow is quite another. Co-creation, popularised by the late CK Prahalad, is fashionable. Many companies talk about developing products and services with customers. But in reality it is far easier to provide solutions to customers than it is to develop them with customers. It goes beyond co-creation to true coinnovation. The latter takes an endless reservoir of time and patience. Western companies are not known for either. Yet Fujitsu, stubbornly trustworthy and endlessly patient, is a company that is built for co-innovation. It may well be its greatest asset. Fujitsus new business model is all about co-innovation. This ability is probably the biggest attribute we have at Fujitsu, says Sagawa. But we need to change the way we work and think. In the past we helped customers solve problems they identified; in the future we need to share common challenges. We need to move beyond listening to customers to innovating with them. Shaping tomorrow with you is a big promise. We asked Fujitsu president Masami Yamamoto what he wanted the company to be famous for in a decade. His answer was typically bold but matter-of-fact. Contributing to society. Making society more prosperous and more convenient. It is all about challenging new areas with customers. That is also an important message for our employees. It is about shaping tomorrow. The aspiration is clear. But the philosophy remains grounded. It is dorokusai down to earth. But dorokusai with a new-found confidence.
the authors Stuart Crainer scrainer@london.edu Crainer is the Editor of Business Strategy Review. Des Dearlove des.dearlove@ suntopmedia.com Dearlove is an Associate Fellow of Sad Business School and a visiting professor at IE Business School.
health care REPORT
HEALTH CARE special report

Inside this report:
The health care quandary Leadership saves lives Helping hospitals to improve health care Healthy reading
HEALTH CARE REpoRT
healTh care FacToids
of aiDS-related illnesses worldwide in 2008.
Two million Two million people died
$604 billion
The global price for treating alzheimers and other dementias was an estimated $604 billion in 2010.
The international Diabetes Federation estimates that there are 246 million adults with diabetes.
246 million
The alzheimers epidemic

The global price for treating alzheimers and other dementias was an estimated $604 billion in 2010. 70% of this was paid in north america and Western Europe. it is estimated that the amount will exceed $1 trillion annually by 2030, with 65.7 million people affected, up from 35.6 million in 2010. www.bloomberg.com
malaria sTill biTes

in 2008, there were 247 million cases of malaria and nearly one million deaths. in africa a child dies every 45 seconds of malaria; the disease accounts for 20% of all childhood deaths. malaria can decrease gross domestic product by as much as 1.3% in countries with high disease rates. in some heavy-burden countries, the disease accounts for up to 40% of public health expenditures; 30% to 50% of inpatient hospital admissions; and up to 60% of outpatient health clinic visits. www.who.int
diabeTes on The rise

Diabetes affects an estimated 21 million people in the U.S. more than six million of these are unaware they have the disease. The international Diabetes Federation estimates that there are 246 million adults with diabetes. The Western pacific region and Europe have the highest number of people with diabetes, approximately 67 and 53 million, respectively. The highest prevalence rates are found in north america (9.2%) and Europe (8.4%). The five countries with the largest numbers of people with diabetes are india, China, the United States, Russia and Germany. The five countries with the highest prevalence rates are nauru, United arab Emirates, Saudi arabia, Bahrain and Kuwait. www.worldhealthsciences.com
hiv/aids: The ForgoTTen epidemic

in Sub-Saharan africa 12 million children have been orphaned by aids, and by the end of 2010 it is anticipated that this number will have risen to 43 million. 2.7 million people were newly infected with HiV worldwide in 2008. There were 1.37 million new cases of tuberculosis worldwide among HiV-infected people in 2008. Two million people died of aiDS-related illnesses worldwide in 2008. 5.25 million HiV-positive people had access to antiretroviral therapy (aRT) in low- and middleincome countries in 2009. 67% of all people living with HiV are in sub-Saharan africa. 1.8 million children were living with HiV in sub-Saharan africa at the end of 2008. www.worldhealthsciences.com
double size us
Seven in 10 mexican adults are overweight or obese. nearly half of all Brazilians, Russians and South africans are overweight or obese. Severely obese people die 8-10 years sooner than those of normal weight. www.alertnet.org
HEALTH CARE ECoNoMIC pRESSURES
pan pan pan

Britain's 2009 swine flu outbreak killed 457 people and cost $1.8 billion. The swine flu outbreak cost mexico $2.2 billion. The SaRS outbreak of 2003 cost the global economy some $40 billion. www.upi.com
in England in 2009 an estimated 81,400 deaths of adults aged 35 and over were attributable to smoking. This accounts for 18% of all deaths in this age group.
18%
On average about 800,000 people commit suicide every year, 86% of them in low- and middleincome countries.
800,000
Someone in the world is newly infected with TB bacilli every second.
WHO estimates that in the period 2006-2015, China will lose $558 billion in foregone national income due to heart disease, strokes and diabetes.
$558 billion
smokings dark shadow

in England in 2008/09 an estimated 462,900 hospital admissions of adults aged 35 and over were attributable to smoking. This accounts for 5% of all hospital admissions in this age group. in England in 2009 an estimated 81,400 deaths of adults aged 35 and over were attributable to smoking. This accounts for 18% of all deaths in this age group. Over half of Chinas men smoke (about 2.4% of women do); Chinas 301 million adult smokers usually started before the age of 20. www.ic.nhs.uk
menTal healTh quesTions

around 20% of the world's children and adolescents are estimated to have mental disorders or problems, with similar types of disorders being reported across cultures. most low- and middle-income countries have only one child psychiatrist for every 1 to 4 million people. On average about 800,000 people commit suicide every year, 86% of them in low- and middle-income countries. more than half of the people who kill themselves are aged between 15 and 44. The highest suicide rates are found among men in Eastern European countries. mental disorders are one of the most prominent and treatable causes of suicide. www.who.int
Tuberculosis conTinues
Someone in the world is newly infected with TB bacilli every second. Overall, one-third of the world's population is currently infected with the TB bacillus. 5-10% of people who are infected with TB bacilli (but who are not infected with HiV) become sick or infectious at some time during their life. people with HiV and TB infection are much more likely to develop TB. The largest number of new TB cases in 2008 occurred in South-East asia, which accounted for 34% of incident cases globally. But, the estimated incidence rate in sub-Saharan africa is nearly twice that of South-East asia with over 350 cases per 100,000 population. www.who.int
Food For ThoughT

in india, in the past five decades, rates of coronary disease among the urban population have risen from 4% to 11%. The World Health Organisation estimates that 60% of the worlds cardiac patients will be indians by 2010. WHO estimates that in the period 2006-2015, China will lose $558 billion in foregone national income due to heart disease, strokes and diabetes. air pollution is a major environmental risk to health and is estimated to cause approximately 2 million premature deaths worldwide per year. maternal mortality rates vary from 3.9 maternal deaths per 100,000 live births in italy to 8.2 in the UK to 16.7 in the US to 34.1 in Russia to 47.0 in Thailand to 253.8 in india to 582.4 in Haiti to 1570.4 in the Central african Republic. www.dancewithshadows.com
health care REPORT
The health care quandary

Health care in the UK is under intense scrutiny as its government tries to balance rising demands and spiralling costs. Beverly Goldberg, after reviewing the state of health care in other developing nations, says that while the health care profession is fraught with many problems, there are numerous possible solutions.
Few subjects engender as much debate as health care. It arouses strong feelings that are often based on assumptions that have little to do with reality. For example, people tend to believe that each nation has a single system (be it government or private); they also are prone to believe that nations that spend the most on health
REPORT
The harsh reality that too many nations now face: the cost of health care is too high and is likely to get higher.
care achieve the best outcomes. Once people learn the truths about health care, it is far easier to examine the harsh reality that too many nations now face: the cost of health care is too high and is likely to get higher. To address this reality, we must first determine the factors that are driving the problem, then we can discuss ways to mitigate the problem, taking ethical issues into account. A comparison of some of the most talked and written about health care systems reveals that everything is not as conventional wisdom would have it. Most people have the impression that the UK has a totally public system and that the opposite is true in the US. A deeper look at a group of representative developed nations shows that, in reality, most have a variety of approaches.
Heart Attack Grill in Chandler, Arizona June 17, 2009. The restaurant is known for its hospital theme and triple and quadruple bypass burgers.
REPORT The health care quandary
reuters: Joshua Lott
HEALTH CARE REpoRT
healTh care cross-secTion
liFe expecTancy UK France Singapore Japan US 79 81 82 82 77
inFanT morTaliTy raTe per 1,000 live birThs UK France Singapore Japan US 5.1 3.6 2.3 2.8 6.8
recenT healTh care spending as a share oF gdp UK France Singapore Japan US 8.7% 11.2% 3.7% 8.1% 16.0%
uniTed sTaTes
The united states is thought of as having a purely private system; in reality, it has a public-private system but one that has left some 45 million people uninsured. The complex system in the US is comprised of health care providers, insurers, employers and the government. most citizens have some form of private health insurance sponsored (but not fully paid for) by employers, while almost 28% have governmentsponsored insurance. Those over 65 are covered by a federal programme (medicare), and some poor children and their families are eligible for a statefederal programme (medicaid). physicians are, for the most part, self-employed.
The united kingdom has a publicly funded universal, single system known as the national Health Service (nHS). it is paid for primarily by taxes. at the same time, however, about 11% of Britons have private health insurance that allows them to bypass the waits typical in the universal system. physicians who work under contract to the nHS are paid based on a combination of salary, capitation and feefor-service; those who choose to work out of the system set their own fee-for-service rates and are not generally reimbursed by the public system. France has a public health insurance system that covers all legal residents and is funded by compulsory contributions from employers and employees; however, more than 92% of the French have private, supplemental insurance. about half of this cost is funded by employers, and half is paid for individually (which is used to meet co-insurance fees, including 20%for hospital services). The government does fund the supplementary insurance for those who cannot afford it; and, as a result, overall out-of-pocket costs were barely 7% in 2005. physicians are primarily self-employed and paid on a fee-for-service basis, and patients can choose their own doctors.
uniTed kingdom
singapore
France
singapore turned to a system of compulsory health savings accounts, called medisave accounts, in 1984. in addition, most of its citizens also enrol in medishield, a voluntary catastrophic insurance plan. The system is funded by employees and employers, and individuals can choose to use funds from their medisave account or pay out-of-pocket for health care services. The government subsidises the provision of health care services based on the setting in which care is provided; for example, public hospitals charge fees that total at least 19% of total costs, with the government meeting the balance from general revenue, while in private hospitals the patients pay 100% of costs.
Japan
in Japan, universal coverage is available either through employer-based insurance, national insurance or insurance for the elderly. These programmes, which provide almost the same benefits, are financed primarily by the national government, private employers and individual co-insurance payments; and there is a cap on the amount of out-of-pocket spending health consumers may incur in a year. moreover, premiums are based on income and ability to pay. all hospitals and physicians offices are run on a not-forprofit basis, although 80% of hospitals and 94% of physicians offices are privately operated.
The over-65 age group accounts for 4050% of health care spending*
01 NHS theatre room in action 02 Retired worker Eddie Bostec holds signs during a Medicare prescription drug rally on Capitol Hill in Washington. Senior citizens were rallying for a guaranteed prescription drug benefit under Medicare
*OECD Observer.
01
Winners and losers Of course, once the basic health care system is understood, it immediately raises questions about costs and what is received for the enormous amounts of money spent. According to the Organisation for Economic Co-operation and Development (OECD), recent health care spending as a share of gross domestic product (GDP) was: 8.7% in the UK 11.2% in France 3.7% in Singapore 8.1% in Japan, and 16.0% in the US In terms of annual per capita costs, the UK spends almost $3,000 a year; France, some $3,600; Singapore, about $1,150; Japan, $2,250; and the US, $5,700. Given that, which nations have the best outcomes in terms of money spent and value received? This, of course, is not an easy question to answer. One way to start is by looking at two factors: life expectancy and infant mortality. According to the Kaiser Family Foundation, life expectancy in the developed world is about 80 years: for the UK, it is 79; France, 81; Singapore, 82; Japan, 82; and the US (which is the biggest spender but has
02
the worst result), 77. When it comes to the infant mortality rate per 1,000 live births, in the UK it is 5.1; France, 3.6; Singapore, 2.3; Japan, 2.8; and in the US, a startling 6.8! Out of control? Improving the return on health care investment should always be a key concern. However, many developing nations already are having trouble meeting the enormous economic burden posed by their health care systems. Projections indicate that, if nothing is done, the situation will worsen. One reality that must be considered in attempting to control runaway costs is demographics as people live longer, they tend to need and consume more health care. In addition, the ever-increasing costs of pharmaceuticals will also need to be addressed, as will the increase in the shortages of caregivers. Costs Although there is some disagreement about the amount of the increase in health care costs without any changes, there is agreement that
it will happen. Indeed, the OECD projects that public spending on health care and long-term care over the next 40 years could almost double as a share of GDP in the average OECD country. The International Monetary Fund projects health care spending between 2009 and 2030 to increase, as a per cent of GDP, almost 3% in Japan and the EU and almost 4.5% in the US. Moreover, these increases are coming at a time when, for example, according to the Kaiser Family Foundation, financial sustainability has been a major issue for the French health care system for decades, and that in the UK, there has been concern of NHS being insufficiently funded. Age One of the major reasons for these increases is demography. Simply put, the number of people over 65 and the number over 80 are expected to increase dramatically. For example, according to the United Nations, the number of people over 65 in the UK will almost double (from 9.7 million in 2005 to 16.5 million in 2050), while the population over 80 will almost
health care REPORT
triple (from 2.7 million in 2005 to 6.3 million in 2050). The numbers for France are similar. In Japan, the increase in those over 65 in the same period is smaller (33.7 to 45.1 million), while the increase of those over 80 is somewhat greater (6.2 to 15.8 million). And in the US, the numbers are significantly higher: those over 65 will increase from 36.8 to 84.6 million or 130%, while those over 80 will increase by 189%, from 10.6 to 30.6 million. Again, although estimates vary, there is substantial agreement that increases in older populations bring increased costs. For example, an article in the online OECD Observer says, The over-65 age group accounts for 4050 per cent of health care spending and their per capita health care costs are three to five times higher than those under 65. [Moreover,] overall health spending, including long-term care
Photo: reuters
for the elderly, already accounts for around 9 per cent of GDP in OECD countries. According to Japans National Institute of Population and Social Security Research, Medical costs for the elderly aged over-65 amounted to 52 per cent of total health care spending, meaning that more than half of health care spending goes to just 20 per cent of the population. Another aspect of aging that will raise costs is that the elderly often need long-term care, which involves a demand for nursing homes, hospices and ways to pay for home care. Drugs An additional cause of increases in health care spending is the cost of pharmaceuticals. According to the OECD, from 1996 to 2006 in the US, the share of health expenditures that went to pharmaceuticals increased from 9.3% of total health spending to 12.6%. The OECD average in that
01 Around 12,000 newly qualified nurses take their oaths in Manila. Thousands of Filipino healthcare staff, including doctors, leave the Philippines every year for better paid jobs overseas, resulting in a shortage of well-qualified staff at home 02 Care assistance in a UK nursing home 03 NHS paramedics on an emergency call
THE STATE OF THE US

The Department of Health and Human Services estimates that a shortfall of full-time registered nurses in the US will be an alarming 1 million by 2020.
INCREASING Shortage of nurses in the US

02
2020 2015
1,016,900 683,700
2010
405,800 Visa cuts

US Congress is cutting the number of visas for some 400,000 nursing home workers and health care aides to 200,000.
03
01
period rose from a 14.0% to 16.4%. In the US, much of the problem is due to the increase in retail prescription prices: on average those prices increased by 3.6% annually between 2000 and 2009, faster than the average inflation rate of 2.5%. Moreover, according to Fortune, pharmaceutical manufacturing was the third most profitable industry in the US in 2008, with profits after taxes of about 19%. One of the reasons for those profits is the patent protection offered drug companies that prevents the development of generic versions of drugs for long periods of time. Although drug companies routinely explain that the costs of drugs are a result of the enormous amount of research and development involved in developing and testing them for approval, others disagree. Dr. Marcia Angell, former editor of the New England Journal of Medicine, argues
that the pharmaceutical industry is little more than a marketing machine, spending 2.5 times as much on marketing and administration as it does on research. She says that the industry produces little in the way of innovative drugs and relies heavily on publicsponsored research. When it comes to spending on drugs, here, too, the increasing numbers of elderly are a part of the problem: According to Kaiser, In 2007, 90% of seniors, but only 58% of nonelderly adults relied on a prescription medicine on a regular basis. Estimates of prescription drug use among the elderly vary somewhat but tend to fall in the range of 33% of all prescriptions, while the elderly are about 13 to 21% of the population (the US has the lowest percentage; Japan, the highest). Perhaps more telling, the elderly tend to fill between nine and 13 prescriptions a year, most to deal with chronic problems. Caregivers One of the growing problems in the developed nations is the shortage of health care personnel. The result is a migration of doctors and nurses from poorer nations. The OECD and World Health Organisation (WHO) estimates for the use of foreign medical
Applicants turned away

218,800 shortage Turned away: almost 150,000
US nursing schools turned away almost 150,000 qualified applicants in 2005. This is partly due to nurses with advanced degrees choosing to work in hospitals and make higher salaries instead of taking careers in teaching. Consequently, there is a shortage in teaching staff to supply the schools.
health care REPORT
THE LONG PUSH TO THEATRE
personnel in developed countries are that more than 25% of doctors in the US and the UK have been trained abroad; the available data also indicates that the use of foreign medical personnel is a growing trend in the US, Canada, Australia and Switzerland. Estimates are that the number of migrant health care workers in many European countries increased by more than 5% annually over the past 30 years. According to a WHO 2006 report, The number of national trained doctors from a sampling of Sub-Saharan states working abroad represented an average of 23% of those working at home; for some Caribbean island states the figure rises to 50%. The Economist Intelligence Unit notes that India is the largest exporter of doctors (more than 50,000 Indian physicians are in the US). They also found that the Philippines provides the most nurses: In 2004, the Philippines National Institute of Health found that in the previous decade over 100,000 Filipino nurses had left to work abroad. In the US, when it comes to registered nurses, the Department of Health and Human Services estimates that the shortage of some 218,800 full-time registered nurses in 2005 will increase to 405,800 in 2010 683,700 in 2015 and a startling 1,016,900 in 2020. This shortage is due, in part, to the number of trained nurses who are boomers reaching retirement age and, in part, to the shortage of nursing school faculty (nurses with advanced degrees who choose to work in hospitals make
higher salaries). Indeed, US nursing schools turned away almost 150,000 qualified applicants in 2005. One result of the shortfall of health care workers in the developed countries is a brain drain of welltrained physicians and nurses from less affluent nations who can earn more abroad. When it comes to those filling more menial health care jobs, the reaction in developing countries is not as welcoming. For example, in the US, alleviating the shortage of nursing home workers as well as providing home health care aides to help people who could live at home with some assistance will require increasing the number of visas for low-skilled workers from abroad. This move has met strong opposition, with Congress cutting the number of visas for such workers last year from 400,000 to 200,000. The way ahead Many groups are examining the issues involved in health care to find ways to improve care and cut costs simultaneously. Policy makers, all too aware of the economic pitfalls inherent in trying to find ways to cut costs without ensuring there is no diminution in outcomes, are encouraging such efforts. For example, the UKs National Health Service has set up and given significant funding to nine regional NHS Innovation Centres devoted to finding new and innovative ways to deliver quality health care. Health care
organisations in developed nations are looking for ways to change what they do and how they do it, exploring the methods of some institutions that have managed to hold the line on or cut costs through innovative changes. They also are looking to cost-cutting methods that have worked in industry, keeping in mind that health care organisations are service providers rather than producers of products. The urgency of the problem for developing nations in terms of the economic future is so great that scholars from many fields outside health care are now collaborating with those in the health care industry to search for answers. For example, in July 2010, London Business School convened a major conference to look at this issue from a business perspective. Elizabeth Teisberg, the keynote speaker at the conference, said that the focus of those looking at health care should be on improving health outcomes in ways that reduce costs, and she outlined ways in which corporations could play a role in that process. At the same gathering, Kamalini Ramdas, Professor of Management Science and Operations at London Business School, expressed her belief that service-based innovation will be a major component in reducing costs and improving outcomes, acknowledging that the challenges are immense for health care leaders who must identify, prioritise and drive these innovations. The frightening prospect of what will happen if changes are not made has already resulted in actions aimed at reducing health care costs without harming (and, often, with the prospect of improving) outcomes. In Japan, faced with an enormous aging problem, an emphasis has been placed on home-based care for the elderly. The country is now promoting research and development in the areas of drugs for dementia, regenerative medicines, remote medical treatment systems and technological advances to aid in caregiving, including nursing care robots. The UK and Australia have adopted systems for gathering and evaluating information about the relative effectiveness of medical treatments, devices, drugs and various tools used for diagnoses to determine which are the most cost effective and beneficial. In the Netherlands, UK and
New Zealand, according to the Commonwealth Fund, some 90% of primary care physicians have turned to electronic medical records, while only 25% have done so in the US. (Estimates are that the adoption of health information technology in all areas of health care could save the US alone $88 billion over 10 years.) Another solution suggested by many researchers is to move the simplest procedures, often performed in hospitals, to less expensive venues, such as outpatient clinics, retail clinics and patients homes. In addition, an evaluation of the expertise needed to perform tasks now only handled by doctors may allow a shift to nurses, physician assistants and other health care personnel. In the UK, the Royal College of Physicians is promoting a concept known as Teams Without Walls, an integrated model of care in which professionals from primary and secondary care work together across traditional health boundaries. It brings together hospital and community teams to ensure that the patient sees the right person, at the right time, in the right setting. In the case of pharmaceuticals, France is just one of the nations that negotiates prices for pharmaceuticals, something the US has been loath to do except in the case of the US Department of Veterans Affairs, which has used that method to save hundreds of millions of dollars each year. Germany and New Zealand have curbed costs by adopting a system of reference pricing that requires citizens to pay the difference between the lowest priced, comparably effective drug and the price they pay for the prescribed drug, thus providing incentives for their citizens to watch costs. The arguments against such efforts are based primarily on the claims of pharmaceutical companies that they need to charge high prices to cover R&D costs. As it happens, progressive business scholars are searching for ways to help those companies cut those costs. For example, Rajesh Chandy, Professor of Marketing at London Business School, looked at the issue of conversion (that is, the ability of pharmaceutical firms to convert ideas into drugs). He suggests that development costs, and thus the costs of drugs, could be reduced if firms
Service-based innovation will be a major component in reducing costs and improving outcomes.
the author Beverly Goldberg goldberg@tcf.org Goldberg is a Senior Fellow in aging and economics at The Century Foundation in New York, and is the author of Age Works: What Corporate America Must Do to Survive the Graying of the Workforce.
moderate the speed at which they try to develop drugs, focusing on a smaller number of promising ideas in technical fields in which they have expertise. Although this is but a brief list of innovations already being tried or contemplated, it is clear that changes can be made. But there is a set of changes that could make an even greater difference. Singapore, which (as noted earlier) spends little on health care in comparison with other developed nations while achieving better outcomes, is a model that should be a starting point for all nations. Singapore has followed a path that begins, according to its Ministry of Health, with building a healthy population through preventive health care programmes and promoting a healthy lifestyle. Singapore believes that part of the way to achieve these outcomes includes improving sanitation, water supply, education and housing. The belief that preventive care and promoting good health works is something that some businesses have begun to champion. The Economist Intelligence Unit has backed that belief, noting that firms that provide additional health benefits and incentives tend to outperform the market. Clearly, gaining control of health care costs is a must for the developing worlds continued economic stability. Yet, it is clear that the way to do so is complex, involving actions by government, business, academe and, of course, those who are directly responsible for health care services.
health care REPORT
THE CLINICIAN AS LEADER
Leadership saves lives

THE CLINICIAN AS LEADER Leadership saves lives
Clinical roles are also leadership roles. Peter Lees shares insights from his leadership role with the National Health Service in the UK, the worlds largest health care system.
Photos: lc griffiths
health care REPORT
I am a leader who happens to be a neurosurgeon by trade.To some of my colleagues and others outside the medical profession, these two facts are mutually exclusive. Clinicians are suspicious of leadership. They often simply do not regard what they do as leading.
But, after 35 years working in the UKs National Health Service (NHS), I believe that leadership is central to what clinicians do. They practise it in the operating theatre. They practise it as they walk through wards. They practise it when they meet patients. And they need to: the stark truth is that leadership saves lives. I have dedicated much of the last decade to trying to raise the quality and awareness of leadership in the NHS. From 1 April 2009, as medical director and director of leadership for NHS South Central, I have merged one of the most senior NHS medical leadership roles with the responsibility for leadership development of all professional staff in the region. It is a daunting but exciting task and one for which I gave up my hands-on clinical career a big decision. With more than 1.5 million employees overall, the NHS is the largest and most complex health care system in the world. Only the Chinese Peoples Liberation Army, Wal-Mart and the Indian railways directly employ more people. On average, the NHS deals with one million patients every 36 hours and has an annual budget of over 90 billion. Nearly half of the NHS staff are clinically qualified. They include 90,000 hospital doctors, 35,000 general practitioners, 400,000 nurses and 16,000 ambulance staff. In the South Central region alone, 86,000 staff serve a patient population of four million. Given such numbers, the need for financial, organisational and individual leadership is clear. Yet, leadership development in the NHS is in its infancy. We are still getting to grips with what leadership means in the context of the NHS, a context that is, of course, varied and ever changing. Business leadership is required to run the multimillion-pound organisations employing thousands of staff. Clinical leadership, with senior people from many professions, is required to lead clinical care.
So, what kind of clinical leadership is required? What is the nature of leadership in an environment in which life and death decisions are obligatory, speed must be matched by precision and the most effective care is delivered by a multidisciplinary, extended and rapidly changing team? Based on the successful leadership I have encountered during my career, and witnessed in health systems in the UK and elsewhere, I would offer eight simple observations: Leaders have a purpose The starting point has to be that leadership requires a sense of purpose. Effective leaders are driven by a strong desire to make a difference. In the NHS, we have the advantage of having a number of clear and motivational purposes to our activities the organisational purpose of providing free health care for all, professional purposes encompassed by our various professional codes and departmental along with more-local purposes (maximising resources, looking after the local community and so on). Statements of purpose can be trite, but it is difficult to see how effective leadership can be achieved without some shared sense of why the organisation exists and what it and the individual are trying to achieve. Indeed, one could argue that herein lies one of the greatest underplayed assets of the NHS: everyone is here to make a difference to the health of individuals and of the nation a single unifying mission statement at no effort, at no cost. And yet, traditionally (and sadly), we too often focus more on what divides us. While all my colleagues have a sense of purpose, it is not necessarily the same purpose. For example, consultants will still say that they work for a particular hospital; they rarely say that they work for the NHS. Others will describe themselves by their discipline. They are anaesthetists (or whatever their branch of medicine) first and foremost. But all of us are driven by an overarching desire to save lives and relieve suffering. Leaders cannot opt out The second observation is that there is no opt-out clause in leadership. It touches us all as followers and leaders. Carping at the sidelines or working in isolation is damaging personally,
professionally, organisationally and productively. We often talk about a duty of care for others, but I believe there is also a duty of leadership that comes with power and influence. To ignore this fact is an abdication of responsibility. Yet, many clinicians see the world as a microcosm. They regard their job as treating patients. Period. This is true, but it is too narrow in scope. It blinkers them to their leadership duty, which is integral to treating their patients more effectively. It can also mean that clinicians are disinterested in the managerial and operational systems surrounding them. This is no longer an option. Increasingly, doctors, nurses, therapists and other clinicians are becoming engaged with these systems and faced with the stark realities of a serious recession. There has never been a more crucial time for clinical engagement and clinical leadership.
Effective leaders are driven by a strong desire to make a difference.

Interacting with the systems surrounding them requires that clinicians develop new skills. Imagine how much more potent it is when a clinician understands the business side of health care, how to make the system work for clinical improvement and how to harness the skills of management colleagues to that end. This is in stark contrast to the more familiar frustrations seen among clinicians, who often find themselves at loggerheads with managers each side perceiving the other as being obstructive. It is worth noting that this is always a two-way process. There is the legitimate criticism that some clinicians do not engage with broader organisational, managerial and leadership issues. Equally, however, I have found myself in many meetings at which it was not clear we were in a hospital with patients. This is not acceptable, either. Leadership does not occur in a vacuum. It demands an inclusive and broad-ranging world view. Leaders have faith in people The third observation is simple deceptively so. Leadership is about
NHS
Annual budget Employees Hospital doctors General practitioners Nurses Ambulance staff 90 billion 1.5 million 90,000 35,000 400,000 16,000
On average, the NHS deals with one million patients every 36 hours
understanding, caring for and working with people, about getting results with and through people. It is never just about the leader at the top of the hierarchy. In my experience, leadership superheroes are a myth. Even someone like Nelson Mandela could not change the world on his own. Indeed, Mandelas most impressive quality as a leader has always been his unswerving faith in the people of South Africa, black and white. What does this mean for the NHS? Leadership in a health care system will always be dispersed. It is not enough to have leadership at the top; we need it all over. We need leaders at every level in the NHS, including junior doctors and nurses, but also in administration, catering and cleaning. If we could only connect everyone involved doctors, nurses, therapists, scientists, managers, receptionists, cleaners, cooks to the patient, it would make an enormous difference. Everyone should feel that he or she is contributing to the treatment of patients. Herein lies a huge, wasted opportunity: because people in clerical and support functions often have an acute sense of public service. They care. It is increasingly apparent how important all of these people are to the efficient and safe functioning of a hospital. The vigilant cleaner who identifies a potential hygiene risk and does something about it is exercising
a form of leadership that is every bit as important as that of the CEO. This also suggests that it is not just clinicians who save lives. The danger in large, complex organisations is that systems take over. The clinical agenda needs to be aligned to improving organisational performance and vice versa. Systems should serve the core function of the organisation rather than existing in their own right. In health care, as in corporations, as you go up the hierarchy theres a point at which the emphasis shifts from looking towards customers (patients) to serving the hierarchy. At a personal level, leadership is about one-to-one relationships. This requires respect. Indeed, respect is the most important word in leadership. In the operating theatre, as elsewhere, youre only as strong as your weakest link. If you respect people, it changes your mindset and attitude. People know and respond to respect. Equally, they know when it is lacking. At the same time, respect needs to be combined with a commitment to making hard-headed, perhaps unpopular, decisions. Leaders build teams The fourth observation is related to the previous point: leadership is always a team activity. It is about achieving results through other people.
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You might be the most skilful surgeon in the world in your chosen speciality, but you are nothing without your team. Leadership is always a team effort no matter if the leader gets the plaudits or headlines. Instinctively, clinicians think that the only way they can improve patient outcomes is by a clever operation or a new drug or procedure. But there is a growing body of evidence that fewer patients die when there is good teamwork. Our notion of teams is changing. Now, teams are more fluid. In the medical world, teams are continually formed and reformed, which is so different from the past. Implementation of the European Working Time Regulation means that stable teams with the same personnel are now much less likely. If you are rushed to hospital with a heart attack at three oclock in the afternoon, a team will descend on you. Arrive 30 minutes later, and it will be a completely different team. Come in with multiple injuries, and you will encounter teams from all over the hospital. Teamwork in this environment is like a perpetual dance. Leaders watch over trainees and intervene when they are necessary. Partners are changed, the agenda shifts with each case and the dynamics are altered. It is teamwork at its most complex and challenging, and it has potentially devastating results if you get it wrong. Such fluid teams put a premium on communication. This marks an important change. In the past, clinicians didnt really need to communicate beyond their immediate team, simply because they were always on duty. While nurses have had a standardised handover procedure from time immemorial, doctors havent because they worked such long hours and, with stable teams, they didnt need to. Now the onus is on those in leadership positions to add the necessary cohesion to teams through constant communication. Leaders break silos The fifth point concerns the need for clinical leadership to reach across functional silos and disciplines. In the business world, the toxic effect of functional silos is well understood. Thats why companies such as
General Electric have long touted the advantages of boundarylessness. Its an awkward word, but it stands for something leaders must endorse. Companies have spent the past 20 years trying to strengthen interdisciplinary communication and cooperation. That process is long overdue in the NHS. Medicine is a professional bureaucracy that encourages the clinical silos plain to see at any hospital oncology, psychiatry, gynaecology, paediatrics and so on. It hardly encourages a holistic view. Issues tend to be neatly and unhelpfully compartmentalised. The division between primary and
Leadership is a team game and that support is better offered to the team than demanded by the leader.
secondary care, consultant and general practitioner, is probably even greater. This has, historically at least, encouraged clinicians to seek refuge and a sense of belonging, superiority and entitlement in their area of expertise. In leadership terms, this has meant that leadership often involves clinicians proclaiming, in ever-louder voices, that they are the experts while expecting people to listen and respond. After all, that was the norm for the first few decades of the NHS. The reality is that, as noted earlier, leadership takes place at all levels; and with this must come a sense of transparency and fairness. One of the myths of health care is that clinicians are above normal rules of behaviour, and many who bemoan the fact are nonetheless complicit. Discipline is essential but not straightforward. Another challenge in leading doctors is the level of forgiveness to exercise. Do you tolerate the cardiac surgeon who occasionally loses his temper because hes a fantastic surgeon? Or, do you say, We wouldnt let a staff nurse on Ward 22 behave like that, therefore were not going to let you behave like that and risk losing a rare talent?
Leaders are models The sixth observation concerns the signals we send and receive as leaders. The style may be understated, flamboyant or somewhere in between; but leadership is always demonstrative. Leaders must always be aware of the situation and the signals they send. Patients look to us for leadership, are reassured when they see it and frightened when they do not. This may not be obvious to a doctor who believes that her technical and professional judgement are all that matter. A great deal of what we call bedside manner is actually leadership, pure and simple. The other side of the coin is the ability to read signals. Leaders need highly developed antennae. In my experience, the best leaders can walk onto a ward and tell you whether its well led in seconds. They are constantly sensitive to the many different environments and people they encounter. Noticing people and sensing what is needed is at the heart of leadership. A consultant will often have seen hundreds of people with the same problem. He must demonstrate humane and compassionate leadership. Sometimes that means leading from the front. But other times it can mean something subtle such as a show of solidarity and resolve. Effective leaders feel the pulse and react intuitively. This intuitive sense was brought home to me in the middle of an operation when the patient was losing more blood than anticipated. The atmosphere was calm as we dealt with the problem; and, at one point, I looked up. Silently, the theatre had filled with experienced people. The senior anaesthetist had quietly appeared, the theatre manager was there, and an entire team of the people I trusted most was there to back me up. They were experienced people who might have been having a break or drinking a coffee in the kitchen but had heard that there were problems or somehow knew that they were needed. This kind of phenomenon is something I have repeatedly encountered. It is an intuitive understanding that leadership is a team game and that support is better offered to the team than demanded by the leader. Equally, the leader
needs to know when to accept help, to follow rather than lead. Leaders appreciate managers The penultimate point about leadership in the NHS concerns the relationship with managers. When I was medical director of a major teaching hospital, we had an abundance of powerful medical technology. What never crossed my mind, or those of my colleagues, was that there was a limit to the load the hospitals electrical infrastructure could bear. Luckily, before we reached the limit, a manager intervened and saved the hospital from being plunged into darkness in the middle of operations. Yet, the manager would not have been thanked. Indeed, only a handful of people would have known the problem existed and had been resolved. Management is not leadership. Managers follow the path; leaders create it. Not all managers can be or want to be leaders. Equally, great leaders do not necessarily possess the attention to detail required of managers. The key to leadership is accepting that management and leadership are different disciplines that are mutually supporting. The NHS has been driven by a managerial philosophy for most of the past 30 years. A large organisation needs a lot of managing. Activities and processes need to be standardised. Data and feedback need to be handled. That is the job of management. Now, increasingly the onus is shifting from quantity to quality. That is a leadership challenge as much as a management challenge. Quality isnt just about doing the same things more efficiently; its also about doing things differently and moving up the value chain. Leadership is about looking at the whole system, identifying where we should be putting our energies, and developing innovative and creative solutions to the issues we face as an organisation. Leaders understand what is non-negotiable The final observation is perhaps the most important of all. It is about what a leader stands for, and it goes to the very heart of the NHS challenge.
Many leadership decisions are not based on science or even hard data, something that we are not always good at dealing with. Leaders sometimes go to bed at night knowing that they couldnt instantly fix a pressing problem and knowing that it could all blow up in their face. For doctors moving to a leadership role, this is a huge leap and one that is rarely talked about. Also, while clinical results are highly visible and often instantaneous, the results of leadership are much less attributable and often very long-term. Leadership involves taking risks, but that should always be done within clear parameters. Great leaders understand the non-negotiable aspects of their role and never compromise their integrity. For Gandhi, leadership meant protest by non-violent means; non-violence was his non-negotiable. I have had the privilege of working with health professionals with equally strong principles. There is a sense that leaders need to be veritable Renaissance men and women. Expectations of leaders are high, and the traits of leaders often read like wish lists for the perfect human being. The reality is that leaders require a range of technical, emotional and professional attributes. The ability to flex is particularly important, because you may go, literally, in a space of 10 minutes from a patient with a bunion to someone who is dying. The best leaders recognise that there is something more to life than being a technical expert. They are able to maintain their credibility within their profession and within the management structure of the organisation. Many of us in leadership roles in the NHS suffer from what has been called imposter syndrome. Although we are highly trained in our technical disciplines, we feel inadequately prepared as leaders. To technically trained people, leadership can seem a very woolly concept. But I know from first-hand experience that leadership can and does make a huge difference both to how people feel and to the outcomes. It is high time we learned that, in addition to quality technical care, leadership saves lives too. There is nothing woolly about saving lives.
the author Peter Lees peter.lees@ southcentral.nhs.uk Lees is Medical Director and Director of Leadership for NHS South Central, one of the 10 strategic health authorities of the National Health Service.
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Q&A
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Helping hospitals to improve health care

Kamalini Ramdas was convinced that good things would happen if top health care practitioners could spend a day speaking with leading-edge business thinkers. She proposed that London Business School and Cambridge University arrange such a conference, and the event was held in July 2010. Some 100 people attended including 27 chief executives of Hospital Trusts and Strategic Health Authorities, 10 chief executives of privatesector businesses providing health care services to public health care providers, and a dozen or more business school faculty. The result was an invigorating interchange of new ideas.
Georgina Peters asked Kamalini Ramdas to share some of her ideas about how to improve health care in an organisation central to any society, the hospital.
Q When people think of health care, they often think first of hospitals. Is that true with you as well? A In terms of improving health care in the UK or in any other country, thats an excellent place to start. This does not mean that health care cannot be improved throughout the entire system, but hospitals are, after all, central. And hospitals have more control than they realise when it comes to making improvements.
Q&A
that hospital boards must change policies before improvements can be made. Neither is true. I have found that hospital managers can often improve their own internal processes and thereby make enormous improvements in providing health care. They dont have to wait for other players in the health care system to make improvements first. You mean they can cut costs? Sadly, thats what too many hospital managers think is meant whenever someone like me talks about improving health care. So, let me just concede that it would be the rare hospital or health care provider who could not find at least some ways to either cut costs or boost productivity through more efficient processes. But that is just one way to improve health care and it may not even be the best way. The real goal of hospital managers ought to be improving outcomes, the health of the patients under their care. Many hospitals cut costs or otherwise try to become more efficient and, in the process, begin to compromise quality. That is not improving health care, as I see it.
Q A Q How, then, should hospitals think about improving what they do? A What I tell hospital managers is to step back and think about how they deliver health care. I ask them to look at the big picture first, then zoom in on specific areas of their work flow and brainstorm ways to change processes. Q Is this done best at senior levels of management? A Absolutely not. I have found that everyone can (and should) be involved in the goal of improving health care. This means that managers who only talk to other managers about improving the system are missing the dozens of ideas for change that can come from involving every level of employees in the search for better ways to manage a hospital. For example, Walsall Hospitals made improvements in the transport of patients after consultation with the porters who provide those services, with the result that porters are now working out of a central hub instead of being allocated to each wing of the hospital. This suggestion turned out to improve communications vastly and save everyones valuable time.
Kamalini Ramdas kramdas@london.edu Ramdas is Professor of Management Science and Operations at London Business School and Academic Director of its Institute of Innovation and Entrepreneurship. Her current research examines new ways to create value through innovation, including service and operational innovation in business sectors such as health care and information services.
More control? I find that many people who manage hospitals think that improving health care starts with government changing regulations, drafting new legislation and so on. Or they think
Q A
Q&A Helping hospitals to improve health care
There is one important role I should mention that is tied to senior executives. The leaders of an organisation must create a culture in which employees at every level are engaged in innovation on a daily basis. HCL Technologies CEO Vineet Nayar has written a book on the subject, Employees First, Customer Second: Turning Conventional Management Upside Down (Harvard Business School Press, 2010). We all know that leadership is not limited to a boardroom, a podium or a battlefield, he says. Nor are established leaders the only people we can emulate. The world abounds in leadership lessons in our homes, schools, offices and neighbourhoods. He also notes, Id like to invite each one of you to share a story about yourself, or any other person in whom you saw leadership in action. Anything that made a difference. A key role for senior business executives is to create such a culture in their own firms.
Q Isnt such all-employee involvement only good for ideas that will have a smaller impact? A Not at all. I dont believe that every discussion with employees will yield changes that will have a major impact. In some cases, yes, this might happen; but its important not to discount the effects that many smaller incremental changes can have in terms of making patients healthier and happier. Curiously, companies like Ford learned back in the 1980s how important it is to commit to total employee involvement if youre going to improve the company in both large and small ways. This approach is used in many corporations (especially those in manufacturing); its success should be studied by all health care providers, especially hospitals.
the importance of customer touch points, the times when a service provider interacts with the user. This is also an area in which hospitals can generate some positive effects quickly. For example, consider patient check-in procedures: most people are now accustomed to what I call the 50-question drill that hospitals often force people to complete even if they were patients at the same hospital just a few weeks before. Hospitals ask, Have you had asthma? Do you suffer from diabetes? Who is your regular doctor? And so on. Sometimes, different departments of the same hospital will ask some of these same questions as patients navigate through different layers of health care.
Q But arent electronic medical records a major trend right now? A Yes. But making a patients health care records totally electronic and systematically updating them after every treatment hasnt been done yet. Theres a long way to go. Beyond that, getting to the state in which a patients records are easily transferrable to other health care providers is still in the very early stages. So, thinking about this, notice how inefficient this is for everyone who is asked to help a patient and notice how unpleasant it is for patients to have to keep answering the same questions over and over. I would also add that, in the case of getting second opinions from other doctors or health care specialists, a patients care could be seriously compromised if different health care providers are not working with the same data. For example, it might be an innocent slip, but what happens if a patient simply forgets to mention a diabetic condition when being examined by another doctor: the results could be quite problematic. I realise that emergency medical records get a lot of press these days, but patient checkout is another big opportunity for hospitals to improve. Patients are very anxious upon leaving hospital care and are rarely well prepared by the provider for things they will need to do that could have been forecasted weeks in advance.
We expect pilots on jet aircrafts to go through a checklist before flying a plane. But how many surgeons go through a similar process?
(Profile Books). He talks about how it is critical, in so many organisations, to be thorough when doing important, complex work. We expect pilots on jet aircrafts to go through a checklist before flying a plane. But how many surgeons go through a similar process? The number of things that have to be done right, repeatedly right, during any work inside an operating theatre in a hospital is absolutely crucial. Yet I personally only know of one neurosurgeon who has taken up the practice of using a detailed checklist during his surgeries, and he says it has helped boost the quality of the service given to his patients.
Q So perhaps there should be a chief quality officer on duty during major surgeries? A No, Im not in favour of that. And Im not saying that a surgeon, during a delicate operation, should stop and check off boxes on a form. I realise that surgery is often as much an art as it is a science. But what would help is if all those involved in such important work could use such checklists as long as they could be implemented in a helpful way to make sure their work is done properly. But, as with all successful quality improvement efforts, its important for people to improve their performance by managing themselves, not by having someone from Quality Control looking over their shoulders. Q Are there any other good places to improve health care processes inside hospitals? A There are many I could name. Heres another good one that immediately comes to mind. Every
Starting points
Q In your own work with health care providers, have you found some obvious areas in which improvements should be leveraged sooner rather than later? A Every hospital is different and I dont believe I can put forth any kind of formulaic approach that will work everywhere. Design firms that I have spent time with, like IDEO, talk about
Where else could hospitals look for process improvements? A Atul Gawande received a lot of press for his book, The Checklist Manifesto: How To Get Things Right
Q
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hospital operates on shifts of doctors, nurses and technicians. Yet, its often the case that one shift does a poor job of briefing the next shift on the status and needs of patients. In reality, theres often a huge amount of potentially important information not transferred, say, by nurses, between shifts. Any review and improvement of the process of shift changing would be a real boost toward improving health care; in fact, a pilot programme done at Kaiser Permanente-California showed just how efficacious such a programme can be. And, you know, while this really might seem like its a small, incremental change, such changes can be critically important to the proper care of patients.
priced. If you buy gourmet dark chocolate at their store, it is going to be good chocolate, even if its not a name brand. They actually are a health care provider (of a sort). For example, they have for years aimed at providing customers with healthy fare, usually through self-branded products. And in 2007 long before it became a legislated requirement in some places they committed themselves to removing private-label products from their shelves that contained trans fats, artificial colouring and flavours, as well as genetically modified foods. Its a model, for me, of food merchandising.
Q Is there something to be learned from Trader Joes and its pricing if youre in the health care profession? A I dont think Id want a Trader Joes Hospital, but you raise an interesting point. A lot of the health care world is tied up in daily discussions about the rising costs of providing care to patients. This is true in every sector of health care, not just hospitals. Elizabeth Teisberg, who co-authored Redefining Health Care (Harvard Business School Press, 2006), makes many important points about health care. She has been a huge influence on my own thinking as she writes and speaks powerfully about the need for changes that both improve quality and reduce cost. This is something she has been stressing for years. Its important to be aware that, whether you pay for your health care costs or an insurance company does or the government does (with your tax dollars), society is spending a huge amount of money on patient care. And many people, no matter how their health care bills are paid, believe that they are getting fairly low or mediocre quality at the highest possible cost. So it would be fascinating to see a health care system commit to the concept of the highest quality at the lowest cost to the customer or patient. In a way, some of the medical tourism trends were seeing people going to specialty hospitals in India or Eastern Europe because the care is top quality and the costs are low are good examples of that. Its worth thinking about. Q Supposing you had only five minutes to share with a large group of health care providers your most important findings about improving the profession.
Reasons to be optimistic
Q You have worked in many industries. Do you think that the level of progress being made in health care (hospitals and beyond) gives reason to be optimistic? A Im fairly optimistic about what Im seeing in the health care industry. One thing that always impresses me is that, whenever I talk to doctors, I realise how much they care about their patients. The question I always put to doctors is this: is caring enough? The key, I believe, to seeing widespread improvement in the health care world is to make everyone involved from doctors to those who prepare food in the hospital cafeteria, from nurses to those who work in maintaining the hospital grounds patient-centric. Anytime I talk to any group of health care practitioners and motivate them to start thinking about health care outcomes actually helping patients to become healthier those groups of providers become excited. That is encouraging. Q Earlier, you mentioned the achievements of Ford.You have worked widely in the automotive industry, but, Im curious: do you have a personal favourite when it comes to companies you deal with as a customer? A Interesting question. Well, I guess the first company that comes to mind is Trader Joes (www.traderjoes. com). Heres a grocery-store chain in the US that provides higher-quality merchandise that is also reasonably
What would you say? A First, I would emphasise that everyone, at every level, of providing health care, can make a difference. I have seen too many examples of how health care processes can be improved without the involvement of senior executives. The potential for innovation in this field is absolutely enormous. Everyone needs to have the confidence that he or she can make a difference. What this means, then, would be my second point: it is important to regularly stop and think critically about what you do every day as a health care provider. Could the mistake you made yesterday have been avoided by using a short checklist? Is there a better way to transmit the information you just collected on a patient to other health care providers who will also be assisting this patient? Are there ways to help patients help themselves by becoming more informed about their conditions or treatments? Whatever could be done differently and better should be uppermost on your mind when youre at work. Lastly, I would stress that health care has a huge advantage over other industries in terms of improving itself. For example, consider those who provide information technology systems for end users, such as airlines, manufacturing companies or retailers. Many of those involved in providing such IT services are far removed from the people who will actually benefit from their work. The opportunity for them to actually see and hear, firsthand, how their work is impacting customers is almost non-existent. Thats not true in health care and thats a good thing! My guess is that the ratio of people working in health care who can see and hear what the customer (the patient) is thinking and feeling is much higher than in most other professions. The health care providers with whom I have worked who have actually made their patients healthier and happier derive great enjoyment from doing their work in ways that are more helpful to patients, more productive and more economical. Focus on the outcome of the health care processes you utilise and it will become clear right away that change is needed and that it is also possible.
Research
Using location to innovate in health care delivery

When one thinks about improving health care by changing the processes inside hospitals, the path to innovation often leads one to go outside hospital walls. And improving health care is something in which many industries can take part. A good example is Cisco, which has teamed up with hospitals in the UK and France to provide Cisco HealthPresence. In Scotland, remote areas are served by telemedicine booths developed by Cisco; each booth is manned by an attendant. Rather than go to a faraway emergency unit, patients come to the booth (or the booth can be brought to them), which allows them to connect with a doctor through a very high-quality video conferencing screen.
Blood pressure gauges, stethoscopes and other devices are operated by the booths attendant; and readings are transmitted directly to a doctor. In an application of the same technology at a geriatric hospital in Paris, patients can access one of 20 specialist doctors cardiologists, nephrologists and other doctors in advanced medical fields without having to ever step out of their hospital. This eliminates hours of waiting for an ambulance, waiting for a nurse and wheelchair to navigate the hallways at each end to get
Kamalini Ramdas and Elizabeth Teisberg
to the ambulance, and discomfort due to movement and having to dress and then change into hospital attire. Interestingly, such process improvement also radically transforms how medicine is practised. While traditionally a patient would take his or her file containing a few lines of notes from a local geriatrist to a specialist appointment, today, the geriatrist is in the room with the patient connected remotely with the medical specialist. They interact directly, resulting in highly coordinated care. The benefit to the health care providers is one advantage of this approach, but Cisco has told us that patients are also often happy not to have to have a face-to-face meeting with a doctor, which some can find quite intimidating. They also feel they have greater control of their records and their health as they have access to the same information as does the doctor in this type of electronically mediated appointment. Another good example of how changing the location of the delivery of health care can have a huge impact is tied to patients with heart problems. Most would think that a suite of equipment as expensive and delicate as a cardiac catheterisation laboratory would be carefully and permanently installed in a hospital. Yet, the founding principle of the Regents Park Heart Clinic in London was to question this very assumption. This organisation owns mobile cardiac catheterisation units that it leases to hospitals. By doing so, smaller hospitals that cannot afford to have a permanently installed unit are able to offer the service. London Business School alumnus, Anil Ohri, who founded the clinic, shared with us that his ambition was to bring better service and less waiting times to patients. Of course, using a mobile unit requires that the installation and removal process is totally error free and that on-site staff be trained on use of the unit.
One other example: the Acute Medical Unit team at Ipswich Hospital now uses an outpatient management system for pulmonary embolism patients, reducing the number of admitted patients for this condition by 95% cutting bed bays and increasing patient satisfaction. Typically, fewer than 10% of patients with a suspected embolism turn out positive on scanning for embolism. In the past, patients were admitted and waited in the hospital for scan results. Today, all patients (except those assessed to be high risk during the scan) are sent home afterwards and get follow-on treatment in the comfort of their homes while awaiting the scan result. A team of rapid response nurses visits patients in their homes to monitor them and administer medication. Switching to the current approach required working to ensure that scans could be done five days a week and also needed the buy in of the rapid response team. Central to each of these three quite different examples is the idea that changing the location at which a service is delivered can result in a very different service concept that brings new sources of value to the patient. Location change can be a powerful source of innovation in health care delivery. However, successfully using location to create a new way to deliver value in health care simply cannot be achieved in a vacuum. As evident in the examples above, changes in the location of delivery need to be coordinated carefully: staffing, new technology and information systems and patient education must mesh for value to be gained from the proposed change. Without close attention to these and other interconnected cogs of the delivery system, altering the location of delivery can result in worsened service and ultimately poorer health outcomes. With proper management, however, great things can happen in this area of health care.
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Healthy reading
AGENDA-SETTING Books
There is an array of books on how health care should best be led and managed. Here, we present our pick of the prescriptions.
01 Reengineering Health Care: A Manifesto for Radically Rethinking Health Care Delivery by Jim Champy and Harry Greenspun (FT Press, 2010) Champy was co-author of the landmark book, Re-engineering the Corporation, which showed how businesses could retool the processes they used to achieve dramatic cost savings, greater customer satisfaction and more value. In this book, he and his co-author (a doctor of medicine) show how this proven re-engineering methodology can be applied to health care (including physician practices, hospitals and whole health systems) to improve quality, reduce costs and expand access. They urge a focus on prevention and wellness, explore ways to use technology to better deliver services and reduce costs, and provide examples of successes, such as Lenox Hill Hospitals ER.
The Innovators 02 Prescription: A Disruptive Solution for Health Care by Clayton M. Christensen, Jerome H. Grossman and Jason Hwang (McGraw-Hill, 2008) Christensen is the author of the best-selling The Innovators Dilemma, which explored how the development of new technologies can create an entirely new value proposition, disrupting the normal results of innovation. Here he and his co-authors (both doctors) look at the technological enablers of disruption in order to explain how various aspects of the health care system such as the hospital business model, the physician practice business model, the reimbursement system and medical education can be effectively disrupted to produce more cost-effective and accessible health care. Redefining Health Care: 03 Creating Value-Based Competition on Results by Michael E. Porter and Elizabeth Olmsted Teisberg (Harvard Business School Press, 2006) Porter and Teisberg (authorities on strategy, competition and innovation) propose a focus on value (as measured by health outcomes per dollar expended) to reform the health care system. As current competition in the health care field has failed to provide an accessible, equitable system at reasonable cost, they assert that the nature of competition itself must be reformed. Its not acceptable for providers to shift costs, increase bargaining power or deny services to patients in need. The key is to provide real value for patients, not excessive profits for health care providers. By boosting competition in the diagnosis, treatment, and prevention of specific health conditions, hospitals, doctors, health plans, employers and policy makers can truly revolutionise health care.
Healthcare 04 Management by Keiran Walshe and Judith Smith [editors] (Open University Press, 2006) This volume, aimed at researchers, managers and health care policymakers, examines the health care practices and policies that pose the greatest challenge to those managing health care organisations. It looks at different health care sectors (such as primary care, acute care and mental health; partnerships with other agencies; and health care information systems and technology) in order to provide guidance to those in training or in the field who want a guide to the theories, issues and skills needed for effective leadership. The chapters include self-test exercises, summary boxes, further reading and lists of Web-based resources. Leadership for 05 Healthcare by Jean Hartley and John Benington (Policy Press, 2010) Aimed at those who have leadership positions in health care organisations, especially the British National Health Service (as well as those in government, education, housing, leisure services, the police, fire services and the voluntary sector), this book provides a set of a half-dozen lenses aimed at exploring the leadership literature relevant to health care. It looks beyond the idea of leadership as something performed by an individual, arguing instead that leadership must be understood and developed in terms of the actions and practices of many people within a broad range of areas that affect the health of the population.
06 Chaos and Organisation in Health Care by Thomas H. Lee and James J. Mongan (MIT Press, 2009) These two doctors believe that tight organisational structures will help put an end to the chaos in the current system that results in high costs and inefficient care. They explore a number of specific examples of successes (such as Geisinger Health Systems and Virginia Mason Medical Centre) to show changes that work including salaried physicians, electronic medical records and other technologies, aggressive treatment regimes, programmes to coordinate the care of the sickest patients and team-based care. Although they present many ways that they believe costs can be lowered, there is very little in the way of detailed financial analyses of these ideas. 07 Management Lessons from Mayo Clinic: Inside One of the Worlds Most Admired Service Organisations by Leonard L. Berry and Kent D. Seltman (McGraw-Hill, 2008) Based on numerous in-depth interviews and observations of staff, patients, clinicians and the interactions between them, the book is filled with praise for this remarkably successful institution; but it fails to offer comparisons to other institutions or specifics on how things that make Mayo special could be replicated. It is, however, useful for concrete examples of approaches that work at Mayo, including the team approach to health care (made easier by the fact that all of its physicians are employed directly by Mayo and are paid on a salary basis), Mayos early entry into integrating medical records and its use of technology to improve access to those records, as well as the strong channels of communication between administrators and physicians.
Book Review Healthy reading
08 Economic Analysis in Health Care by Stephen Morris, Nancy Devlin and David Parkin (John Wiley, 2007) This comparative study explores the economics of health care systems and evaluates health care technologies. Basically a textbook for students with knowledge of economic analysis, it presents case studies from the UK and other countries and analyses decision making by individuals, health care providers and governments. While based in economic theory, it also explores such diverse subjects as the behaviour of patients, doctors and hospitals, and analytical techniques developed to aid in decisions about resource allocation. It carefully explains that health choices must be made on the basis of how much health care costs, who pays for it and how it is distributed. The Healing of America: 09 A Global Quest for Better, Cheaper, and Fairer Health Care by T.R. Reid (Penguin, 2009) The author compares health care services across the globe, a study triggered by his own experiences while seeking help for a chronic problem in the countries in which he served as a Washington Post correspondent. His health condition led him to travel around the world, visiting doctors in places as diverse as Britain, Taiwan, France, Germany, Sweden and India to see how their systems differed. He discovered that, in most nations, health care costs are far lower than in the United States, while the outcomes are better. He notes the problems of other countries as well as their successes and points to the universal problems arising as a result of aging populations and the development of expensive new technologies.
STRATEGY
Its time to set the record straight so companies can start to be much more effective in their decision making, and have a clearer understanding of what we really know about business and what is just simply misleading and potentially damaging.
Professor Freek Vermeulen, London Business School, author of Business Exposed.
after an overwhelming backlash to the new 'younger' Gap logo, the American retailers were forced to abandon their planned makeover
THINKING ALOUD corporate social responsibility
Making better risk management decisions Julian Birkinshaw and HUW JENKINS p41 Good business makes poor customers good customers Jamie Anderson et al p46 The extraordinary emergence of China Linda Yueh p64
Strategy
Profiting from corporate social responsibility
One of the most asked questions in business today is whether there is a link between a companys social responsibility and its profitability. Ioannis Ioannous research sheds new light on the subject.
In recent years, the issues of ethics and morality in business have received a great deal of attention. This has often been of a negative sort from Enron to Lehman Brothers and beyond. I have always been interested in the positive aspects of the intersection between the business world and society. Today, many companies are pursuing environmental and social initiatives, often popularly called sustainability initiatives. My colleague, George Serafeim of Harvard Business School, and I wondered if any or all such initiatives have a direct impact on the financial performance of firms. In other words, do such corporate social responsibility (CSR) initiatives create real economic value? It has been difficult, in the past, to find any empirical evidence of a causal relationship. We thought that, if there is a link between CSR and profitability, we should be able to trace it by examining the way information is transferred to the capital markets. We thought of the influence that sell-side analysts
THINKING ALOUD
recommendations and long-term growth forecasts have on expectations of value creation at the firm level. Evidence suggests that they are an important information intermediary, and theres a vast literature examining their role and impact on capital markets stock prices and trading volumes in particular. They essentially reflect equity holders expectations about the future of the company. We obtained data from KLD, the major company producing CSR ratings and rankings in the US, and then took a step back to better understand analysts and the potential reaction they could have to such ratings. Work in finance, for example, shows that analysts, on average, tend to have accurate forecasts. However, work from economic sociology found that when companies deviate from what theyve traditionally done in their choice of strategy, in such a way that they seem to be moving away from their traditional industry categorisation, analysts tend to drop coverage and appear to have a lag in amending their evaluation models to reflect these changing firm behaviours. In the short run, this is reflected in relatively negative stock recommendations.
Author Ioannis Ioannou iioannou@london.edu Ioannou is Assistant Professor of Strategic and International Management at London Business School.
strategy ILLUSTRATIONs: Joe mclaren
STRATEGY
Thinking more positively So, often there is some delay before analysts recognise that a change in a companys strategy might be a beneficial move. If a company is improving safety standards or moving into a different industry, for example, it is likely to take analysts a while to understand and incorporate such actions in their valuation models and therefore reflect the potential longterm benefits for the firm and the perceived level of value creation in their recommendations. In our research, we found that until 1997/1998, if a company engaged in CSR initiatives, analysts tended to penalise it with more negative (sell or strong sell) recommendations. After 1998, we find that the trend reverses and becomes positive: it seems that analysts began to understand and think more positively about the implementation of CSR strategies. In order to understand why that was the case, we searched for articles that mentioned the phrase corporate social responsibility in the Factiva database, from 1990 to 2001 or later. If you graph the number of mentions over the years, you can see that during the 1990s they are flat; then, around 1998 and 1999, there is the beginning of exponential growth in CSR mentions in the popular press. This told us that a process of external legitimatisation of these strategies could be taking place, as well as some learning at the analyst level about what impact CSR strategies actually have on a firms real valuecreation potential. According to our econometric analysis, this happened around the same time that the analysts attitudes towards CSR seem to have changed. Definite implications All of this matters for leaders of companies committed to CSR. It is clear that firms must work closely with the investor community to enhance the interface between the firm, analysts and investors letting them know exactly what theyre trying to achieve through their CSR strategy. In this way, analysts are fully informed and understand where the firm is headed strategically. In other words, managers are well advised to educate and inform analysts about what the target is and why CSR stakeholder value maximisation is beneficial for the firm in the long run. And
Often there is some delay before analysts recognise that a change in a companys strategy might be a beneficial move.
managers should definitely not hide their dedication to CSR. We found that the positive link between CSR and recommendations is stronger for more visible firms, suggesting that the CSR benefits are perceived as being greater for more visible firms. We also looked at analysts themselves. We examined the number of years an analyst has been following a specific firm, the idea being that if someone follows a firm for many years and reads all their reports, he or she is more likely to be able to understand the strategic implications of CSR. The other measure we noted was the size of the analysts employer larger brokerage houses may provide analysts with superior research resources or administrative support and are thus better positioned to understand CSR initiatives. Another thing we looked at was the broader exposure the analyst had to CSR initiatives. We constructed a composite measure of what we call CSR awareness based on the total number of firms the analyst was following and how CSR-strong they were. We found that analysts with a higher ability to understand CSR were more likely to positively incorporate CSR strategies in their recommendations. To sum up, managers should particularly focus on communicating the value of CSR strategies to the investment community. Highlighting not only short-term costs but also long-term benefits could mitigate difficulties that investors may face in understanding the value generated through such activities and might expedite the adjustment of their valuation models to these new CSR-augmented business models. In other words, managers should be aware that not only what is communicated matters but also to whom it is communicated.
LEADING THOUGHTS Making better risk management decisions
Leading thoughts
Making better risk management decisions

During a three-year research project on risk management in large organisations, Julian Birkinshaw and Huw Jenkins interviewed three dozen executives from a diverse array of business sectors.Their findings reveal that risk management must be personal to be successful.
Managing risk has always been one of the key functions of an executive. But rarely have the consequences of ineffective risk management been as clear as they are today. Consider three high-profile cases: BPs Deepwater Horizon explosion in April 2010, Toyotas recall of more than nine million cars during 2009 and 2010, and Lehman Brothers collapse at the height of the credit crisis in September 2008. All three were caused by low-probability, highseverity risks; and in all three cases the consequences, in terms of loss of life, environmental damage and economic costs, have been severe. There are no simple ways of avoiding these types of risks, and yet the evidence suggests that some companies are better able to manage them than others. The credit crisis illustrates this point very clearly: while Lehman Brothers and Bear Stearns were wiped out and while UBS, Citibank, Merrill Lynch and Royal Bank of Scotland were badly hit several other banks (including Goldman Sachs and JPMorgan Chase) sailed through unharmed. What explains the very different fortunes of the winners and losers in this period of unprecedented turbulence? Our argument, in a nutshell, is that in the years leading up to the credit crisis, financial services companies focused unduly on the formalisation of risk management by developing multistage procedures, with many signatories, to evaluate what risks were worth taking. They also relied on externalisation of risk management to a large degree the use of expertise and approval from outside parties such as auditors, regulators and credit-rating agencies. Risky business Risk is the potentially negative impact arising from a future event, and it can be calculated as a product of the probability of the future event happening and the scale of loss associated with that event. Firms face multiple risks of contrasting types all the time; so, rather than think in terms of removing risk altogether, the task of the organisation is to learn how to manage its risks appropriately. Indeed, it is a truism in the world of business that riskier activities require higher rates of return to make them worthwhile investments; thus, to a large degree, the organisations that become highly capable at managing their risks are likely to generate superior returns over time. Risk management requires firms to balance two distinct types of risks the false positive risk associated with investing in a potential opportunity that does not transpire, and the false negative risk associated with failing to act on an opportunity that did transpire. The consequences of false positive and false negative
STRATEGY
There is no simple way to build a supportive culture. It takes many years of consistent messages and actions from a leadership team. But there are nonetheless a couple of basic principles that can be applied.
errors are very different; effective risk management is all about evaluating the pros and cons of these two types of errors and adjusting decisionmaking processes accordingly. For example, if an oil and gas company is extremely cautious about investing in new oilfields, it can generally avoid costly false-positive mistakes in the form of dry wells; but it risks leaving money on the table that other competitors can pick up. In other words, the more one type of risk is
minimised, the more the other type ends up occurring. So how do firms manage risk? How do they bring to bear the necessary level of knowledge and expertise on difficult decisions? And how do they ensure that individuals act in the best interests of the firm, rather than themselves? Historically, the answer to these questions was the model known as bureaucracy, the regulations and structures used to control activity. While the term is often used in a pejorative sense, bureaucracy has many benefits: it encourages the development of formal rules and procedures that transcend individual idiosyncrasies and historical orthodoxies. However, it also has many unwanted side effects: it can become overly rigid and specialised, it encourages groupthink and it can lead to depersonalisation and a lack of ownership on the part of employees. It is this last set of concerns, around depersonalisation and loss of ownership, that is most salient here. As firms grow, they need to build formal systems to generate economies of scale and scope,
but they also need to balance that with the agility, personal accountability and freedom of expression that come from a small, more entrepreneurial environment. While this point is often made in the context of innovation and creativity, it is just as valid in the management of risk. RoJ Consider, for example, the winners and losers in the credit crisis. While there were certainly some notable failures among small players such as hedge funds, the major losses were borne disproportionately by the very large banks. This was partly because small financial services companies did not have the credit ratings or balance sheets to carry the so-called super senior tranches of the collateralised debt obligation (CDOs) that ultimately got the big investment banks into trouble. But it was also partly because the decision makers were close to the action, highly knowledgeable, and personally accountable for the outcomes of their decisions. As one leading hedge fund executive commented to us, We
have robust informal systems, we communicate naturally and we develop our own views on what risks to take. We get a return on our judgement. JPMorgan Chase, one of the least-affected major players, also had a highly cohesive top team that took ownership of its riskmanagement agenda. As is now well known, CEO Jamie Dimon and his team saw early warning signals (back in 2006) of the credit risk on mortgages and the market risk on CDOs, as a result of which they reduced the banks level of exposure to mortgage-backed securities. Most of the large investment banks, in contrast, had hundreds of employees working in risk management, using procedures so carefully defined that well-intentioned managers could no longer see the forest for the trees. According to one report: The risk governance failings [of the banks] resulted from an overreliance on low-level risk decisions in siloed businesses, product lines and trading desks that ignored how these exposures contributed to a firms overall risk profile.
The net result was that some of the investment banks ended up making false-positive and false-negative decisions. Not only did they steer clear of promising lines of business that other firms, such as hedge funds and private equity houses, grew into, they also made horrendous trading losses on some of the lines of business they chose to invest in. When a firm makes both types of error at the same time, it is a sure sign that the system is not working. Three approaches So where did bureaucracy go wrong? In our view, it failed because it allowed individuals to detach themselves, legally and morally, from the system in which they were working. We suggest there are three complementary approaches to managing risk in large firms: Formalisation involves using system-wide procedures and rules to evaluate and adjudicate on what risks are worth taking. Externalisation involves making use of the expertise and seal of approval provided by third parties, some required by law (auditors and
regulators), others optional but widely used (credit ratings agencies). Both of these approaches are manifestations of bureaucracy, the former controlled by the firms management, the latter controlled by third parties. The third approach, personalisation, involves pushing the responsibility for evaluating and making a judgement around risk to those individuals who are making decisions and requiring them to live with the consequences of those decisions. While all three are necessary and used to varying degrees all the time, the recent evidence in banking and elsewhere suggests we need to redress the balance back towards personalisation, especially in large firms. Goldman Sachs, one of the best performers through the credit crisis, is frequently held up as the acme of personalisation. As the Financial Times reported: Employees [at Goldman] typically view themselves as being affiliated to the bank, not the business line, and there is a strong ethos of shared accountability. And in JPMorgan Chase, Jamie Dimon is known to have taken an active personal role in risk briefings. But Goldman Sachs and JPMorgan Chase are clearly exceptions: other firms in the sector relied, and continue to rely heavily, on bureaucratic approaches to risk management. The personalisation approach to risk management applies in many different contexts. In the pharmaceutical industry, for example, firms make high-stake investments in new drugs all the time. These firms have sophisticated formal systems and stringent external regulations; but, in addition, they are able to rely on the strong ethical norms and professional standards of the medical fraternity, a form of personalisation. As one observer noted: Such experts are driven by a public willingness to improve collective knowledge of products rather than by a private or commercial will to distribute them. It is this shared accountability among medical professionals that helps to minimise false positive risks. Or consider an entirely different context, the social services profession. There was the tragic case in the UK in 2008 of the death of Baby Peter at the hands of his mother and stepfather, despite accumulating
STRATEGY
evidence of abuse. On further investigation, it became apparent that the local social services organisation had formalised its support services to such an extent that social workers were spending 6080 per cent of their time on paperwork, rather than out in the field talking to the families of at-risk children. There had been 60 separate appointments with Baby Peter and his mother; but, because these were spread over so many different social workers, the full story had not emerged until too late. One investigation into this case concluded that computer technology replaced a system where social workers wrote case notes in narrative form, which made it easier for different officials to quickly pick up the details of complex cases. Or, in our terminology, the formalisation of risk management, through computer monitoring and nationally-imposed targets, squeezed out the personalisation approach that many would see as the essence of effective social work. Personal touch While the concept of personalisation has intuitive appeal, many people struggle with how to apply it in a large organisation that, by definition, relies on significant amounts of formal systems to get work done. Our research suggests three necessary and supporting elements. High-quality insight It goes without saying that those making decisions require good quality information, effective analytical tools and the competence to interpret this information. But it is rare for all these things to come together. More often, decisions get made with poorquality insight from self-interested sources and with relevant information fragmented across different parts of the organisation. The credit crisis provides abundant examples of such failings. Lloyds TSBs acquisition of HBOS, for example, was a massively risky decision made on the basis of very limited insight. While the board of Lloyds TSB was clearly under a lot of pressure from the Bank of England, its primary responsibility was to its shareholders and it failed them. At a more micro level, studies have looked at the securitisation of mortgage loans in the run-up to the credit crisis. They show that, when loans were
securitised and sold on to non-banks, the likelihood of default was far higher than when loans were sold to affiliates of the originator. The non-banks, in essence, lacked the high-quality insight to make the right judgements about the risks they were taking. Effective personalisation of risk management is therefore about building a system that puts the right information in the hands of those making the call and then transforming that information into insight through deep experience. Heres one example of how this works in a different setting. The UK police force gathers intelligence on a daily basis about criminal activities, community affairs and so on. Usually these are dealt with quickly and without note; but, occasionally, an incident flares up and becomes really serious. To better alert themselves to the potential flare-ups, and in recognition of past failings, the police force in the late 1990s instituted a critical incident approach in which an employee of any rank could call together a cross-force group to consolidate all the available information about an incident and make a call on how to react. Critical incidents are only called occasionally, when the officers antennae are twitching, but they provide an effective way of quickly bringing to bear all the different views on an issue and reaching a thoughtful decision. Many large companies have also developed specific techniques for improving the quality of insight around important decisions. For example, one major mining company has an independent evaluation team that will put together their own analysis of a proposed investment (such as a new mine) before a decision is made. Almost in the manner of a court of law, the investment committee reviews the proposal by the business unit seeking investment funds; then, it considers the independent teams assessment. By having two points of view, the quality of insight is improved and the likelihood of a false positive investment is significantly reduced. This company now has an enviable record in making profitable mining investments. Personal accountability Its no surprise that effective risk management requires personal accountability, but most firms get this wrong as well. Sometimes there are too many decision makers, or the decision maker is too far removed
So where did bureaucracy go wrong? In our view, it failed because it allowed individuals to detach themselves legally and morally from the system in which they were working.
from the action to feel any genuine responsibility. And, often, there is no link between the decisions taken and the rewards provided. For example, in the run-up to the credit crisis, many banks traded in risky securities to optimise revenue growth or short-term profits without giving due regard to the appropriate cost of capital or the long-term nature of these securities. It is now conventional wisdom among commentators that a key factor in the creation of the current financial crisis was this focus on short-term accounting profit and the use of highly geared incentives around it. What is needed, instead, is a system in which personal accountability is rewarded and in which the individual or team with the highest-quality insight is also the one making the decision. For example, one of the basic principles that every airline captain knows well is to have risk decisions made at the appropriate level. Appropriate here means the level at which the individual has the necessary experience and maturity to make a good decision. The captain may, for example, delegate specific decisions to engineering specialists or dispatchers; but the decision to fly the plane rests with him or her not on the wishes of the air traffic controllers or the airlines chief executive. The same logic applies in policing. In the critical-incident model described above, a key principle is the concept of command, whereby one individual leads and coordinates a response, even if it cuts across multiple departments or police forces. In the business world, accountability is as likely to sit with a team as with a named individual, but the logic is essentially the same. Every board member in a public corporation, and every partner in a
partnership, understands his or her formal accountability. But clearly the top of the organisation is not the appropriate level for many decisions to be made. As with the airlines and the police, firms need to find mechanisms for pushing personal accountability down to those who are closest to the action without those at the top abrogating their overall responsibility for the decisions being made on their watch. Supportive culture The informal norms of behaviour in a firm, its culture, should support the principles of high-quality insight and personal accountability. But all too often, these informal norms end up undermining the effectiveness of decision making. Some firms exhibit a fear culture in which bad news is hidden from top executives; some have a purely mercenary culture in which everyone looks out for themselves; yet some other organisations suffer from a culture thats chronically risk-averse, with almost zero tolerance for falsepositive errors. Of course, there is no simple way to build a supportive culture. It takes many years of consistent messages and actions from a leadership team. But there are nonetheless a couple of basic principles that can be applied. One is the need for transparency of purpose, a higher-order reason for the organisation to exist. Many investment banks such as Lehman Brothers and Bear Stearns had formal vision statements, but the credit crisis revealed that these were full of empty rhetoric. Transparency of purpose, instead, refers to visible and ongoing commitment to a set of nonfinancial objectives. Consider, for example, a leading mining company that committed a decade ago to eliminating one type of risk: employee injuries at work. All leaders signed up to this goal, all employees were trained on the companys safety standards, measures of lost-time injuries were monitored for all sites, and managers compensation was linked to safety. Today, all meetings, even those in white-collar environments, start with a safety update. Safety thinking is deeply ingrained in the minds of individuals throughout the company, and the resulting safety record is impressive. Cultural transformation, in other words, is possible when it is tied to a very clear purpose that everyone can identify and when it
is reinforced through consistency of action. For example, one of the key features of the critical incident approach to policing described earlier is to acknowledge the efforts of the individual who calls it even if it proves to be a false alarm. The other principle is a refusal to simplify the big picture. Academic studies have been done of nuclear power plants and aircraft carriers, locations where errors can have catastrophic consequences. The studies have sought to understand how these high reliability organisations function. It turns out that one of the key features is that individual employees involved, for example, in routine maintenance activities are expected to take responsibility for seeing how their work fits into the big picture. Rather than compartmentalising every task, employees are encouraged to look across organisational borders to understand how their work has implications for others. A balanced system The components of a personalised approach to risk management are far from surprising. However, personalisation should not be viewed as a substitute for the formalisation and externalisation of risk management it must be a complementary approach. The best-managed financial services companies essentially balance the three models. There is true ownership of the decision to underwrite a risk by the manager or trader who has the appropriate level of expertise and insight. There are formal systems for setting limits for exposure to the types of risks the organisations will tolerate. And external agencies are brought in periodically to validate and quality assure the internal processes. Once again, Goldman Sachs is an interesting example. As a former partnership, there is a greater degree of personal accountability and ownership than in most other banks; but, according to CEO Lloyd Blankfein, Risk and control functions need to be completely independent from the business units. Personalisation and formalisation at Goldman Sachs are the yin and the yang of effective internal decision making: they keep the organisation in harmony.
Authors Julian Birkinshaw jbirkinshaw@london.edu Birkinshaw is Professor of Strategic and International Management, Senior Fellow of the Advanced Institute of Management Research and Deputy Dean for Programmes at London Business School. Huw Jenkins huw.jenkins@btgpactual.com Jenkins is a Managing Partner in BTG Pactual. He was formerly CEO of UBS Investment Bank and has an MBA from London Business School.
STRATEGY
THE BOTTOM OF THE PYRAMID
Good business makes poor customers good customers

Would your company like to add thousands, if not millions, of new customers? Jamie Anderson, Martin Kupp and Sandra Vandermerwe believe that serving the worlds poorest people in developing markets can be both profitable and socially rewarding if its done right. As it turns out, whats good for business in developed countries also applies to emerging markets.
To date, few firms have used a customer-focused approach to serve the worlds poorest people a full two-thirds of the worlds total population at the so-called bottom of the economic pyramid (BOP). Much more prevalent has been a mass-produced approach that assumes that the poor in developing economies can only afford basic, cheap products emphasising functionality. In this classic product approach, often little more is done than push existing or barely adapted products onto shantytown dwellers and rural villagers. Consequently, real value that opens up new market spaces for companies and produces longer-term value for the customer has been lost. Our research reveals that contemporary enterprises that have taken the leap to the customerfocused way of doing business in the developing world grow markets and their stake in them, outperforming traditional enterprise and industry product approaches. The crucial steps in this approach are becoming better known but deserve much more attention. Articulate and define the new market space Defining the market space is the first step towards achieving customer focus in developing markets. The market space articulates the desired outcome for customers, which directs strategy from discrete products and services, easy to copy or marginalise, to outcomes. It unifies the parts of an offering across the company/division/ industry, which produces a result in which a companys core products and services may be one small part. When Zain, Nigerias second largest mobile network operator, began to explore the needs of the poor, the first action of the companys COO was to admit that he and his management staff knew almost nothing about the behaviour and activities of low-income rural customers, a segment that represented more than half of its local market. To overcome this lack of knowledge, the firm sent project teams into some of the countrys poorest communities, and this experience led to revelations about the needs of low-income consumers. Zains ethnographic research identified a range of activities undertaken by low-income Nigerians before, during and after accessing telecommunications: Before Zains research revealed that many rural Nigerians were travelling up to 50 to 80 kilometres to access telecommunication services not because there was not a network coverage in their area but because handset ownership was at less than two per cent of rural consumers. Consumers had very low levels of understanding about the correct costs of mobile telephony or even how to use a mobile phone. During Pay phones were not available in the smallest villages.
LEADING THOUGHTS good customers
Even when pay phones were available, villagers did not trust unofficial pay phone operators who frequently charged wellabove-market rates. For families who had mobile handsets, it was frequently impossible to buy lowdenomination top-up vouchers, as most mobile network operators did not have effective rural distribution. Where vouchers were available, they were often sold at 2030 per cent above face value. High levels of network downtime also presented a problem for customers, with Zain suffering high levels of vandalism and theft of its networking equipment in many rural communities. After Consumers were confused about how to upgrade to different tariff offers and how to access customer service, due to poor literacy and fear of automated customer care systems. Due to the large number of regional dialects in Nigeria, it was not always possible for rural consumers to access a Zain call centre agent who spoke the local language. Finally, some consumers were afraid of
accessing new services such as text and picture messaging because of superstition for example, rumours spread that evil spells could be sent via text message. Through the recruitment, training and support of village-level franchisees, Zain added value at each critical point in the customer cycle for example, helping customers manage the transition from shared-phone use (by providing affordable Zain-branded village pay phones) to a shared family phone (distributing low-cost handsets in partnership with microfinance institutions) and eventually to individual ownership and usage of a mobile telephone (expanding the local financing of handset purchases, developing and distributing micro top-up vouchers and providing access to handset power recharging services in areas lacking electricity). The companys rural franchisees also managed local marketing, communication and customer care activities, not only educating consumers on Zains products and services, but also providing a local touch-point for customer service
thereby eliminating the need for consumers to call a centralised call-centre. Village franchisees even took responsibility for security and basic maintenance of networking equipment, significantly reducing levels of vandalism and theft, and thereby increasing the reliability of network coverage for consumers. Such a connection to local communities dramatically reduced the average time and cost of accessing telecommunications for consumers in rural Nigeria, but it also resulted in significant growth in Zains subscriber numbers and network utilisation. However, Zain was no longer thinking of itself as simply a supplier of telecommunications. It had started thinking of itself as a firm that supported the poor in the quality of life through communication market space: it had become a company with customer focus. Stretch activities to fill gaps in the customer experience The customer-focused company opens a new market space and then fills it with value-added products and services. The market space
STRATEGY
Customer focus means finding partners with the expertise the enterprise doesnt have, or chooses not to acquire, in the customer activity cycle.
gives concrete shape and form to the otherwise conceptual idea of a seamless customer outcome, which is at the heart of customer focus. Once the market space has been framed, the next step is to add value through the customer experience in order to get increased value. By identifying gaps in the customer activity cycle, activities not being done or being done badly, and filling these gaps, the company has opportunities to give and get new value. This value add takes place at each critical point: pre (when the customers are deciding what to do), during (when the customer is doing it/using it), and post (when the customer is reviewing the interaction). The customer-focused objective is to get into the activity cycle as early as possible and to stay in as long as possible. This allows the reinforcing lock-on loop to begin, whereby the customer wants the company as the sole or dominant provider. In Kenya, for-profit HealthStores CFW franchise clinics are located in underserved villages and poor urban areas and are owned and managed by a licensed nurse or a qualified
community health care worker with medically qualified staff. The HealthStore model incorporates many of the key elements of successful franchising in the developed world: strict quality control and consistent branding, centralised selection of locations, collective purchasing and standardised systems and training. Clinics are located within short walking distance of the communities they serve and offer between 150 and 200 government-approved, tested products that can be offered at competitive prices of approximately USD $0.50 per treatment. HealthStores franchisees aim to build relationships with the poor before they require health care. Energies and efforts are directed to minimise a specific persons risk of getting a disease, spot it early, manage it, get rid of it and minimise the chances of re-occurrence; so HealthStore provides screening services for children in school. The unique knowledge franchise owners glean about the health of young low-income individuals within the local community is used for future preventative action and ongoing
consultative health care throughout a patients life. HealthStore directly addresses many of the value gaps in the customer experience of health care in Kenya. The guarantee of high-quality advice and medicines at reasonable prices from qualified local medical personnel fills a critical need in a country in which ill patients either have to turn to a public healthcare system that is notoriously under resourced (there are only 13 physicians per 1,000 people in Kenya) or to private pharmacies or grocery stalls that offer drugs that can be unlabelled, of poor quality or provided without a proper diagnosis. Since 2000, the CFW network has more than quadrupled to 80 locations, with over two-thirds being basic medical clinics and the rest drug outlets. This network treats an average of 45,000 customers and patients per month and, since inception, has served over 2 million people. Over the next three years, the organisation aims to expand to 200 CFW outlets in Kenya, serving up to 1.5 million patients and customers per year. It also recently launched its first outlets in Rwanda.
Personalise offerings for individuals It is individual customers who lock on, not markets, thus the need for personalisation if the company is to both give and get maximum value. Providing personalised integrated offerings is very different from providing mass-customised products or services because it involves everything that goes into the customer experience. It requires personalising the 3Cs: Content (what customers get) Zain franchisees provide advice to low-income customers on the best handset and tariff options based on their usage patterns. They can also extend credit to poor consumers for handset purchases based on their deep knowledge of the creditworthiness of local villagers. Context (the way customers receive it) Zain works with franchisees from local communities, has branded retail offices in small rural towns, and the sales and customer service staff of its franchisees visit villagers in more isolated communities. Contact (how customers are treated) Zain provides respect, trust and long-term relationships for the poor through professional business processes, specialised training for employees and associates, and by demanding stringent service quality requirements from distributors and retail franchisees. Build a network of providers to deliver value Having defined a portfolio of value add-ons that produce the fully integrated personalised offering, customer focus means finding partners with the expertise the enterprise doesnt have, or chooses not to acquire, in the customer activity cycle. Recognising that few of its poorer mobile phone consumers had bank accounts, and that this lack of secure current facilities resulted in fears and insecurities causing gaps in the financial management market space, Smart Communications in the Philippines partnered with MasterCard and Banco de Oro to introduce a proposition called Smart Money. Utilising a co-branded cash card linked to and controlled by the users mobile phone, Smart Money enabled customers to store money on their mobile phone accounts and then
to withdraw this money via ATMs and associated businesses or make over-the-air payments for goods and services. By the end of 2009, Smart Money had more than 8.5 million users (about 10 per cent of the total population), many of them previously un-banked customers. Companies must also sometimes look beyond the private sector and build close partnerships with the public sector and non-government (not-for-profit) organisations (NGOs). This is a very different requirement than in most developed markets, as in the developing world supporting institutions are frequently lacking. To be able to offer competitive prices, HealthStore partners with the Mission for Essential Drugs and Supplies (MEDS) that has traditionally supported church health facilities and other non-profit health care providers. HealthStore franchise owners engage with community outreach efforts in partnership with local authorities, offering health screenings in schools as well as education about products and services beyond those that HealthStore sells. Through this hybrid publicprivate networking system, HealthStore acts to reduce childhood mortality and the spread of infectious diseases, not just to push its products. The basis for partnering is to create new ways of doing things for customers and sharing in the financial or non-financial benefits by insuring a win-win for all contributing players. This new approach for the developing world has been termed a marketoriented ecosystem, and the instance of such symbiotic relationships continues to grow. Create win-win opportunities Rather than use the old industrial model, in which the battle for margins means someone down the linear chain has to lose for someone else to gain, companies adopting a customer-focused approach to the poor make sure everyone gains in collaborative partner networks. Appreciating the importance of local and international remittances by Filipinos working in cities or abroad, Smart Communications partnered with mobile network operators in Asia, Europe and North America, international remittance service provider Travelex, local banks and a network of Philippines-based retail
outlets to introduce a service called Smart Padala (Padala, or Remittance, is a Filipino household word that represents a means of financial support). For a small commission fee and linked to the companys Smart Money m-banking proposition, the service allows customers to make international and domestic electronic transfers of money from one mobile phone subscriber to another. To claim the cash, the recipient can go to any one of the companys 10,000plus encashment partners in the Philippines, including McDonalds restaurants, 7-11 convenience stores, Shoemart Department Stores, Seaoil gasoline stations and Tambunting Pawnshop branches all of whom gain from this new traffic. Feed the economic model With customer lock-on, the economics of customer focus come into play. Revenues per customer potentially go up over the lifetime of a relationship while risks, customer replacement and transactional and marketing costs decrease. As in the developed world, getting share of customers through time value rather than share of product category is the reward for a company that truly implements customer focus to the poor. This can come from existing or new services developed, bought or brought in by partners. Revenues go up through longevity of spend, depth of spend, breadth of spend and diversity of spend as demonstrated through the long-term relationships that companies such as Zain, Smart and HealthStore are now building with their customers. Intangible assets such as customer information and knowledge grow as they are reutilised. This pulls down the marginal cost of delivery and transactions if information and knowhow are used in order to add value in the customer experience. Brazilian consumer goods retailers Casas Bahia and Magazine Luiza, which are active in some of the countrys poorest slums or flavelas, capture data on customers at the checkout daily. They do this expressly so that customers can be offered options or better alternatives that suit them or their finances. In addition, this facilitates seamless and instant decisions as to who can get credit for more goods. Because initial investments in outcomes are largely in intangibles,
STRATEGY
they are expandable, a baseline cost requiring refreshment and update, rather than expensive replacements as with traditional hard assets. ProCredit Bulgaria specialises in extending loans to micro-enterprises in one of Europes poorest countries, and its deep understanding of microenterprises not only allows it to achieve very low default rates but also provides it with a low-cost platform to expand into other financial services solutions such as trade financing and mortgages for commercial property. In less than five years, the company has built relationships with 25 per cent of all private enterprises accessing financial services in Bulgaria. Many of these models also appreciate customers as potential producers, often giving them new income opportunities. As a result, they are not only fostering inclusive growth, but enhancing the wealth creation capability of their own customers. In the case of Zain Nigeria, they found out that each of their local franchisee employed in average five people, giving them a regular income and of course enabling them to use Zains services.
Brands can be stretched into new adjacent market spaces at low or no cost once customer lock-on, knowhow and information dominate the relationship. A deep knowledge of customers individual circumstances has enabled Magazine Luiza to partner with Cardif, the BNP Paribas Assurance life insurer, and move into the provision of life insurance, disability and unemployment protection, and extended guarantee products for the poor, a first for a consumer goods retailer in Brazil. Work for personal and social good There are special challenges in emerging markets if customer focus is to make poor customers good customers. Improving the quality of life is probably the most obvious. From HealthStores countering of poor health care in a country notoriously under resourced, to Grameen Bank reversing the poverty cycle in Bangledesh by lending to impoverished families and protecting small businesses from corruption, working for social as well as personal customer good is an integral part of applying the customer focus model to
deliver outcomes for BOP customers. Involving locals to deliver sustainable business approaches can increase skill levels within poor communities Zain Nigeria, HeathStore and Smart Communications have all developed the small-business management skills of their micro-franchisees, and ProCredit actively develops local employees for management positions. The cost-value trade-off is not as clear-cut in developing countries. Low-income customers simply cannot afford high prices, but the alternative of giving them the most inexpensive alternative will not bring about a desired outcome. Companies with customer focus need, therefore, to find a way to lower the cost without compromising the result at each critical point on the customer activity cycle. For example, Smart Communications recognised the minimum $2 price of prepaid cards as a significant barrier to mobile telephony usage by the poor and also identified the lack of access to top-up outlets in more remote regions as another blockage. Smart developed a unique over-the-air recharge system so that Smart resellers could
Companies adopting a customer-focused approach to the poor make sure everyone gains in collaborative partner networks.
electronically transfer credits from one handset to another without the need for prepaid cards, reducing the minimum top-up value to just a few cents. Smarts innovation drove household mobile penetration in the Philippines to almost 75 per cent by the end of 2009. Finally, it is important to eliminate the inequalities characteristic of BOP markets. This involves balancing buyer-seller power in environments that have sometimes been notoriously unscrupulous and unfair. At the start of the new millennium, Bulgarias GDP per capita remained among the lowest in Europe (1,900 in 2001) and a quarter of the population lived in poverty. Micro-enterprises accounted for more than 50 per cent of total employment in Bulgarias private sector, with 81 per cent of these micro firms employing fewer than 10 people. But in the late 1990s and early 2000s, these crucial businesses were starved for cash because banks were reluctant to lend to risky clients. At the end of 2001, for example, banks had collectively extended only 16,336 loans under 100,000 to private enterprises in Bulgaria. ProCredit developed a business model to bring these microenterprises into the formal economy and within five years had extended 139 million in loans to 26,852 clients, with loans of less than 1,000 comprising close to 50 per cent of total outstanding credit. Through its unique business approach, ProCredit helped micro businesses that had been shut out of the formal banking sector to overcome the asymmetries that had retarded their growth. Implement a customer-focused approach in developing markets The experiences of companies such as Zain, Smart Communications and ProCredit demonstrate that it is possible to adopt a customer-focused approach at the base of the economic
pyramid. But how can a company move towards implementing such a model? The most important step is for managers to acknowledge how little they know about the poor and to determine possible market spaces in which to engage with low-income consumers and communities. This can only be achieved by market research that involves ethnographic approaches including a willingness to observe the day-to-day experiences of the poor, to enter into dialogue with poor communities and to even go so far as having employees spend time living in shantytowns and rural areas. This phase should also involve engagement with informal community institutions, government agencies and non-government organisations as these groups are more likely to understand poor communities than the private sector does. Once a company has engaged with the poor at this deep level, it becomes possible to identify and articulate desired outcomes and to define these outcomes in terms of market spaces. The firm can also start mapping the activities that customers are undertaking in their own efforts to achieve their desired outcomes and to identify value gaps across the customer activity cycle. The next step is to identify partners with whom to deliver solutions to the poor. Not surprisingly, these partners are frequently the NGOs and other nontraditional players who have already implemented social infrastructures to serve poor communities. The key in this phase is to develop win-win approaches that deliver value not just for the company and end consumer but also for communities and developing countries. There are some differences in dealing with poor customers in emerging markets. However, the underlying thinking and some of the customer-focused activities are consistent with those in even the most sophisticated marketplaces. Companies that understand this have managed to show that, compared to conventional approaches, they can get and stay ahead in a way that makes it difficult for rivals to catch up. Moreover, they have provided hope to customers (and to the communities and countries in which they live) that they can have an improved quality of life.
Authors Jamie Anderson janderso@tiasnimbas.edu Anderson is Adjunct Professor in Strategic Management at TiasNimbas Business School and Fellow of the Centre for Management Development at London Business School. Martin Kupp martin.kupp@esmt.org Kupp is a member of the Professional Faculty and Programme Director at the European School of Management and Technology (ESMT), Berlin. Sandra Vandermerwe sandra.vandermerwe@ btinternet.com Vandermerwe is a Visiting Professor at the Gordon Institute for Business Studies South Africa, at ESMT Germany and at Imperial College Business School, London. Resources Bernard Garette and Aneel Karnani, Challenges in marketing socially useful goods to the poor, California Management Review 52, no. 4, 2010. C. K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, Wharton School Publishing, 2009. C. Seelos and J. Mair, Social entrepreneurship: Creating new business models to serve the poor, Business Horizons 48, no. 3, 2005.
STRATEGY
WORKING REALITY
The most important relationships for temporary workers may be not with the firms in which they are placed but with the intermediaries that find them those jobs.
The permanence of temporary workers

In many firms, lean staffing is now the norm. Consequently, the temporary help industry is more important than ever. Isabel Fernandez-Mateo has learned why staffing agencies will play an increasingly important role in managing tomorrows labour market.
In this age of lean organisations, having workers who are not always engaged in tasks requiring their skill sets could be wasteful. It may be more economical to hire workers with the skills you need when you need them. According to a report in BusinessWeek, a nonpartisan think tank estimated that in 2005, 26 per cent of the US workforce was in jobs that could be classified as nonstandard. That quarter of the workforce included workers classified as either independent contractors, temps, part-timers or freelancers.
LEADING THOUGHTS The Permanence of temporary workers
STRATEGY
The report went on to point out that for many companies, especially those in the technology field, the trend to hire temporary workers has become a way of life. For example, Microsoft has used temporary-staffing firms such as Volt Information Sciences for a variety of short-term projects for years. These firms provide workers who can write chunks of software, according to Microsoft spokesman Lou Gellos. Our contingent workforce fluctuates wildly depending on the different projects that are going on, Gellos says. Somebody does just part of a project. Theyre experts in it. Boom, boom, theyre finished. This approach to staffing presents its own problems: not only must companies search more frequently for workers in the open market, they are also less certain of these workers abilities. Rsums and interviews give some information about workers but generally offer little guidance on how well a worker will perform, because they provide limited information on technical skill levels and almost none on soft skills, such as motivation and reliability, which are among the most important attributes for employers. Using brokers to screen for the qualities of workers considerably reduces these problems, making brokers valuable players in employment relationships. There are a growing number of companies that serve as labour market brokers, matching workers with firms because the latter do not want to waste valuable time searching for and hiring individuals: they want to avoid conducting interviews, doing background checks and dealing with benefits and eventually lay-offs. The workers, individuals who either cannot find or (for various reasons) do not want steady, full-time jobs, join staffing firms in order to access their broader range of contacts and knowledge of the needs of many companies. In the United States, the staffing sector has grown faster than any other over the last 30 years, generating, according to the American Staffing Association, approximately $87 billion in sales in 2006. Staffing firms routinely place workers in client companies for short-term projects. These workers are legally employed by the staffing firm but take
direction from the client company and usually perform their work at the clients site. Although some staffing firms occasionally provide training in general skills, the staffing firms role usually involves no more than matching clients to workers. Search engines Of course, these brokers are not a new development. Specialised middlemen have long played a central role in structuring the exchange of a wide variety of goods and services; for example, headhunters, dating agencies, realtors, and even banks all are brokers providing a valuable service for market participants. In return for their matching services they charge a commission, whose format varies depending on the market. In the staffing sector, brokers generate profits from the difference between the bill rate paid by the client firm and the pay rate received by the worker. This difference is often known as the margin. Bill rates and pay rates are usually set in separate negotiations with each of the parties. Unlike real estate and some financial markets, in the staffing sector there are no institutionalised norms about the size of these margins. There are many interesting questions about how market brokers attempt to maximise the margins they obtain for their matching services. However, since a central function for brokers in most markets is the lessening of information asymmetries (buyers and sellers often have little or no information about each other and struggle to find suitable matches), developing long-term relationships with both buyers and sellers should enable brokers to access private information about them and use that information to create more valuable matches. This may in turn increase both the prices they can charge to clients as well as the margins they obtain for their services. In order to test whether or not there are increased rewards to brokers from long-term relationships, I worked with Matthew Bidwell of the Wharton School to examine a particular segment of the staffing sector high-skill information technology workers. This market is highly competitive; there is often intense rivalry among several similar staffing firms to attract clients and
In the US, the staffing sector has grown faster than any other over the last 30 years.
LEADING THOUGHTS ThE pERMANENcE of TEMpoRARY WoRkERS
workers within any given local market. Nonetheless, long-term relationships also are a common feature. These relationships are often supported by legal practices within the market; if a client wants to continue hiring the same worker, it must usually use the same staffing firm that initially placed the worker. Contracts with client firms and workers often forbid clients from directly employing workers initially supplied by a staffing firm for a certain period of time (unless the client is willing to pay a substantial fee to the staffing firm to hire the worker as a permanent employee). The Agency We examined the role of long-term relationships in shaping brokers margins by studying a single staffing firm (which I will simply call the Agency). This is a large global staffing firm that specialises in temporary placements for highly skilled, creative IT professionals, such as graphic and Web designers. We interviewed 43 people (37 contractors, four placement agents from the Agency, and two industry experts). More importantly, we collected archival data from one of the Agencys largest offices, based in a major US city. We gathered data on workers who joined the Agency in 1998 and 1999. All in all, we collected complete data on 250 workers, placed in 1,464 projects across 461 clients. We also collected publicly available information on the clients. Our database included the bill and pay rates for every project, which allowed us to explore how the Agencys margins evolved over time. The average bill rate charged to clients is $45 per hour, while the average margin is 40 per cent of the bill rate. Thus when the Agency charges the client $45 per hour, it pays the worker an average of $27 per hour. Managing relationships Our findings are clear-cut: We found that the Agency was able to charge higher bill rates to clients when it matched them with workers with whom it had a longer relationship. In our analysis we made sure that the only difference between workers was the length of their relationship with the Agency. Indeed, we find
that the very same worker is placed at a higher bill rate over time as her relationship with the Agency develops. Specifically, a 12-month relationship with the worker allows the Agency to raise its bill rate by 9.6 per cent. This represents an increase of $3.84 per hour for a worker billed out at $40 per hour (or an average of $153 additional billings per worker per week). In other words, client companies were willing to pay more for a worker that the Agency could vouch for. Why would this be the case? As we suspected, the answer has to do with the brokers ability to reduce information asymmetry. Many markets (especially mediated markets) are characterised by high uncertainty about the quality of participants. In such contexts, brokers can create better matches between sellers attributes and buyers needs when they have access to private information. In the staffing sector, when deciding whether to hire a particular temporary worker, a client firm will want to know about the workers strengths and weaknesses. How productive, creative or accurate is he? Does she work well in teams? Does he fit the organisational culture? These details cannot be assessed by reading a rsum or even a brief interview. By repeatedly staffing a given worker, however, placement agents are able to gather information about his or her performance in various projects. This allows the Agency to better match workers and clients, finding the best fit for a workers idiosyncratic skills or placing those workers that it learns to be most able with clients that most value the best quality workers. This can translate into higher prices charged to the clients, who come to trust the Agencys judgement.
If firms continue to keep their workforces lean, the temporary help industry will become more important than ever.
STRATEGY
The ability of brokers to create value from relationships relies on the importance of private information.
Our results indicate that the Agency shares some of its increased revenue with workers workers that have been with the Agency for longer receive higher pay rates. However, we also found that, whereas bill rates rise 9.6 per cent over the course of a years relationship, pay rates only rise 5.6 per cent. This difference translates into higher margins for the Agency when it matches workers it knows very well. The reason for this, we argue, is that entering a longterm relationship with the Agency increases the workers dependence on the Agency more than it increases the Agencys dependence on the worker. Even though mutual dependence increases for both parties as they enter into long-term relationships, it rarely does so symmetrically. Whether increases in dependence favour one party or the other hinges on which party sees its alternatives diminish more as it invests in the relationship. In most mediated markets (and certainly in the staffing sector), the balance is likely to tilt toward the broker, who should find it easier than the worker to maintain multiple longterm relationships. When a worker first joins a staffing firm, for example, many other similar staffing firms in the market offer comparable opportunities. Once the worker establishes a long-term relationship with one of these staffing firms, however, that firm becomes more important to her, because the staffing firm can find her highervalue placements. Of course, the same learning process also makes the staffing firm more dependent on the worker, but not to the same degree. While the staffing firm can maintain long-term relationships with multiple different workers, the worker can only maintain long-term relationships with one or very few staffing firms. This difference reflects the nature of their roles: the staffing firm can staff multiple workers simultaneously; workers can only be on assignment with one staffing firm at a time. Thus, entering long-term relationships will make the worker more dependent on the services of the staffing firm than vice versa. As a result, the increased dependence of the worker allows the Agency to obtain a higher share of the value created in the relationship and thus increase its margin. This finding raises the question of
whether workers would be better off working with a number of different staffing firms in order to reduce their dependence. Within the context of our study we found that workers appear to benefit from affiliating with a single staffing firm. Although it is true that pay rates rise more slowly than bill rates, pay rates still increase significantly as the broker is able to find better matches for the workers over time. Splitting work among several staffing firms would reduce the workers overall pay growth. In other words, the positive wage effect of better matches compensates the worker for her reduced bargaining power in an exclusive relationship. Overall, long-term relationships between the workers and the Agency seem to favour both parties, although to different degrees. Three-way dynamics We also found that in this setting where three parties interact with each other (the worker, the Agency and the client), some interesting dynamics occur. In particular, the broker will find it more difficult to raise prices and obtain higher margins when the worker and the client establish a relationship with each other. This happens for two reasons. First, the Agency finds it more difficult to raise prices when it continues to match the same worker and client. A variety of research on price setting indicates that prices are sticky within relationships. Attempts by one party to deviate from the terms of this reference transaction are perceived as unfair, unless the deviation is clearly required to maintain that partys profits. Thus, enduring worker-client relationships limit the Agencys ability to benefit from its long-term relationships with the worker. The Agency will be better able to raise the price it charges for a given worker when this worker is matched with a new client, allowing the Agency to establish a new reference transaction. Second, a staffing firm often has multiple different workers that it could propose in a first transaction with a client. Were a worker to demand too high a pay rate, the staffing firm could offer the job to another worker. Once a worker has a long-term relationship with the client, however, this worker becomes more
LEADING THOUGHTS The Permanence of temporary workers
difficult to substitute. According to placement agents at the Agency, it is very common for clients to demand the services of the same worker repeatedly. When clients request a specific worker, the Agency will try to comply; not doing so risks damaging its relationship with the client and makes it more likely that the client firm would open up this and future positions to other intermediaries. Striking a deal with a specific worker, therefore, is much more important for staffing follow-on projects than when first staffing the worker to the client. Because the worker becomes less substitutable, this should increase her negotiating power, and thus reduces the Agencys ability to extract a higher margin. In summary, the Agency benefits from establishing long-term relationships with workers, but when these workers also establish a good relationship with the client, its margins suffer. And there is not much the Agency can do about it. Although it can take some action to prevent buyers and sellers from interacting repeatedly, its ability to keep them apart will be constrained by the need to maintain relatio nships with both parties. When it comes to managing relationships, it is all a matter of making trade-offs. Creating and capturing value These observations were developed and hypotheses tested within a single setting, a staffing firm in the IT sector; nonetheless, it seems reasonable to believe that what was learned from studying this staffing firm might translate to different firms and situations in a number of ways. First, long term relationships between market participants are a fundamental driver of value creation, even in a setting such as temporary work that is usually characterised as driven by short-term considerations. Brokers are able to better reduce information asymmetries when they establish long-term relationships with workers. This allows them to both charge higher prices for their services and also to capture a higher share of the value that they create as relationships evolve. This points to a cautionary tale in the development of long-term relationships with market partners: while entering these relationships helps create value that
Long term relationships between market participants are a fundamental driver of value creation.
would otherwise not be created in arms-length interactions, it can also increase dependence from the other party. In this setting such changes in dependence benefitted the staffing firm more than the workers, but in other contexts this will depend on who has the most alternatives to lose by establishing long-term relationships. The specific trade-offs involved in the decision of interacting repeatedly with the same partners need to be carefully considered. Second, the ability of brokers to create value from relationships relies on the importance of private information that is not readily accessible through short-term ties. Hence, one could expect to find similar effects in markets such as loan syndication, in which important aspects of the borrowers quality are hard to quantify. By contrast, in contexts in which exchange is very standardised, such as in buying and selling highly liquid securities, long-term relationships may be less important. Finally, more research is needed to fully understand the temporary labour market. Our study showed that employment relationships in one specialised market differ from conventional employment in several ways. In particular, we argue that the most important relationships for temporary workers may be not with the firms in which they are placed but with the intermediaries that find them those jobs. Temporary employment relationships can help workers find good matches for their skills by providing them with a set of opportunities that span many different firms. At the same time, short-term relationships make it ever harder for firms and workers to find good matches on their own. If firms continue to keep their workforces lean, the temporary help industry will become more important than ever, and staffing firms will play an increasingly important role in managing the labour market.
Author Isabel Fernandez-Mateo ifernandezmateo@ london.edu Fernandez-Mateo is Assistant Professor of Strategic and International Management at London Business School.
STRATEGY
SEIZING THe day
Strategic orchestration
Many companies seizing major opportunities in emerging markets are blazing a management path also shared by companies such as Apple, RyanAir and Nestl. Strategic orchestration allows firms to get to market faster, adapt to changing circumstances and lower their invested capital, thereby allowing them to pursue less profitable opportunities such as serving emerging market consumers. Donald L Sull and Alejandro Ruelas-Gossi tell how.
As the global economic crisis recedes into the past, executives are raising their heads from cost cutting and looking for opportunities to grow the top line. Unfortunately, revenue growth is elusive. The four horsemen of the new normal insecure employment, stagnant wages, unsustainable credit and low investment returns cast a dark shadow over consumers who cut back on spending. At the same time, governments are slashing investment and public payrolls to reign in fiscal deficits. Major savers, like China and Germany, cannot shift from exports to consumption fast enough to offset declining demand elsewhere in the world. How, then, can executives grow revenues despite tepid overall demand? The standard answers are corporate entrepreneurship and innovation. To grow in stagnant markets, managers need to spot novel opportunities or envision breakthrough products or services that will differentiate them from competitors. Unfortunately, established firms often struggle to seize new opportunities, losing out to more fleet-footed start-ups. The failure of corporate entrepreneurship is often blamed on a lack of imagination. To stimulate the necessary creativity, companies send executives to workshops where they use finger paints or pretend to be jungle animals (real examples both) to think more creatively. These efforts to stimulate creativity are misplaced. In most large corporations, the primary impediment to revenue growth is not a lack of creativity, but an unhealthy addiction to power. Pursuing new opportunities often demands novel resources and competencies not currently at a firms disposal. In many cases, executives reject out-of-hand any opportunity that doesnt leverage the firms existing resources and competencies. Like the proverbial boy with a hammer, they reject any opportunity that isnt a nail. If internal champions persist in pursuing the market gap, they often draft detailed blueprints to develop the necessary resources in house. But senior executives often turn down the proposal as too expensive, time-consuming or risky. There is an alternative, which we call strategic orchestration, whereby a firm pursues an opportunity not by controlling all the required resources and competencies but by assembling and managing a network of partners. Strategic orchestration allows firms to get to market faster, adapt to changing circumstances and lower their invested capital, thereby allowing them to pursue less profitable opportunities such as serving emerging market consumers. We have found this approach to be particularly powerful in seizing opportunities in emerging markets, but it also applies to Apples iPod, RyanAirs ancillary service and Nestls Nespresso. Strategy is power, but power corrupts Managers typically discuss strategy as a means to create economic value, but strategic choices have as much
LEADING THOUGHTS Strategic orchestration
to do with power as value. Indeed, the two dominant streams of strategic thinking industry structure and the resource-based view of the firm both connect strategic choices to value creation by way of power. According to the industrial structure framework, firms erect barriers to entry that keep rivals out and confer the market power to set prices. A firm that successfully erects barriers to entry can prevent rivals from entering and leverage its monopoly power to pay suppliers less, charge customers more and squash would-be rivals. Seen through the resource-based view, firms create and sustain value to the extent they control resources or competencies that share three characteristics: first, a resource or competency must create value by cutting costs think Wal-Marts logistics or increase willingness to pay Coca-Cola charging twice what a store-brand cola costs. Second, a resource or competency must be rare if every car included BMWs technology, the German automaker could command no premium. Finally, it must be difficult to substitute an alternative resource or competency Saudi Aramcos oil stockpiles will remain valuable until mass-market
automobiles can run on alternative fuels. Power, in this view, arises from dependence. Coca-Cola exercises power over its bottlers, to the extent these distributors depend on CocaCola. Owning a resource, in this case one of the most valuable brands in the world, is the source of both the bottlers dependence and Cokes power. The conventional strategic wisdom, therefore, views power as a good thing for the firm that wields it. Powerful firms think Coca-Cola, Royal Dutch Shell, Microsoft, Roche or Wal-Mart can capture more economic value by squeezing their suppliers and distributors or charging customers a premium. Strategic power helps firms sustain profits into the future by fending off established rivals or new entrants that might compete away profits. No wonder powerful firms are so attractive to investors, such as Warren Buffett, who described his ideal company as an economic castle protected by an unbreachable moat. Executives crave strategic power as much or more than investors do, because it makes their life much easier. First, managers can get things done by the raw exercise of power over
employees, distributors, suppliers and even customers who are dependent on the firm. Second, strategic power provides greater certainty about future revenues and profits. Finally, strategic power allows firms to weather changes in the marketplace without having to respond immediately. General Motors market power in the 1950s allowed the automaker to survive decades of changes in technology, regulations, competition and consumer preferences before finally succumbing to bankruptcy. The GM example hints that strategic power is not an absolute good. The obvious risk of over reliance on strategic power is that no positional or resource advantage lasts forever. The personal computer disrupted IBMs stranglehold on mainframes, just as the tablet threatens Microsofts dominance in PC operating systems. But we all know that. The more insidious risk is that the very market power that companies use to protect their established business hinders them from seizing new opportunities. Over time, strategic power tends to pervade a companys culture and not in a good way. When speaking to customers with high switching costs,
STRATEGY
company representatives often lecture customers on what they should want rather than listening to what they do want. Sony lost to the iPod, in part, because it forced users of its digital music players to use its proprietary ATRAC software rather than the MP3 standard that customers wanted. In selecting partners to work with, power-drunk executives prefer vassal organisations whose dependency renders them easy to control. Leaders who can exert hierarchal control to get things done within their own company often apply the same heavy-handed tactics to corporate partners. To grow revenues, companies must often enter new market segments in which they lack power, as Microsoft discovered in the game box, mobile phone and Internet search segments. To seize an emerging opportunity, these companies must also assemble a new set of resources or competencies that they do not already control. The iPods success depended not on hardware and software alone, but on the cooperation of record labels and producers of complementary products such as speakers and carrying cases. Owning its own record label hampered Sony from striking a deal with other music companies. There is another way. Strategic orchestration describes a time when a firm pursues an opportunity not by leveraging strategic power, but by assembling and managing a network of partners. This is not about pursuing partnerships for their own sake the corporate equivalent of having 1,000 connections on LinkedIn. These networks are strategic in the sense that they serve to create, capture and sustain economic value. Strategic orchestration flips traditional strategy on its head. Rather than start with what you control and look for ways to leverage it, managers begin with the opportunity and then assemble the required resources in its wake. (See box for problems that strategic orchestration can help solve). Strategic orchestration requires a shift in orientation. Existing strategy theory is egocentric its starting point is the individual firm that exists to create, capture and sustain economic value. The firm focuses on opportunities that it can seize by leveraging its strategic power. The allocentric orientation, by contrast, takes a broader perspective and incorporates
the various partners in the network as the unit of analysis. Apples renaissance began when the newly returned Steve Jobs reframed the company as the hub of a digital lifestyle, rather than a computer maker that had to do everything important itself. An allocentric view allows executives to recognise and, more importantly, seize a whole range of opportunities that could only be pursued by a network rather than an individual firm, no matter how powerful. An allocentric orientation does not imply that
There is an alternative, which we call strategic orchestration, whereby a firm pursues an opportunity not by controlling all the required resources and competencies but by assembling and managing a network of partners.
managers ignore the interests of their own company. Rather, they recognise that the value lies in the network, which they cannot own. Put yourself in your customers (and partners) shoes When executives in powerful companies want to grow revenues, they often start with the same basic question: how can we sell more software, pizza, cement, insurance, coffee? Asking the same question leads to the same tired answers use better raw materials and hope the customer will notice, cut prices to steal share, boost advertising, add features or simply give up and focus on cost reduction. These stale answers are often attributed to a lack of imagination, and they indeed share a tiresome lack of creativity. But that is not all they share. These responses are all actions that are under the companys exclusive control. In taking these actions, companies avoid the difficulties of probing customers
unmet needs or collaborating with partners to provide an integrated solution. How else can one explain the mindless proliferation of features that no one understands (let alone uses) that clutter consumer electronics, other than employees desire to rely exclusively on actions under their control? To break out of the arrogance of power, it helps to start with a different set of questions. What really matters to our customers? What emotional need, beyond the purely functional, is unmet? What do our customers hope for? What do they fear? You may think these are absurd questions for an insurance or coffee company to ask. You would be wrong. By asking just these questions, Swiss insurance firm Baloise learned that customers bought insurance but craved safety; while CEMEX discovered that low-income customers bought cement to build a legacy that they could pass on to their children. Armed with these insights, these companies could begin to assemble a network of resources to address customers deep desires and fears. Customer empathy is the first step in discovering how a product could resonate with a deep emotional need. Empathy is not the same thing as niceness, which is often used as an excuse to avoid hard discussions. Rather it is the ability to put yourself in someone elses shoes. Strategic power erodes the empathy required to understand customers deepest hopes and fears. When working with a large European bank, for example, one of the authors sat with the top management team as they discussed how to grow revenues. As they spoke, he jotted down the verbs they used to describe what they would do to (never for or with) the customer. The list included cross-sell, leverage, squeeze, exploit and penetrate, at which point, he interrupted the proceedings to note that he was not one of their customers and never would be since no one in that room was going to exploit, let alone penetrate, him. A leading technology firm, to give another example, refers to customers as sockets, presumably just waiting to be screwed. How can managers, whose empathy has been blunted by strategic power, see the world from the customers point of view? Most companies collect reams
of monthly sales data and survey current customers satisfaction. These quantitative data reveal only those times when a customer is satisfied with a current product but mute on what would delight or surprise a customer or meet his or her deeper needs. Some companies attempt to discover this with focus groups, but this is the equivalent of scientists going to the zoo to study animal behaviour. To empathise with customers unmet needs, managers must observe them in the wild, not the zoo. To better understand the needs of Mexicos less affluent customers, CEMEX assembled a crossfunctional team of high-potential managers who spent 10 hours each day for a year in an extremely poor neighbourhood in Guadalajara. This intense observation provided many surprising insights. They noticed, for example, that poorer consumers generally bought less expensive powdered cement in bags, rather than pricier ready-mixed concrete delivered by trucks. In these neighbourhoods, cement is a consumer product. Their observation led CEMEX to market powdered cement like powdered soap, through consumer advertising and sponsoring local football clubs. More importantly, the team gleaned insight into the subtle emotional benefits of home extension that supplemented the functional benefits of more room. Home improvements not only added space, they learned, but also conferred an important psychological satisfaction by creating patrimonio something of enduring value that customers could pass on to their children and grandchildren. The insight that buildings represented more than utility inspired CEMEX to create a programme called Patrimonio Hoy (legacy today) that appeals to consumers aspirations to create an enduring legacy that their children and grandchildren could enjoy. To help customers realise their legacy, the CEMEX team had to understand obstacles that prevented consumers from building a legacy. Funding was one. They discovered that poor Mexicans raised capital for building by organising tandas, a lottery in which a collection of families contribute a set sum to a pool each week and one family wins the entire pot at the end of the week (no family
can win more than once). Although these funds were intended for building, winnings were often diverted to alternate uses such as celebrating a wedding or birthday. Lack of building equipment and expertise also hindered construction. Although bagged cement represented a significant expenditure, the CEMEX team discovered that 40 per cent of all cement went bad, because customers lacked the tools or blueprints to complete their construction project.
Managers aspire to strategic power, but power corrupts. The same power that helps capture and sustain profits in the short term and midterm can limit a firms ability to thrive in the long term.
Get partners to play ball Identifying an unmet customer need is one thing, but meeting that need is quite another, particularly when providing an integrated solution would require resources and competencies that your company doesnt control. CEMEX executives had no desire to run hardware stores or provide financing for construction. To provide their customers with an integrated experience, CEMEX needed to work with partners, including mom and pop retailers and banks, over which the company could exercise more power. The team was also charged with observing local hardware stores first-hand to understand what would induce them to work with CEMEX. When faced with the need to find partners, managers accustomed to exercising power often look for companies they can easily boss around. When that doesnt work, they look to pay the partners to play, but this is not the only or best approach. In many cases, particularly when
dealing with customers at the bottom of the pyramid, there is not enough profit to go around. Second, by linking cooperation exclusively to cash payment, companies risk the winners curse, paying above the odds to woo partners over their next best offer. Finally, exclusive reliance on financial incentives, rebates and commissions to attract and retain partners fosters a transactional attitude in which more cooperation requires more cash. Of course, a partnership must work for everyone financially; but cash need not be the only, or even most important, way to attract partners. Empathy is as important for partners as it is for customers in order to understand what matters to them beyond money and to structure deals that appeal to their values. CEMEX attracted local hardware stores into a network of Construrama solutions providers, in large part by providing them with access to best practices from CEMEX, the opportunity to learn from other leading retailers and the use of the Construrama brand that signalled quality to customers. Apples commitment to elegant design attracts accessory producers, apps providers and product reviewers at sites such as iLounge that value aesthetically pleasing products. High-end equipment makers, leading hotel chains, premium airlines and sommeliers at Michelin Star restaurants are attracted to Nestls Nespresso coffee system for its luxury and elegance. Nespressos elegance likewise attracts customers who sign up to the companys Nespresso Club, which might sound like a marketing gimmick until you realise that half of new customers learn about the system through demonstrations by current club members. These evangelists have helped make Nespresso Nestls fastest growing brand with revenues approaching $3 billion dollars. In some cases, a dominant value such as design or luxury will attract partners. In other cases, however, strategic orchestration requires different deals to induce different partners to play ball. Consider the case of JLT, a British insurance and risk management firm, which was attempting to grow its business in emerging markets. JLTs Peruvian management team knew that the government was concerned about its aging taxi fleet that caused pollution
STRATEGY
What really matters to our customers? What emotional need, beyond the purely functional, is unmet? What do our customers hope for? What do they fear?
and traffic accidents and also knew that the country had ample supplies of low-cost natural gas. The JLT team saw an opportunity to convince taxi drivers to buy new vehicles that ran on natural gas and to make money selling auto insurance. It was a great idea in theory, but it faced myriad obstacles in practice. The banks wouldnt lend to taxi drivers with no credit rating; lacking bank accounts, drivers could not pay their bills; without customers gas stations refused to stock natural gas; and car dealers refused to order natural-gas powered cars. Rather than give up, the JLT Peru team figured out a way to get everyone to play ball. JLT added mortgage insurance to the bundle of insurance it sold drivers, agreeing to pay off the loan on the car if the driver defaulted, which induced the banks to make loans. To stimulate the use of natural gas, the Peruvian government provided low-cost natural gas to filling stations that agreed to invest to distribute the new fuel and also install a billing system that allowed taxi drivers to pay their bank loan and insurance premium when paying for gas. Facing new demand, auto dealers started stocking vehicles that could run on natural gas. JLT Peru also worked with the national taxi drivers association to identify drivers who would drive the 200 kilometres per day required to cover the financing charges and with two local companies who installed GPS systems to monitor miles driven and locate the cars if they were stolen. The Peruvian taxi case illustrates that one company has to take the lead in identifying the pieces needed to seize the opportunity, understanding what matters to each player and structuring deals that make it work for everyone. This may seem like a lot of work and it is. But it offers several advantages. First, the network is simple for the customer to use, thereby stimulating adoption. Demand for the new taxis grew five-fold in its second year as did the number of filling stations carrying natural gas. Second, while the network is simple to use, it is very difficult to copy because key partners are already locked in. Finally, the company that orchestrates the network is wellpositioned to make money. As a trusted partner within the network, JLT has
offered a comprehensive insurance package including damage, theft, liability, mortgage and policies to ensure the bank is paid if the driver is ill or the car is in the shop. The network also provides a platform for offering additional coverage, such as health or life insurance, to existing customers, or expanding the programme to shipping companies or private bus firms. Guide the network with a light touch, not a heavy hand Strategic orchestration requires a shift in how executives deal with partners. Executives often brandish their companys strategic power as a stick to threaten partners into compliance with their wishes. But when value creation depends on partners voluntary participation, firms like Nespresso, CEMEX or JLT can guide a network, but they cannot dictate what partners do. Guiding without power requires executives to exercise diplomacy rather than raw power in dealing with their partners. Part of guiding a network is dealing effectively with communities rather than engaging in bilateral agreements in which you can leverage your power. JLTs success in Peru, for example, hinged on the insurance firms ability to work with the local association of taxi drivers. In selecting growers, Nespresso identifies regions with the potential to deliver exceptional coffee and then works with local farmer cooperatives to secure the high-quality beans the company needs for its espresso. To spark continued innovation in coffee machines and the overall drinking experience, Nespresso taps into the global design community by sponsoring design competitions. This diplomatic orientation to partners permeates the coffee makers language, which refers to customer-facing employees as ambassadors. It is not enough to talk the talk of communities, but companies also have to actively treat community members as equals, not vassals. With a global brand and billions of dollars in sales, Nespresso could easily use its strategic power to get things done, but it consistently relies on diplomacy in working with its partners. After identifying attractive growing areas, Nespresso offers local farmers the opportunity to opt in by joining neighbouring farms to participate in the cooperative to supply Nespresso.
The lead partner must also be willing to delegate key decisions to partners. It was not the company but Nespresso Club members, the network of millions of customer advocates, who selected George Clooney as the brands representative. Networks rely on trust, and the lead partner in an orchestrated network must go out of its way to build and maintain trust among members. Transparent communication is one powerful way to build trust. Transparency does not mean that all information has to be shared with all partners all the time. Apple, for example, maintains a high level of secrecy about forthcoming designs to maintain suspense and ensure product launches are media events. But a bias towards transparency, rather than bilateral deals brokered in smoke-filled rooms, builds trust within a network. Companies can invite credible third parties to verify that everyone is playing by the same rules. Nespresso works with the Rainforest Alliance, a non-profit dedicated to preserving tropical forests, to verify that coffeegrowing partners are farming in an environmentally sustainable way and provide their workers with a fair wage and access to health care and education. Sometimes a company must orchestrate multiple partners to provide adequate verification and sufficient scope. De Beers launched the Kimberley Process to stem the flow of conflict diamonds rough diamonds used by rebel movements to finance wars against legitimate governments in countries including Angola, Cote dIvoire and Sierra Leone. The process requires member countries to certify shipments of rough diamonds as conflict-free, with each individual diamond having its own passport. Managers aspire to strategic power, but power corrupts. The same power that helps capture and sustain profits in the short term and midterm can limit a firms ability to thrive in the long term. Power corrupts a firms ability to work with partners, substituting arrogance for empathy and high-handedness for diplomacy. Strategic orchestration, however, allows firms to assemble and guide the networks necessary to seize many opportunities that lie outside the grasp of any one firm.
If strategic orchestration is the answer, what is the question?

How can we profitably serve emerging market customers at the bottom of the pyramid? Mexican cement company CEMEX assembled a network of hardware stores, banks and community leaders to help poor customers build extensions to their homes. By relying on partners rather than building the full infrastructure itself, CEMEX earned a healthy return on invested capital despite a relatively low price point. How can we break out of the commodity trap? Swiss insurance firm Baloise has partnered with business service providers to move beyond selling commodity insurance policies to making clients safer through prevention. Baloise has partnered with flood prevention, data security and fire safety firms to provide clients with an integrated approach to risk prevention. How can we grow outside our core market? Nestl is the global market leader in instant coffee, but it had no experience selling systems for in-home coffee consumption when it formed Nespresso in 1986. Nespresso has orchestrated a network of coffee growers, machine manufacturers, distributors, service firms and high-end partners (including Ritz-Carlton hotels and first class on Cathay Pacific Airlines) to provide a luxurious experience to coffee drinkers. How can we provide an integrated customer experience? From its inception, Apple has aimed to deliver a seamless experience to users, but in the Macintosh era the company tried to do everything itself. With the iPod (and later the iPhone and iPad), Apple has continued to value ease of use but achieved it by stitching together an ecosystem of content providers and accessory makers that provide customers with simplicity. How do we grow revenues on a low-cost product? RyanAir offers the lowest prices of any major European airline with an average fare in 2010 of 35, but the company books an average of 10 per passenger from ancillary services. RyanAir partners with Hertz, Booking.com, Costa Cruises and Banco Santander to offer passengers car rental, hotel rooms, cruises and branded credit cards. How can we solve the worlds big problems? Although everyone recognises the value of an effective vaccine against HIV, pharmaceutical companies lack incentives to develop one because the people who need the vaccine most are too poor to pay for it. The International AIDS Vaccine Initiative works with a host of biotech start-ups, pharmaceutical companies, governments, universities and not-for-profits to secure government funding, stimulate experimentation on vaccine design and development, and run clinical trials in developing countries.
Authors Donald L Sull dsull@london.edu Sull is a Professor of Management Practice in Strategic and International Management and Faculty Director of Executive Education at London Business School. Alejandro Ruelas-Gossi alejandro.ruelasgossi@uai.cl) Ruelas-Gossi is Professor of Strategy at the Adolfo Ibaez School of Management in Miami, Florida and Academic Director of the Global EMBA UCLA-UAI.
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Innovation and entrepreneurship Special Report. featuring John Mullins, Rajesh Chandy and more.
STRATEGY
how china did it
The extraordinary emergence of China

China has developed into the worlds second-largest economy from being one of the poorest in 1979. Linda Yuehs research explains the countrys success.
As late as 1980, China was not viewed as a future economic superpower by most forecasters. It was not only a poor, developing country, it also had to cope with reforming the stateowned enterprises and banks that had derailed other transition economies. (The former Soviet Union and Eastern Europe experienced a decade of recession after abandoning central planning). Importantly, China did not intend to fully privatise its economy but was pragmatic in reforming inefficient segments and adept at experimenting with various policies, such as export-oriented Special Economic Zones, to ensure that they were effective before implementing large-scale institutional reforms. Chinas marketisation process entailed a gradual introduction of market forces which required both dismantling the structure of the centrally planned economy and developing market-oriented incentives. Chinas reform path can be roughly divided into three parts: Rural reforms in the late 1970s Urban reforms in the mid 1980s, and Opening to the global economy, which took off in the early 1990s and culminated in accession to the World Trade Organisation (WTO) in 2001. Rural reforms Market-oriented reforms began with rural development and liberalisation at the end of 1978. Farmers became part of a system of residual claimants who could retain returns on their work product after remitting the required portions to the state. Without privatising land, which remained state or communally owned, China was able to create an institution known as the household responsibility system that incentivised output. Indeed, agricultural output growth soared, peaking in 1984. This spectacular success caused the often-heard claim that Chinese economic reforms began in the countryside. Reorientation of the economy through this type of institutional innovation increased the share of national income going to households by 1015 percentage points. National savings and investments remained robust through the 1980s on account of this structural shift. This also minimised adjustment to the economy because, while government savings were falling, investment was maintained at relatively high levels. Consequently, Chinese households helped to maintain macroeconomic stability during this period. As a result, Chinas financial system began to diverge from the standard command economy model (low levels of private savings with subsequent difficulties when governmental revenues decline) and began to resemble the structure of a market economy. Another innovative institutional reform was the establishment of rural industry achieved through the creation of township and village enterprises (TVEs) in the early 1980s. Utilising the savings from rural households, rural enterprises were collectively owned companies, but they had a profit incentive through the dual track system that allowed them to sell their goods in the niche markets neglected by state-owned enterprises and to retain the surplus. For example, consumer goods were neglected by the state-owned enterprises, which had been following a heavy industrialisation
LEADING THOUGHTS The extraordinary emergence of China
strategy. TVEs were permitted to develop in order to provide inputs for the successful agricultural sector in rural areas, and they also became vehicles for absorbing surplus labour from agriculture. What was not anticipated was the profound change they engendered in the economy as a whole. In 198384, a short time after the introduction of market-oriented reforms, most communes were abolished. Their functions were divided between townships that assumed responsibility for governmental operations and local economic committees that took over economic management. This permitted the TVEs to become more independent as well as profitoriented entities. At their peak during the post-1978 reform period, TVEs accounted for around one-third of industrial output in China. Their share has declined as more competition from non-state firms and reformed state-owned enterprises eroded their niche markets. However, TVEs remain some of the most dynamic, small, export-oriented companies in China, operating in coastal regions as suppliers and producers for a range of products including clothing and toys.
Urban reforms The next phase of reform took place in urban areas. There were three main so-called institutional innovations in the state sector that characterised its successful reorientation toward the market in the 1980s and 1990s. First, since 1980, under the Budgetary Contracting System, the central government shares revenues (taxes and profit remittances) with local governments. For local governments that incur budget deficits, the contract sets the subsidies to be transferred to the local governments. This fundamentally reshaped fiscal relations between central and local government. Then, in 1985, the Contract Responsibility System permitted state-owned enterprises to pay a fixed amount of taxes and profits to the state and retain the remainder. In principle, so long as the stateowned firms deliver the tax and profit remittances specified in the contracts, they are free to operate. Soon, direct borrowing was established: state grants for operating funds and fixed-asset investments were replaced by bank loans. Local governments and state-owned
enterprises were the first allowed to borrow directly from banks. Since 1991, local governments and state-owned enterprises were further permitted to borrow from household and other institutions. With World Trade Organisation accession in 2001, foreign banks were also gradually permitted to extend domestic credit into China. Urban reforms resulted in a decentralised state sector in which autonomous local governments, SOEs (state-owned enterprises) and local state-owned banks have increasingly important roles in determining resource allocation, while the central government became less important even though ownership has not been reformed. It is sometimes argued that a market economy could be compatible with state ownership if managerial incentives were introduced, based on Chinas experience. Decentralisation has occurred in almost all areas of decision making: production, pricing, investment, trade, expenditure, income distribution, taxation and credit allocation. The decentralisation reforms may have, indeed, improved the technical efficiency of the state
STRATEGY
It is sometimes argued that a market economy could be compatible with state ownership if managerial incentives were introduced, based on Chinas experience.
sector; but, by the standards of allocative efficiency and inter-temporal stability, the decentralised state sector remains a major institutional cause of macroeconomic instability and of the divergent development of provinces. Therefore, decentralisation and institutional innovations within the state sector were important for Chinas development in the post-1978 period in urban as well as rural areas. However, the retention of the planned track engendered soft budgets for state-owned enterprises that meant that many remained inefficient and generated non-performing loans held by the state-owned banks, which had been directed to support state firms. Eventually, this led to the large-scale redundancies and privatisation that took place in the late 1990s and early 2000s. Although state-owned enterprises were reformed, the large ones were also retained. These more-efficient state firms competed with growing, diversified private and foreign firms in the 2000s. However, government and bank support remain in place for state-owned enterprises. The risk of a banking crisis had faded with the significant reforms of the late 1990s, which included a series of recapitalisations, IPOs and greater commercialisation such as minority equity ownership by foreign financial institutions. The 2008 global financial crisis and the subsequent global recession highlighted the lingering role of the state, insofar as the state-owned bank balance sheets were thought to have worsened due to their extension of credit to support the large fiscal stimulus package. Nevertheless, although there are a number of lingering issues with the retention of state ownership, the productivity and competitiveness of Chinese enterprises in the 2000s are notable. Chinese companies and banks now rank among the largest in the world, and there is scope to grow even further as commercial firms were only allowed to go global in 2000. Opening to the global economy In 1978, the reform period began when market-oriented measures, which included the open door policy designed to encourage international trade and foreign direct investment (FDI), were implemented. Chinas approach to economic reforms, as mentioned earlier, is and has been
gradual as policies are adopted slowly the so-called crossing the stream while feeling the stones. Chinas approach is to wait until a particular policy has been successfully implemented in one region before the experiment is extended nationally. As a result, Chinas open door policy did not take off until reforms were implemented in urban areas in the mid 1980s and then did not pick up until Deng Xiaopings famous tour of the southern coastal processes in 1992. Since then, China has been tremendously successful in attracting FDI. The first reforms in the area of FDI policy created what are known as Special Economic Zones (SEZs), which were institutionally innovative as they attracted foreign investment by creating areas/regions in which the market operated fully. SEZs were first introduced in 1979 in the southeast coastal provinces of Fujian and Guangdong and were located in urban areas. The SEZs are similar to special customs areas. Foreign-invested enterprises received preferential treatment with respect to corporate income tax (as well as up to 50 per cent reduction in custom duties) and were granted duty-free imports. This resulted in extremely rapid growth in these areas due to their attractiveness to foreign investment. Guangdong was the leading exporter among provinces in China in the 1990s because of the successful growth of the SEZ city of Shenzhen on the Hong Kong border and that of the capital city, Guangzhou. Although the SEZs were successful, Chinese authorities believed that they tended to attract investment in lowlevel technology and light industry sectors, which was consistent with Chinas comparative advantage in abundant, low-cost labour. Creating more export processing zones geared to high-end technologies and R&D came next. China attracted foreign investors by offering them market institutions that were not widely available in an economy still transitioning. For example, foreign firms were granted legal forms and contracting security in these SEZs that were not widely available to private domestic firms until the 2000s. Indeed, despite the lack of full convertibility of its capital account, China in the 1990s had become the second-largest host country for foreign
LEADING THOUGHTS The extraordinary emergence of China
direct investment after the US, the eighth-largest capital supplier in the world and the largest among developing countries (not including flows through Hong Kong which reverted to China in 1997). The stock of FDI is impressive, although there is some dispute over the figure on account of round tripping, whereby capital leaves China and returns to take advantage of foreign capital concessions. Chinas further trade and investment liberalisation measures, leading up to membership of the World Trade Organisation, set the stage for its opening. Over the period 1990-2000, Chinese manufactured exports grew by 16.9 per cent per annum, compared with 10.3 per cent for the rest of East Asia; and its world market share tripled from 1.7 per cent to 4.4 per cent. Chinas share of the global export market grew even faster after 2000, and accounted for an impressive 9.5 per cent of world merchandise exports in 2009 after WTO entry, becoming the worlds largest trader. However, WTO accession for China required numerous forms of trade liberalisation and reciprocal entry into the domestic market. China reduced the number of products subject to non-tariff barriers (that is, quotas and licences) from an estimated 1,200 in the early 1990s to approximately 200 a decade later. Nevertheless, the governments shaping of exports and industrial policies remains apparent. For instance, an important feature of Chinas trade regime has been the provision of exemptions or reduced rates for goods imported for production of exports and direct investment, which accounted for about 60 per cent of imports in 2000. As such, this policy supported Chinas linkages with global production and supply chains, which helped it to export increasingly technologically sophisticated products. Indeed, processing trade accounts for around half of all Chinese exports. China, though, retained its strength in labour-intensive products. Notably and specifically regarding textiles, with WTO accession, China became integrated into the General Agreement on Trade and Tariffs (GATT) Uruguay Round on textiles and clothing. By 2005, all existing quotas on Chinas exports of textiles and clothing ended; and by 2008,
Chinas approach to economic reforms is and has been gradual as policies are adopted slowly the so-called crossing the stream while feeling the stones.
any special textile safeguards ended. This coincided with the phase-out of the Multi-Fibre Agreement at the start of 2005, which had previously allocated quotas for output for different countries. As such, Chinas anticipated gain in market share would have been considerable, perhaps as much as 50 per cent of the US market. However, subsequent safeguards against Chinese exports of textiles and clothing were imposed by the US and the EU while smaller exporters such as Bangladesh were threatened, leaving this area still less than fully liberalised. An opening economy Although there remain outstanding issues, including access to Chinas domestic market, China is quickly opening and becoming more globally integrated. Indeed, within a few years of joining the WTO, China had become the largest trader in the world and among the top three trading partners of the European Union and the United States. As with the reforms of agriculture and industry, its opening to the world economy was shaped by the institutional structures put in place to help China achieve economic growth within the complicated context of being a transition economy and developing country. As China is expected to be as important an engine of growth in the world as the United States over the coming decades, understanding the nature of its marketisation process and the fragilities in its institutional system are more important than ever. No longer a country for specialist investigation, China has arrived on the global stage as an economy that needs to be analysed and assessed in order to gain a view of the world economy of the 21st century.
Author Linda Yueh lyueh@london.edu Yueh is a Visiting Senior Fellow in Economics at London Business School. Her new book, The Economy of China, was published in May 2010 by Edward Elgar Publishing. Resources E. Borensztein and J.D. Ostry, Accounting for Chinas growth performance, American Economic Review 86, 1996. S. Lall and M. Albaladejo. Chinas competitive performance: A threat to East Asian manufactured exports? World Development 32, 2004. J.Y. Lin, F. Cai, and L. Zhou, The China Miracle: Development Strategy and Economic Reform, Chinese University Press, 2003. B. Naughton, Growing Out of the Plan: Chinese Economic Reform, 1978-1993, Cambridge University Press, 1996. J.C. Oi, Rural China Takes Off: Institutional Foundations of Economic Reform, University of California Press, 1999.
REVIEW
The only history that is worth a tinkers damn is the history we make today.
Henry Ford
Chile, 2010: 33 rescued miners make history. China, 2009: the death of over 2600 Chinese miners goes comparatively unnoticed.
Photo: Reuters
rEadIng PEElING ThE oNIoN
Face values riChard hytner p72 ProFile the essential Gary haMel p83 voices david de CreMer on FixinG Bonuses p90
Review
Peeling the onion
Freek Vermeulen believes that discovering the truth behind the myths that dominate business thinking can provide a better competitive edge than listening to conventional wisdom gleaned from past giants of management thinking. And hes not hesitant to reveal the truths he has discovered, no matter how much, or whom, it hurts. His book, Business Exposed, targets the collective inertia of middle management, the reluctance of CEOs to pursue the new and different, the waste that results from dependence on consultants and the lack of connection between performance and rewards.
Vermeulen, Associate Professor of Strategic and International Management at London Business School, did rigorous research (based on management science conducted at the top business schools in the world) to discover what really goes on in todays corporations. Combining that research with his experience with many large organisations, he explores such important issues as the way companies formulate strategy, organise innovation, make investment decisions, respond to competitors strategies, make acquisitions, deal with conflicts of interest and rely on still-accepted theories, despite new research that proves they do not work. By means of pointed examples of misunderstandings and fallacies that
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impede companies and damage their performance, he shows executives how to peel back the layers of myths that blur business realities. For example, he explores the belief that it is all right for companies to put family-friendly initiatives on the back burner during economic hard times. He points out that, on the contrary, it is those companies with the most positive employee relationships that weather downturns most easily. Moreover, a study of Fortune 500 companies reveals that family-friendly initiatives are well-received by stock markets, often adding millions to a firms value. Another of the many aspects of contemporary business practices that he probes is the value of investing in research and development. He finds that the real value of investing in R&D is not necessarily tied to people in that function coming up with new products or processes. Instead, value comes when others take the knowledge derived from R&D and assimilate (or otherwise apply) it to their own products and technologies. When it comes to the collection of information, especially firm-specific
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A smrgsbord of essential reading, classic thinking, distilled wisdom and trends to watch.
experiences, he warns that too much knowledge collection can be dangerous, especially when putting together proposals: so much time can be spent searching through documents that there is little left to invest in the kind of original thinking that would differentiate a firm from its rivals. Perhaps the most entertaining mistakes exposed in this lively study are those made by chief executives. He shows, for example, how CEOs too often give into their drive to make acquisitions even though solid research proves that about 70 per cent of acquisitions destroy value. CEOs ignore this failure rate out of a belief that they are so good that they will succeed where others fail. Their egos prevail, so they acquire another company, often paying a premium in order to obtain a controlling stake in it. As he does often in the book, Vermeulen reveals a fascinating fact: the size of the premium paid tends to be linked to the number of favourable articles about the acquiring CEO in the business press. Each highly favourable article increases the premium paid by up to 4.8 per cent. (Unfortunately, favourable press does not change the odds of success). But Vermeulen, always fair, warns that while it is tempting to blame such executives for being arrogant, we should not forget that CEO hubris often arises out of the coverage they received in the first place. The popular press often reports on someone investigating (and rapidly deflating) the latest urban legend; Vermeulens investigations target the business world, and he has found that management myths may be easy to swallow but they are usually impossible to digest.
Resources Business Exposed: The Naked Truth About What Really Goes on in the World of Business is published by Financial Times Prentice Hall.
Read my tips
John Mullins has long been associated with the world of entrepreneurship. What are his favourite books on the subject? Here are 10 that he selected if youd like a start-up plan for upgrading your entrepreneurial library.
How to Change the World: 01 Social Entrepreneurs and the Power of New Ideas, David Bornstein All over the world social entrepreneurs are asking, What does the world really need? Foundations, development organisations, religious groups and investment bankers feel the groundswell of energy in those who want to work for the greater good. Bornstein tells inspiring success stories of Ashoka members, an international network of social entrepreneurs. (368 pages, Oxford University Press, 2007) 02 The Art of the Start Guy Kawasaki Kawasakis humorous style delivers what start-up businesses need the most: quick, practical advice from someone whos been there. He favours technology start-ups, but all entrepreneurs can benefit from his advice. An example of his humour is the section titled Frequently Avoided Questions. (226 pages, Portfolio, 2008)
WORDAGE
The Monk and the Riddle: 03 The Art of Creating a Life While Making a Living Randy Komisar Komisar invents an original fable to help would-be entrepreneurs learn what really counts in a start-up: in the end, its about the journey. Using an engaging cautionary tale, Komisar compels Lenny to let his passion drive his ambitions. The author weaves his own real-life experiences into the story. (208 pages, Harvard Business School Press, 2001) 04 The Republic of Tea: Letters to a Young Zentrepeneur Mel Ziegler, Bill Rosenzweig and Patricia Ziegler What happens when the hip and groovy co-founders of the Banana Republic clothing store get together and dream of tea? They create The Republic of Tea one of the most successful tea and herb specialty food distributors and catalogue companies in America. (1,450 pages; Bantam Doubleday Dell, 1992) 05 Smarter Ventures: A Survivors Guide to Venture Capital Through the New Cycle Katharine Campbell Former journalist Campbell shines a light on the process many entrepreneurs find daunting approaching venture capitalists. She focuses on what European venture capitalists seek (and it is not just return on investment!) and takes readers step-by-step through the process. (319 pages, FT/Prentice Hall, 2003)
WOrdagE ThE ENTREPRENEUR'S lIBRARY
guerrilla Financing: 06 alternative techniques to Finance any small Business Bruce Blechman and Jay Conrad levinson small and medium-business owners will find the practical fund-raising advice that the authors suggest empowering. those seeking less than a quarter of a million dollars will be buoyed by the many innovative financing strategies mentioned. (352 pages, Houghton Mifflin, 1992) 07 guns, germs, and steel: the Fates of human societies Jared diamond in this pulitzer prize-winning global history, diamond (a professor of geography and physiology at uCla) explains how europeans became the dominant culture for the past 13,000 years. in short, it is location. the climate in eurasia supported farming and an expanding population; this increased competition among european cultures. the author gains credibility by using scientific investigation to prove his thesis. (480 pages, Norton, 1997) Purple cow: transform 08 your Business by Being remarkable seth Godin Godin warns readers that this is no time to be shy. if youre not putting something truly new, remarkable and purple into your products, you wont get noticed. dare to be a purple cow standing in a field of brown cows. this is survival in the new marketplace the old marketing manifesto tied to pricing, promotion and publicity is now pass. (160 pages, Penguin, 2005)
Boulevard of Broken 09 dreams: Why Public efforts to Boost entrepreneurship and venture capital have Failed and What to do about it Josh lerner harvard professor lerner presents a retrospective look at how government interventions intended to support entrepreneurs and venture capitalists have fared. Many of these efforts have failed, wasting billions of taxpayer dollars through poor program design, implementation and policy making. he offers suggestions on how public ventures should be handled in the future. (248 pages, Princeton University Press, 2009)
Pour your heart into it: 10 how starbucks Built a company one cup at a time howard schultz starbucks has grown from one store based in seattle, Washington, in 1971 to more than 15,000 stores in 50 countries today. Ceo schultz tells how, by means of innovative marketing strategies, employee-ownership programme, and a product thats become a subculture, the company achieved phenomenal success. (368 pages, Hyperion, 1998)
the author John Mullins JMullins@london.edu Mullins is an associate professor of Management practice at london Business school and author of The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (3rd edition), Ft/prentice hall, 2010. he is also co-author (with randy Komisar) of Getting to Plan B: Breaking Through to a Better Business Model, harvard Business school press, 2009.
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FACe vALUeS
nothing is imPossiBle
Richard Hytner is Deputy Chairman of the global advertising agency, Saatchi & Saatchi. Responsible for the companys strategy and for its programme of continuous transformation, he works with leadership teams around the world to accelerate transformational performance. Hytner joined Saatchi in 2003, having previously been UK CEO and Chairman of the advertising group, Publicis, and Chairman of The Henley Centre. He was also a co-founder of the Manchester United SupportersTrust, reflecting his belief that brands are truly owned by the people who use them. In this interview with Richard Brass, Hytner discusses values, Lovemarks and the overriding importance of purpose.
How important are values in business? Tremendously important. At Saatchi, we talk about being purpose-driven, having a really clear purpose. The best ally you can have in business is a very strong sense of what your dream is, what your huge challenges are and then, critically, what beliefs and values underpin that. We spend a lot of time with our clients getting them to a clear, strong sense of purpose. A lot of companies have a mission statement or a vision statement and theyre just words on a page. Unless you can bring those to life with a strong sense of values and explain why those values make you different from anybody else, then its just a kind of generic
Values make the organisation as well as the men and women within the organisation. What are you passionate about?
With values
Like anything else, values are best demonstrated as opposed to talked about.
photo: lC griffiths
FaCE VaLUES NoThING IS ImPoSSIBlE
wish. Typically what differentiates companies is less what their goal happens to be and much more the kind of character, personality and beliefs that drive them. Thats where you look for sources of distinction. Which companies stand out for their values? If you compare and contrast some of the more disruptive, challenging organisations Virgins an easy one to quote, but also note Southwest Airlines and, these days, the Amazons and the Googles they have values that in some way make it really clear whether you belong or you dont. Theyre kind of lighthouse companies. They put themselves out there and, on the basis of that, their customers and their employees self-select. Thats one of the great advantages they have over the market leaders who feel that their values have to be sufficiently broad that they dont quite manage to describe who in essence they really are. What are the essential values within Saatchi & Saatchi? We have what we call a spirit, which is: Nothing is impossible. Thats a spirit thats quite topical. We just celebrated our 40th birthday with the original Saatchis, Maurice and Charles, who coined that mantra. Its something we have held very dear since they left. Unless you are the kind of person who signs up to behaviour that says nothings impossible, youre not really a Saatchi person. Were looking for radical optimists, people who really believe they can change the world and its very, very defining. Demonstrating values How do you get that kind of thinking across to your clients? Like anything else, values are best demonstrated as opposed to talked about. You have to be a little bit wary about shouting about values because, quite often, you can protest too much. If I want to make you feel that Im
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FACE VALUES
We believe in the unreasonable power of creativity. We also believe that an idea is not an idea until its executed brilliantly.
years, I have personally overseen the training of 3,500 people. Ive been to every continent in the world to talk about the purpose of the company. Everywhere we go, we get the purpose out first. Our chief executive, Kevin Roberts, is fantastic at referencing the purpose in pretty much every communication he has. Whether its one-on-one or an all-staff communication, its always rooted in: We are this kind of company, this is what were trying to do, heres what we believe and thats why were making this decision. Its constant, to the point where people really do know the lingo. Again, youve got to be terribly careful that people dont just sing the company song. Theyve actually got to feel it. For us, the only way of giving them that chance is to give them two-day experiences around the purpose of the company and how to take Lovemarks thinking into our clients business and in what kind of spirit. Its a disproportionate emphasis on training and development. Increasing importance Are values more important in business now than in the past? I think they are, because people today have huge expectations of the companies to whom theyll lend their talent, particularly Gen Y. That kind of generation is simply not going to gift their talent to companies that arent really clear about what they stand for. And increasingly, if they dont stand for making the world a better place, then they will just be rejected. Thats why we think sustainabilitys going to be so very important. Not simply because its a kind of business imperative, but because its a talent imperative as well. We find the best people will go off and do their own thing if they dont trust businesses to house the kind of beliefs they do or if they cant find the right business doing the right thing by the planet and by people. The younger generation simply will not come to work for companies that havent got massive commitments to targets on carbon reduction, companies that dont give their employees time off to do things that are good for society or companies that arent really conscious of the communities directly around them. Among clients too, if anything, I think Ive seen an acceleration in the sustainability agenda through hard times because I think most companies now have wised up to the fact that this could be a great way to save a great deal of money. What does Saatchi do in terms of contribution to the community? For years and years weve encouraged our creative talent to unleash their brilliance on social causes. We have huge pro bono programmes in place that allow people to do fantastic work for causes they care about. Thats number one. Number two is that, three years ago, we launched a programme called Do One Thing, which is to give people a mission to do one thing every day that they think is going to make their lives, their immediate families or their communities feel better. That was launched in a spirit of real optimism. It isnt saying you must stop drinking water out of bottles or you must stop bringing the car into work. Its much more giving people a sense of we want you to do one thing thats going to make you personally happier and feel better because we feel these movements are best done in a spirit of optimism as opposed to fear. What do you do yourself to contribute to the community? Again, Im encouraged by our CEO, who leads from the front. He has a massive programme in place himself, so everyone knows this isnt just something thats negotiated but is something thats encouraged. I personally am chairing a sustainability educational enterprise in Sierra Leone, and I went there this year to have a look at how our kids are doing. Im currently chairing the Mending Broken Hearts appeal for the British Heart Foundation for a big piece of pioneering research. And Michael Hay at London Business School has a thing called the Business Bridge Initiative, and hes asked me to be a trustee of that.
funny, I tell you a joke. I dont say Im funny. Values work like that. We would like to think that our clients look at us and say, My goodness, theyre real can-do people. They dont actually have to say theyre nothings impossible people. So you dont often have to advertise your values or give them too much voice, but you do have to make it really clear to your own people that this is the behaviour that we expect, that we reward and that we hold dear. Saatchi has developed the concept of Lovemarks instead of brands. How important are values to that concept? We have eight core beliefs, one of which is that we believe in the power of creativity to earn clients loyalty beyond reason. Everybody who comes to Saatchi, if they dont buy into the fundamental idea of Lovemarks, then theyre not really going to have a great time with us. We believe in the unreasonable power of creativity. We also believe that an idea is not an idea until its executed brilliantly. Ideas can be cheap. What makes an idea really special is when its out there. How do you instil those values throughout your organisation? By a massive commitment to training and development. In the last three
FACE VALUES nothing is impossible
Shaping careers Do you think values should be an essential part of business school education? I do and Im really encouraged, because as an executive fellow at London Business School I have been in the privileged position of seeing the emergence and development of the schools own Vision and Values project. One of the great things that Sir Andrew Likierman is bringing to the school is a really strong sense of values. I hosted a workshop with him and a team from right across the school, a really diverse group of faculty and people from marketing and operations; it was really encouraging to see how hes set a tone in which its acceptable to disagree with one another, even fun to disagree. Hes leading the values from the front, hes encouraging strident debate, hes encouraging diversity of thought and hes letting people have their say, which I think in a business school is so important. Aside from Saatchis particular values, what values have guided you in your career? I believe that emotional intelligence is every bit as important as intellectual intelligence. Ive always believed in family first. I believe in the power of humour and humility in business. These are the kind of things that I hold dear and try to practise as best I can. As you get older and wiser, you get more sure-footed about what works for you and, more importantly, you get more unabashed about living the values that you hold dear, which makes it much easier to navigate your way through the tough times and complexity in business, because people begin to see what kind of person you are, what it is thats going to really bring out the best in you. We invite people Im now running programmes across the world on this to marry personal purpose with organisational purpose, to make sure what it is that they most want to do and what they most believe marries with (and hopefully amplifies) the
I believe that emotional intelligence is every bit as important as intellectual intelligence. Ive always believed in family first. I believe in the power of humour and humility in business.
Author Richard Brass richard.brass@gmail.com Brass is a business and finance journalist who has written for newspapers including the Daily Telegraph, The Times and the FT.
companys purpose. If it doesnt, its still a useful exercise, because people can quickly realise that theyre in the wrong place and need to move on. This year, weve taken 100 people across the world, our key inspirational leaders, through personal purpose reviews in the hope that they can see things about the companys purpose that can really accelerate their own personal purpose and vice versa. Whats the most important piece of advice you could give about values? When I was in my last class at the MIT Sloan School of Management programme, somebody said to Rob Goffee, Professor of Organisational Behaviour, If you had one piece of advice as you go into the world, what would it be? He said, Be yourself more with skill. Thats become the mantra that I use. Its brilliant advice, and I wish Id adopted it when I was 21 as opposed to waiting till I was 42. It has guided me to make some fundamental decisions. I think that it operates at the personal level and at an organisational level. And its all about values. Ive shared that with my kids and with anybody who seeks out advice. Get on with being who you are just get better and better at it.
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Business is fixated by the here and now, but sometimes wisdom is eternally useful.
THINK AGAIN
Summer 1997
The business of economics is business

Advances in the subject have greatly developed the ways in which economists within a business can contribute to strategic decisions. In this 1997 article, David Stout draws on his experiences with Unilever to demonstrate the contribution economists can and should be making.
My personal conviction that economics was of some practical commercial use came to me by chance. I was working on a vegetable farm in southern New South Wales, on my first long vacation. We would load cabbages in the evening and drive them down to the Sydney market overnight. One morning, there would be a glut, and we would have to unload them for a shilling a dozen or haul them back to feed to the cows. That evening, we would cut no cabbages. As like as not, we would hear next day that the price had bounced back, and off we would go again. I remembered the lecture about the hog cycle and suggested we exploit what appeared to be a oneday production lag in the response of our fellow producers by cutting when the price had dropped and staying at home when it rose. It worked; I earned a bonus at the end of the season and stuck with economics. Strangely, even these days, economists employed in industry are often immured in cells within a company, where they spend much of their time talking to other economists. In 1982, some of the team engaged
on IBM Europes defence against a Section 86 charge of abuse of dominance of the European market invited the companys economists in Stuttgart to comment on a draft of the economic argument. It was disconcerting to find that they not only had not seen any of the earlier drafts they were barely aware that a case was in progress. They were fully engaged with building a model of the world economy to run on the new IBM 370. Later that year, on joining Unilever, I found a battalion of 93 economists, distributed between London and Rotterdam, who were almost wholly segregated from the operational decisions of the concern, who produced regular reports that few had solicited and even fewer took any notice of, and who, at best, performed the somewhat ritualistic function of providing deceptively exact numbers for growth and inflation to adorn the Country Annual Plans. The little microeconomics that was done was somewhat mechanical estimating demand elasticities or extrapolating raw material price changes. Meanwhile, in the world outside the Blackfriars head office of Unilever in Britain, the character of industrial economics had moved on. The focus of theory had begun what was to be a long shift from the industry to the firm. Structure was being shown to be determined by the interaction of the agents engaged in the market. The intricacies and paradoxes of the competitive process were being explored. Yet even in this decade, as John Kay remarked, economists in industry were largely missing the point, and chasing the industry, not the firm. Changing economics in Unilever Unilever, in 1982, decided that it was time for economists to get out of their empty box and become more directly useful. The perception was growing that the market was not something out there, its structure
fixed and determining what was the appropriate conduct of any and all firms in that rigidly bounded market. Rather it was in here, shaped and reshaped by the interactions of the players, the pace of change and the complex unchoreographed dance of competition. To change the metaphor, economics had been concentrating on the sets on the stage the scene rather than the scenario and had lost the plot. A study of the characters was necessary if the script of the next act was to turn out well. The appreciation of the endogeneity of market structure meant the end of the old static formulation of barriers to entry. A high concentration ratio was no impediment to cross-entry from a neighbouring technology, whose advent automatically broadened the relevant market. A high ratio of historic minimum efficient size of plant to total market was made irrelevant by new, more flexible manufacturing techniques. Product differentiation, reflected in low short-run cross-priceelasticities, exposed bright new niche entry opportunities which could become bridgeheads to the destruction of hitherto entrenched positions. Most of Unilevers main products detergents, margarine, tea, soap, toothpaste, shampoo were, in the early 1980s, typical fast-moving consumer goods, in markets fought for in countries all over the world by a very few companies in each, often with a powerful local competitor in the frame as well. Each was in a position to influence the behaviour of its rivals and did so, often without systematic design or even conscious purpose. Here was an opportunity for economists to get involved. In 1983, the plan of the Economics Department included, for the first time, a statement of purpose, which read, in part: to inform those decisions which anticipate change, to eliminate routine reporting and to design and apply to the business dynamic economic models with behavioural feedbacks, lags, costs and
THINK AGAIN The business of economics is business
rewards built into them. Six sections were reduced to three. Environment, pared down, continued to provide some regional forecasts as context for individual country plans, where these could not be relied upon from specialist sources within the country. Otherwise, that section turned its attention to new market opportunities outside what Unilever pleased to call, in those days, the Unilever World. Intelligence acted as the central clearing house for the raw data that was the economists resource. And Market was the industrial economics engine room, supporting everything from corporate strategy reformulations, through Product Group strategies, to entry tactics in particular markets ice cream in Spain or prepared meals in Thailand. The CEO of Unilever its Special Committee remarked at that time that it was more important for economists to influence the main direction and provide advice to help strategic decisions than to do routine work for individual management groups. In the event, salaries have to be paid, and a compromise was reached. Most of the work of the slimmed-down department was commissioned and paid for, task by task, by the client Product and Regional Groups, and performed, in the main, by small teams dedicated to that client. A corporate team, loosely formed with changing members as the needs demanded, was also created to tackle higher order policy issues and to service a corporate strategy advisory committee of Main Board members which reported to Special Committee. The bulk of the work of the economists, in the years that immediately followed, increasingly became strategic and long-term major acquisitions, the impact of new technologies, new business opportunities like chilled foods or medical diagnostics, and the fathoming and anatomising of major global competitors. This was in contrast to much of the earlier
work which had been concerned, almost to the point of obsession, with measurement, at the expense of explanation. There had been much use of the PIMS database to derive correlations between advertising spend and profitability or labour intensity and return on investment, with no causal direction and often misleading implications. We economists had been like the drunk searching for his keys under the lamp post because the light was better there. Two keys to change Two keys turned economics in Unilever into an instrument for action in the early 1980s. One was the fact of oligopoly. Almarin Phillips had long ago pointed out that the little local interdependencies between firms the actions and reactions that could be found between corner groceries as well as among giant oil companies rendered oligopoly ubiquitous. With its decentralised structure, Unilevers subsidiaries, and the brand managers within them, had been engaged for decades in skirmishes with rival brands. Not much attention had been paid to the fact that, in many of these battles, it was a different face of the identical competitor the same Nestl or the same Procter & Gamble. In most of its main markets outside food, Unilever is involved in a struggle for market dominance with a handful of equally determined global wouldbe leaders. (Even in food, this is increasingly the case, for by 1990, the top three UK firms, for example, controlled 70 per cent or more of the sales in each of the major categories.) Operating head-to-head across so many local markets and with so many shared product categories, there is apparent a strategic advantage that might follow from organising scattered information about the will, resources, strengths and weaknesses, and above all the patterns of response of a key rival across years, across products and across countries. Floris
Unilever, in 1982, decided that it was time for economists to get out of their empty box and become more directly useful.
Maljers, who was later to become the Dutch Chairman and was himself an economist by training, remarked at the time that the proper role for economics in business is not the traditional one of looking outward at the impervious external forces, the winds to which a company must bend, but at the internal forces which can be tempered and directed. The fact of competition among the few was the first key. The second key was that change in the discipline of industrial economics itself. The history of the battles for territory, the characters of the main rivals, the resources they chose to build and command, the changing technologies they employed and the strategies they adopted all these altered a market structure never settled for long, never in Marshallian long-term equilibrium. Tides of change could be discerned, life cycles of individual products evolved as the means of satisfying a demand: uncertainties indeed, but not chaos. These were processes that could be understood, influenced and turned to advantage by the company which was best organised, best informed and best directed. With the firm rather than the industry as the centre of attention, the concepts used to understand competition became those of conflict strategy and non-collusive games. Fighting prejudice When economists in industry try to get a piece of the action, they
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THINK AGAIN
Two keys turned economics in Unilever into an instrument for action in the early 1980s. One was the fact of oligopoly.
can run up against some deeply entrenched positions and ingrained preconceptions and prejudices among the other functions and among the operators the real decision takers about the place of economics. Like the old IBM Europe team and like the old E and S Department in Unilever, economists are still often seen as the crankers of the handles of black boxes, out of which pop forecasts which you take on trust or ignore. They were supposed to produce information that might be used as a pump might be, rather than metabolically. It is the fault of in-house economists themselves if such misconceptions are not scotched; but the label economics itself can sometimes be a handicap, and a group of economists may make a bigger and faster impact in a company if they change their title. Particular skills occupy the stage. Business decisions depend upon the flair that comes with selection and with operating experience. They are informed by estimates of costs and capital requirements which are the province of accountants; by the knowledge of the effects of price and quality and selling effort upon market shares which is the stamping ground of market research; by considerations of first-mover advantage and innovative lead-times which draw in Research and Engineering and the Patents team. And not to step beyond the unwritten or the written rules of competition is the business of the corporate lawyers. Yet all these, and particularly their strategic combination in a setting which will be mutated by the companys own choices, is the stuff of industrial economics as it has developed. The trick is to become involved as the synthesizer of a team of particular expertises: not to expect to displace them, but to connect them to the advantage of the ultimate decisiontakers. Most of the private language of economics is best avoided, at least until it has become common property by cautious introduction. Jargon is anathema. No folk theorems, no bounded rationality, no conjectural variations, not even an occasional chain store paradox. Gradually key ideas like sunk costs, incentive compatibility, the Prisoners Dilemma and the other more accessible paraphernalia of game theory become familiar currency that can pass about. Why economists? When this happens, and when, at the same time, the plurality of possible outcomes is apprehended, economists will have to parry a different challenge. Why do we need to pay economists to tell us this? It is all such common sense and so obvious. As in Molieres Le Bourgeois Gentilhomme, We have been speaking prose all our lives and never knew it. And furthermore, You cannot give us that certainty about outcomes which we really crave. This is a hard challenge to meet. It is best done by keeping well out of sight the arcane mysteries of the models behind the conclusions but known to be there, and available for inspection if required. The conclusions themselves need to be appealing. Intuitive acceptance is always more likely to lead to action than analytical rigour. This is largely a matter of presentation. Decisions that look counter-intuitive are rarely taken. Persuasive skill is called for to change a mindset; there is more scope here for metaphor and analogy than there is for mathematics. And a picture is worth a thousand words. All successful operators, in whatever stratum of management, are liable to be prejudiced by their own particular experience which is treated as if current, and from which they will generalise. This is inescapable. Paradoxically, they will also tend to regard each market as having unique features which discourage drawing conclusions based on experience outside their own. Also no operator has succeeded by looking backward, so the lessons of history, apart from the most personal, are rarely learned. Secrecy is prized, and optimism, so that the real reasons for failure and success are often suppressed in favour of conventional explanations. Success is demanded of strategic action within impracticably short
Summer 1997
time frames if the advantages are to appear before the decision-taker has moved on for others to enjoy or suffer the consequences. Above all, there is little time allowed to think. The operators are intensely involved in the dangerous performance of sanctioning irreversible actions. Thinking is a luxury enjoyed by the functional managers the priesthood of knowledge-workers that may sometimes include economists as arch-priests. They alone have the time to develop and follow through the processes of strategy. Strategic thinking The consultants Booz Allen describe strategic planning as requiring credibility, innovation and non-linear thinking. It is data-driven, highly analytical and intensely focused; yet it requires judgement, intuition, vision and the ability to reach global decisions. It must be rooted in quantitative analysis of economics, market and segment dynamics, technologies and competitive positioning, but nevertheless qualitatively responsive to organisation behaviour, management style and the environment. Most important, strategic planning must be integrated, cutting across a broad swathe of issues, functions and organisational entities. Economics can now lay claim to be the lead discipline among this broad swathe of functions. Dynamic systems modelling was adapted from engineering science by George Baumol, Richard Goodwin and others long before it became a discipline in its own right. Speeds of response, feedbacks, competitive escalation and control systems are the work-in-trade of economic modellers. In a fundamental sense, the whole of economics is about identifying and measuring the trade-offs between the costs and advantages of alternative choices. The selection, weighing and comparison of causes and effects with incompatible dimensions of more and less quantifiable gains and losses, risks and rewards, nearness and distance, are the essence of the subject. Game theory Within the industrial economists toolkit, the most powerful instrument for competitive analysis is game theory. A chief delight of game theory is the way its results demonstrate, time and again, how a superficially plausible outcome may not happen, or how misguided may be an intuitively appealing course of action. The solution of the Prisoners Dilemma is unsatisfactory for both parties. So are most price wars. The theory explains both why they occur and how they may be avoided. Delegation of responsibility for action from owners to managers looks likely, on the face of it, to compromise the maximisation of shareholder value. The driving inspiration behind the application of game theory and other aspects of the new industrial economics to corporate decisions is the focus upon the competitor, both present and potential. In Unilever, we developed a rudimentary duopoly game. The game was set up so that the character of a particular real or imagined competitor could be locked into the computer: attentive or oblivious to the human rivals moves; aggressive or co-operative in its positioning in neighbouring product space or in its pricing; opportunist or long-term in its objectives; gambling or risk-averse; technology-driven or market-driven. A game consisted of a succession of simultaneous moves by the two players on price, capacity investment, product positioning, new product introduction, research and marketing spend. There was no set limit to the number of moves and so no endgame strategy of defection. Most interesting and most difficult to build in was an artificial intelligence element. The computer learned, by observation, about the strategy of its human rival, and adapted its own responses in the course of the game, according to its own character. So it was possible to parry threats, to signal, to build credibility about the humans own reaction to predation or to defection from earlier established tacit accommodation. The chief benefits of the crude version of the game we developed was to familiarise operating managers, in their training sessions, with the conflict strategy ideas and to let them try their hands at reading, from its responses the character hidden in the box and trying to outsmart it by tit-for-tat or by other strategies of their own, in competing teams. A more sophisticated programme, fed with real information of actual moves and responses drawn from a history of actual encounters with a global competitor across times and places and truncating 20 years into a day, could be developed into a powerful strategic tool. In principle, one could investigate individual tactics like crowding out by brand proliferation, cloistering a rival in a stagnant part of the wider market, aggressive building of spare capacity to deter entry, the costs and benefits of reputation building, patent races, preemptions, facilitating practices like a tough environment policy which forced the hands of less well-placed rivals, or the impact of a strongly signalled change in the character of the CEO. There is also scope for smaller, more easily manageable game theoretic programmes, applied to specific markets and issues. We wrote, at one time, a so-called meta-game programme into which could be fed the current price-set and cross-priceelasticities of all the competing brands in a particular market. From it could be predicted the eventual stable price structure which would result from the price moves and reactions and jockeying for position in the interim. The local company, applying this offthe-shelf programme could then short circuit the price adjustment process with advantage pass GO, as it were, without visiting gaol. Corporate response For several reasons, the application of game theory to a companys competitive strategy meets with a good deal of sceptical resistance and occasional outright hostility. Usually, the scepticism arises because everyone can think of situations where signalling doesnt work or hasnt worked: when one or both players completely
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Within the industrial economists tool-kit, the most powerful instrument for competitive analysis is game theory.
misjudge their relative strengths; when the opponent is deaf or deliberately and ostentatiously not attending to what one is doing; when the level of background noise in the market is too high; or when the market is immature and chaotic, with large-scale entry going on, for example. Deafness or inattention is a particular worry. Burning ones bridges is expensive, and there is little point in doing it if the enemy cannot see the smoke. As Dr Strangelove said to the Russian ambassador, What was the point of building a Doomsday machine when you kept it a secret? Hostility has different roots. It is partly territorial. Communication with competitors, even the most indirect communication where actions speak louder than words, spells trouble to the corporate lawyer. Signalling by investing a dollar or an ECU more than is absolutely necessary will raise the accountants hackles. The marketing director resists any distraction of attention away from the consumer. What is often regarded as game theorys Achilles heel is, in fact, its shield. Scenarios are inevitably plural and outcomes uncertain. There is no point in a theory that abolishes that uncertainty in favour of an imagined and precise equilibrium. Game theory admits the variety of outcome and sets boundaries to it. Teamwork Many different skills have to be combined in the prosecution of conflict strategy. Psychology lies near the heart of it. One primitive theorem is that to fool a rival into believing that ones costs are lower than they really are will enhance ones share of a growing market by deterring him from contesting it. In practice, such a bluff is much more likely to rebound against one, since the rival, galvanised by his apparently inferior performance, will set himself new benchmarks, drive out X-inefficiency and end up with a long-term cost advantage over the bluffer. In Unilever, we found that, for greatest effectiveness, it was helpful for Economics to combine with Research and Engineering, IT and Market Research, and sometimes Patent Division, and for our preliminary results to be presented to operators and other senior managers to be argued over, modified, and sometimes with good reason rejected. From the hundreds of commissions over my 10 years at Unilever, I select four to illustrate different aspects of the contribution economists can make to business. They are necessarily somewhat veiled, since all are still live strategic issues. Neither with all of these four, nor with several of the others, did we always carry the day. When we did not, it was because we presented our case badly, or missed some key facts, or were not involved closely enough with the decision-takers themselves. But we had a good number of successes, and when our advice was rejected, it was almost always leaving a clearer view than had existed before. We survived the toughest of tests over those 10 years, the market test, recovering 80 per cent of the Departments budget from tightpursed corporate clients against the competition of outside consultants. Case 1: Country risks in the eye of the beholder It is common for multi-domestic companies to consult from time to time commercially available tables of overall economic and political risk, expecting to do less well, on average, in politically volatile or inflation-prone countries. One such index is the BERI (Business Environmental Risk Index), which reduces several kinds of externally perceived risk to a single number for each country. Common sense suggested that one of Unilevers core strengths was the range and depth of its experience across more than 70 countries. Profit is not the reward for bearing uncertainty. It is the reward for being sure when others are uncertain. We set out to test this. The companys experience of producing locally in five continents over several decades might enable it to prosper where others were fearful and unambitious. We ran a simple cross-country regression of BERI risk against Unilever
Summer 1997
profitability and presented the results at a conference of the heads of our overseas businesses. Without going into detail, in general terms, the higher the outside worlds perceived risk in a country, the better Unilever did. Once again, what turned out to matter was not the state of the external environment but the companys relative strength vis--vis its local and global competitors, knowledge derived from successful operations elsewhere and transferred to sensitive new markets. Outside risk factors were swamped by the benefits of market leadership, technological and marketing applications, and the ability to adapt confidently to each countrys stage of development. Case 2. Product evolution and graduation Out of the store of privileged data, kept up to date in the central information warehouse within the department data collected on sectors and sub-sectors of demand in many countries over many years it was possible to build a model of market evolution and the changing life cycles of particular vintages of product across countries at different stages of development and per capita real income. To take an obvious example: as populations become richer, they move, in washing their clothes, from hard soaps, through detergent paste to powders and eventually to liquid detergents and fabric softeners. All products survive, and many exist side-by-side in countries with large differences between rich and poor. The cross-section demonstrates the progression through the vintages in any one country, and the migration of the more sophisticated variants from the more developed to the less developed as they grow, with the horizon which is created by the most advanced variant continually moving through competitive innovation. From work of this kind, exploiting income elasticities and other determinants of choice across the world uncovered by the research labs and market researchers, a moving picture of the evolution of future demand can be built up, which supports long-term investment decisions in both traditional and new washing media. Locating and riding the product life cycle was a large part of our work across the Regional and Product Groups. Case 3. Cross-parrying to contain a rival This case directly involved the application of a principle of game theory that goes back many centuries to Sun Tzus Art of War. In a large and fast-growing overseas market, the company suddenly found itself facing ferocious deep-pocket price-cutting and promotion of a rival product in its hitherto private preserve at the top end of the product scale. This competition was coming from a powerful, well-connected and technologically advanced local producer who enjoyed a near monopoly at the very large-volume, low-margin, bottom end of the broad market, the end which Unilever had abandoned as being too labourintensive, necessarily low-tech and likely to be deserted as consumers moved up-market. The rival was able to subsidise, out of the margins on the large volume bottom-end product, an attack with a look-alike, but in no sense inferior brand, supported by profligate gifts. We visited the market, studied the rival at close quarters, and put together all the information we could get on the ground. We developed some game theoretic scenarios based on what we had found out. The evidence of moves and countermoves over recent years and what we knew of the character of the company led us to conclude that he confidently expected that we would never counterattack it in his bottom end home territory. We were also able to show, thanks to the help of the research labs, that the high volume product need not be inferior at all, and had indeed, in other parts of the world, extended its life cycle by appealing to more sophisticated consumers. After assessing the innocent and strategic barriers to our entry, we recommended that Unilevers best strategy was to re-enter the rivals bread-basket market with a technically superior product, and on a visibly committed and large scale. We had reason to believe that small-scale retaliatory entry would not be credible to the rival, our exit costs being then too low. We also found that small-scale entry would not eat sufficiently into his ability to crosssubsidise. There was a touch of tit-fortat in the strategy proposed. As well as distracting the rival from its foreign adventure in order to protect his home base, it signalled a believable intention to fight for, and indeed transform, what had been the low-tech preserve of the rival. The decision to do so was taken, but, as is usually the case, not solely on the strength of the game theoretic case, but on its own merits. Case 4. A Competitor war-room As I have pointed out, the nature of Unilevers business is to a large degree a series of head-to-head battles for dominance or leadership, with equally determined opponents. The breadand-butter work of the economists was competitor monitoring and auditing establishing the characters, motives, strengths and weaknesses of each main rival, set against Unilevers own, and trying to identify the particular contributions of different factors to overall differences in market share and profit performance. A first cut at such an analysis would typically break down an operating margin difference into five plusses and minuses product mix effect, regional mix effect, price-cost edge, R&D expense per unit, and marketing and administrative cost per unit. The hard analysis would then begin on the reasons for the pricecost edge and the interdependencies between the five elements. Knowing where to fight, where to sit tight, and when and where to withdraw requires one to know ones competitor better than he knows himself. The study needs to be continuous and to display both memory and foresight. There were many such audits in those 10 years. I hope they are continuing, because, of all the uses to which economists may be put in a global business with few contestants, this strikes me as being the most useful. Relative market share is the most
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Profit is not the reward for bearing uncertainty. It is the reward for being sure when others are uncertain.
event of failure to establish a viable market share in a given time. It is for the CEO to weigh the two sets of considerations and to decide whether and when and how to enter. The in-house economist may set a higher value on a potential acquisition target than does the Mergers and Acquisitions team, who value the tangible and intangible assets, because he (or she) throws into the calculation the present value of the future damage that would be done if the target were acquired, along with its brands and its bases, by a particular rival. Again, which basis of valuation should prevail depends upon critical value judgements about the direction of the company as a whole which are not for the economist to make. My experience is very particular. It relates largely to one company. It leads me nonetheless to venture a general conclusion. Probably, across most of the corporate sector, economists are wasted, or allow themselves to be wasted, when they do not use the tools that they now have to hand to address competitive strategy. Aside from fast-moving consumer goods, their happy hunting ground includes the oil companies, the major software houses, the beleaguered cigarette companies, the pharmaceutical majors, the global chemical companies indeed everywhere the actions of one company shape the responses of both rivals and other agents within strategic groups. Insofar as these companies are not using economists in all these ways, it will to a large extent be the fault of the economists themselves. Teamwork, with other functions and skills, is the sine qua non. Economists working alone are ineffective in a business. They must be prepared to sacrifice the luxury of precision and high theory. They should never complain, as I once heard a colleague complain at a conference, that introducing that much reality would make my problem intractable. Their watchword should be transparency, not mystification. The watch will never be found under the lamp post. A good plan is to get hold of a torch.
Summer 1997
Author David Stout d.stout@ucl.ac.uk Stout was formerly Director of the Centre for Business Strategy at London Business School and headed the Economics Department at Unilever plc. He is now an Honorary Research Fellow at University College London. This article was originally published in Business Strategy Review 8, no. 2, 1997. Resources John Kay, Economics and business, Economic Journal 101, 1991. Colin Mayer, The assessment: Recent developments in industrial economics and their implications for policy, Oxford Review of Economic Policy 1, no. 3, 1985. R. Nelson and S. Winter, An Evolutionary Theory of Economic Change, Harvard University Press, 1981. Alex R. Oliver and Joseph R. Garber, Implementing strategic planning: Ten sure-fire ways to do it wrong, Business Horizons 26, no. 2, 1983. A. Phillips, Market Structure, Organisation and Performance, Harvard University Press, 1962. T. C. Schelling, The Strategy of Conflict, Oxford University Press, 1960. Sun Tzu, The Art of War, (S. B. Griffith, trans.), Oxford University Press, 1963. S. Trachtenberg, The Wall Street Journal, January 2, 1997.
powerful driver of profitability in every oligopoly market. The share of industry profit over the share of industry sales is typically two or more for a dominant company in a regional market. Of course this is heavily influenced by all the factors independent of relative size which affect both share and profitability. But after account is taken of all these, the signal advantages of dominance remain. For this reason, if for no other, competition among the few prevails as fiercely as it does among the many. The art of moderation Perhaps the best way to describe the contribution a team of industrial economists can make to strategic decisions within a business is as a moderator and balance for the many special interests, skills and motivating forces, both operational and functional, within the company. The economists viewpoint tends to be more analytical and more longterm than the other members of a team. His or her perspective (more than half my team were women) will not always prevail; nor should it. The economist may urge that entry into a new market where there is a dominant incumbent should be on a grand scale, with heavy and visible commitment to maximise the likelihood of reluctant acquiescence rather than total war. The accountant will argue just as convincingly for a minimal commitment and the use of third party manufacturers, where possible, to lower the exit costs in the
prOFILE GARY hAmEl
PROFiLe
the essential
a short and snappy introduction to the thoughts and theories of an important thought leader.
gary hamel
In this series, Business Strategy Review profiles major thinkers who have made a significant difference to how organisations are managed and how business careers have been shaped as a result.
Gary Hamel has become one of the worlds foremost management thinkers by telling management it does just about everything wrong: Their strategic vision is too narrow. The Management 1.0 practices found in most companies strangle innovation, frustrate collaboration, curtail ambition, undermine loyalty and stymie adaptation. The bottleneck is at the top of the bottle: the most powerful defenders of strategic orthodoxy are senior management Getting large organisations to be persistently innovative is akin to getting a dog to walk on its hind legs. Management processes are the antithesis of innovation. Most organisations today look a whole lot more like the Soviet Union than we would like to admit. And management loves him for it. Or at least tolerates him sufficiently to make him one of the planets most sought-after (and highest-compensated) consultants and speakers. His clients include General Electric, Time Warner, Nokia, Nestl, Shell, Best Buy, Procter & Gamble, 3M, IBM and Microsoft. His pioneering concepts such as strategic intent, core competence, industry revolution and management innovation have changed the practice of management in companies around the world.
Not bad for a guy with virtually no management experience. He found it intolerable: I spent a year working as a hospital administrator after earning a master of business administration. He soon realised he couldnt stand the minutia of actually being a manager. What seemed far better, he recalls, would be thinking about management. I didnt want to be in a career where you had to go to the same committee meetings every week. His path to thinking was considerably smoothed by his decision to pursue his doctorate at the University of Michigan, where he met professor and author C.K. Prahalad, with whom he went on to write the best-selling Competing for the Future and a succession of
My argument is the more difficult the economic times, the more one is tempted to retrench, the more radical innovation becomes the only way forward. In a discontinuous world, only radical innovation will create new wealth.
Gary Hamel in Business Strategy Review (Winter, 2003)
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The most powerful defenders of strategic orthodoxy are senior management, and strategy making needs to be freed from the tyranny of their experience.
and strategy making needs to be freed from the tyranny of their experience. To those who grasp far too tightly onto their companys strategic processes, he advises, Strategy making is about letting go. Whats the penalty for not letting go? According to Hamel, its falling prey to the twin killers of success in the 21st century: retrenchment and incrementalism. Most companies dont have any strategy which goes beyond retrenchment, he has asserted. Retrenchment doesnt buy you growth, it doesnt buy you a future. At best it buys you time. Incrementalism, in Hamels opinion, perhaps had its place in the last century. At the beginning of the 1980s, companies aimed for greater size and success through downsizing, flattening, re-engineering and other fad instruments such as total quality. Today, the goal of becoming incrementally better is ingrained in our thinking, in our language, in our reward mechanisms and everything we do, he asserts, adding that such techniques must be consigned to the dustbin of history. We have to create new metrics. Most of the metrics companies use ROI, EVA and so on push us into thinking simply about incremental improvements. We still have a very deep belief in management processes which are the antithesis of innovation. New metrics might best relate somehow to the presence of two interrelated presences: newcomers and passion. Trust the new voices that emerge coincident with top management relinquishing its hold on strategy and introducing newcomers. Young people and people from different groups bring richness and diversity to strategy formulation. It is, he says, the only way for incumbents to renew their lease on success The same people talking the same issues over and over again leads to sterility; new opportunities arise from juxtaposing formerly isolated people. And when that happens, passion makes its critical contribution to strategy of a uniquely effective sort: Strategy that is passionately believed in, that is competitively different and that is articulated in enough fine grain to act on. Profound advantage In Hamels corporate world of the 21st century, strategy must be directed, above all, toward innovation; and innovation can be neither relegated to departments such as R&D nor to periodic corporate innovation blitzes. Instead, it must be a constant concern in every corner of the company: My argument is the more difficult the economic times, the more one is tempted to retrench, the more radical innovation becomes the only way forwards. In a discontinuous world, only radical innovation will create new wealth. Radical innovation isnt your fathers innovation, the kind found when CEOs say that they need to innovate and put innovation as one of their top two or three priorities. Trouble is, Hamel argues, the buck stops there: Go down a few levels in the organisation and talk to mid-level employees its obvious that most companies have not institutionalised innovation in a meaningful way It is not seen as the responsibility of every single employee every single day. Yet the rewards of making it so are decisive for long-term corporate success: Companies which commit themselves to innovation like Whirlpool, Cemex, Shell and a few others are going to have a profound advantage Over the last 40 years Western car makers havent recaptured even a single point of market share from their Japanese competitors. To avoid a similar fate, Hamel says, requires a fundamental rethink of your most basic business principles Innovation has to be central to the purpose of organisations. We have to systematically train people in new ways of thinking We have to re-engineer management processes to minimise the time between an idea and wealth creation. Its not the supply chain which needs shortening and automating, its the innovation chain which needs shortening and automating True innovators are
influential Harvard Business Review articles. Since 1983, Hamel has been on the faculty of London Business School, where he is currently Visiting Professor of Strategic and International Management and co-founder of the Management Innovation Lab. Hamels genius spans the full range of issues that todays corporate leaders must contend with; but, above all else, he homes in on strategy and innovation. As if trying to avoid being something less than a rabble-rouser, he often accompanies any mention of those concepts with the nearby descriptors radical and revolution. The tyranny of experience Hamels take on setting corporate strategy is typical of his take on any number of devices by which a company sets its course and might be accurately (if too succinctly) summed up as: get outside your comfort zone. Strategy making should be subversive, he has said. Great strategies come from challenging the status quo and doing something different. The impetus to make that happen, he believes, should come from the highest offices: The bottleneck is at the top of the bottle. The most powerful defenders of strategic orthodoxy are senior management,
profile Gary Hamel
never bound by what is; instead they dream of what could be. In those dreams, Hamel believes, lay what he calls economic progress. Theres social innovation, institutional innovation, technology innovation and finally management innovation. It was management innovation that delivered actual economic progress. Until we learned how to bring people together, to do things at scale in highly productive ways, all that other innovation was great but it didnt fundamentally result in anything that actually changed our standard of living The evidence would suggest that management innovation fundamental breakthroughs in how we motivate, organise, plan, allocate, evaluate those things tends to produce longer lasting advantages. Totally rad Hamels talk of business innovation in the 21st century is punctuated with recurring use of the word radical, as in: Can you envision radical and far-reaching changes in how managers do what they do? While corporate chieftains of the Fortune 500 ilk may find the word disquieting, Hamel seems to find it profitably provocative, given that Strategos, the Silicon Valley consulting firm he founded, claims to aid client efforts aimed at achieving radical innovation. Hamel warns that radical change and radical innovation are no longer optional for companies. Could the practice of management change as radically over the first two or three decades of this century as it did during the adolescence of the 20th century? I believe so. More than that, I believe we must make it so. The challenges facing 21st century business leaders are at least as intimidating, exciting and unprecedented as those that confronted the worlds industrial pioneers 100 years ago. One may expect that most corporate leaders, contrary to sentiments expressed by the Beatles, are not among those who would want a revolution that
The challenges facing 21st century business leaders are at least as intimidating, exciting and unprecedented as those that confronted the worlds industrial pioneers 100 years ago.
Selected works of Gary Hamel Strategy as revolution, Harvard Business Review, July/August 1996. Strategy innovation and the quest for value, Sloan Management Review, Winter 1998. Leading the Revolution, Harvard Business Press, 2002. The Future of Management, Harvard Business Press, 2007. With C. K. Prahalad The core competence of the corporation, Harvard Business Review, May/June 1990. Strategy as stretch and leverage, Harvard Business Review, March/ April 1993. Competing for the Future, Harvard Business Press, 1994. Competing in the new economy: Managing out of bounds, Strategic Management Journal 17, 1996.
would change the world. Hamel might argue that the world has changed with or without companies senior management: Only those companies that are capable of creating industry revolutions will prosper in the new economy. Hamel sympathises with the executives plight: Weve learned how to use our positional prerogatives, our access to power and our polished professionalism, to get ahead, he wrote in The End of Management. Talk about revolution particularly management revolution makes us jittery. Who, one wonders, will come out on top if the rules and roles of management are turned upside down? Yet despite our reservations real progress demands a revolution. No surprise, then, that an earlier Hamel book was Leading the Revolution, in which he advised companies to adopt Hamel-ian prescriptions: Set unreasonable goals. Define the business broadly. Create a cause. Listen to your newcomers. Divide big companies into cells. And so forth. Hamel seems not to think many companies will ultimately heed his advice, as he says, truly revolutionary, global-scale business models dont come along every day or even every decade. That should keep him in heavy demand for as many more years as he cares to toil.
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Ports oF call
Nitin Bakshi, Stephen E. Flynn and Noah Gans, Estimating the operational impact of container inspections at international ports, forthcoming in Management Science.
The economic prosperity and much of the power of the United States is dependent on its access to worldwide transportation, energy, information, financial and labour networks. When it comes to transportation, ports handle the bulk of Americas imports and exports; but since the attacks of September 11, 2001, the millions of shipping containers that are used to transport goods in ocean-going vessels have been recognised as a potential means for terrorists to hide a nuclear device destined for US shores. In response, a number of systems have been put in place aimed at reducing that risk. Now, a US law mandating non-intrusive imaging and radiation detection for 100 per cent of US-bound containers at international ports is supposed to go into effect in 2012. Unfortunately, implementing that law may dramatically increase port congestion, raising the cost of doing business and hurting commerce. Nitin Bakshi, along with Stephen E. Flynn and Noah Gans, believed it was critical, before any action was taken, to compare the costs and benefits of the two most likely systems to be used. They set out to gather and weigh the pros and cons of how each of these plans might function if ramped up to meet the new requirement. To do so, they used detailed data on the movement of more than 900,000 containers, gathered from two large international terminals, to perform a simulation analysis of the
The latest academic research, distilled and dissected
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two competing systems. They first measured the impact of the current inspection regime being advanced by the US Department of Homeland Security. Currently, this system, called the CSI system, uses rules-based software to identify high-risk containers and inspects only those. The inspection equipment is located somewhere in the interior of a terminal or in an offsite location. They also analysed an alternate inspection protocol, the SFI inspection system, which emphasises a rapid primary scan of all containers, followed by a more careful secondary scan of only a few containers that fail the primary test; its equipment is located at the terminal entrance. The authors research suggests that a variant of the SFI inspection scheme is capable of being scaled up to satisfy the scanning and radiation detection requirement mandated by the 2007 US law. Its use of rapid screening by relatively low-cost drive-through portals allows it to handle 100 per cent of all
container traffic bound for the US, as well as other destinations, on a costeffective basis. In turn, the relatively small percentage of containers that fail this rapid primary inspection can be scanned in a cost-effective manner by more sensitive drive-through equipment. In contrast, the current CSI protocol, which relies on more sensitive equipment to scan highrisk containers in a centrally-located, government-operated inspection facility, would face significant hurdles were it to be scaled up to scan more than a small fraction of USbound container traffic. Moreover, if ramped up, it would cause major congestion and raise shipping costs far more than the SFI system would. The authors note that there probably is no one-size-fits-all solution that will provide total security at every international port. However, with their research, ports may become safer sooner rather than later, a solid plus for the stability of global business.
EXECUTIVE SUMMarY dISTIllEd WISdom
Present and accounted For

Kimberly D. Elsbach, Dan M. Cable and Jeffrey W. Sherman,How passive face time affects perceptions of employees: Evidence of spontaneous trait inference, Human Relations 63, no. 6, June 2010.
Professors Elsbach, Cable and Sherman conducted two studies on the importance of passive face time (the amount of time a person is passively observed at work, without any interpersonal interaction). They took two situations into consideration: work during normal business hours
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(expected face time) and work outside normal business hours (extracurricular face time) in order to understand how real-life observers came to make evaluations and judgements. Business icon Jack Welch was quoted, saying Companies rarely promote people into leadership roles who havent been consistently seen and measured. Its a familiarity thing, and its a trust thing. In essence, the authors asked, How true is this? Does an employee have to be seen to advance inside the company? To test the idea, they recruited workers with supervisory responsibilities who were also supervised themselves. Volunteers from 30 corporate offices in California were interviewed. In the first of the two studies, the participant group consisted of 39 managers. They had worked an average of nine years in a corporate environment and had been with their current employer an average of five years. Most worked for high-
tech companies. All had supervisory responsibilities that required them to make judgements about the work performance of others. All worked in an office and were not telecommuters. Seven common descriptors of behaviour (such as I always see him when I walk by his office and I always see him if I happen to come in on the weekend) were collected. They were then put into one of two face-time categories: expected or extracurricular. Next, the types of traits that observers inferred from those displaying the behaviours were noted and coded. Over half associated activities such as sitting at a desk all the time with the trait dependable. The word committed was used to describe those showing extracurricular face time; in fact, the words committed and dedicated appeared more in relation to extracurricular face time. In the second study the professors used a false-recognition experiment to expose any bias on the part of the observer. In short, if a participant falsely identified a trait word that was not included in a description, it strongly implied that the trait was spontaneously inferred. This played out, interestingly, in how supervisors might evaluate telecommuters. A manager may be aware that the company encourages working from home, yet unaware of his own bias that he views more favourably those who are present in the office. While the authors concede that their studies had limitations, such as the fact that qualitative data about passive face time was based on participants recollections, they aver (convincingly) that passive face time, which has not been examined in scholarly investigations, can affect employees status, performance evaluations, raises, promotions and job security even though being observed at the work site may not be linked to actual productivity. This might make Jack Welch happy, but it doesnt make him right.
illustration: tonwen Jones
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the comPensation/ PerFormance equation
Gary Dushnitsky and Zur Shapira,Entrepreneurial finance meets organisational reality: Comparing investment practices and performance of corporate and independent venture capitalists, Strategic Management Journal 31,no.9,2010.
The issue of how organisational realities affect the way people in corporations respond to the need to innovate and take risks has long been questioned, but until now it
research
has not been the subject of detailed analysis. Fortunately, the differences between the reward structures for independent venture capitalists and corporate venture capitalists presented by Gary Dushnitsky and Zur Shapira offer the opportunity to analyse the effects of the type of compensation corporate personnel receive on their investment decisions. Dushnitsky and Shapira point out that a typical independent venture capital fund raises money from pension funds, universities and wealthy individuals, and then invests those funds on behalf of those investors. The venture capitalists compensation scheme usually consists of an annual two per cent of the total assets under management plus 20 per cent of profits. Corporate venture capitalists, in contrast, invest their parent companys money and often receive just a salary and, perhaps, an annual bonus. To determine the relationship between performance and compensation, the authors conducted extensive analyses of venture capital investors during the 1990s, studying
the direct relationship between investors compensation schemes and investment practices using a sample of 13,096 investment rounds by corporate and independent venture capitalists. They focused on investment practices that corporate venture capitalists and independent venture capitalists commonly used to manage investment uncertainty: deciding at what stage in a new venture to invest and whether to invest alone or with a group of two or more investors. The analysis demonstrates that compensation has a large effect on performance: all else being equal, the contribution to firm value from corporate venture capitalists is greater when firms award them significant incentives. On average, their rate of success is similar to or higher than that experienced by independent venture capitalists most likely as a result of their ability to leverage parentfirm resources, industry foresight and customer and supplier networks. However, the performance gap between the two groups is sensitive to corporate venture capitalists
EXECUTIVE SUMMarY dISTIllEd WISdom
compensation schemes; it is large when corporate venture capitalists receive performance-based pay and diminishes substantially when they receive few or no incentives. The reason for these differences is the tendency of corporate venture capitalists to shy away from risk by not investing in seed and early stage start-ups, entrepreneurial ventures that really amount to little more than a promising business plan, even though that can mean acquiring a lot of stock at a low price. Instead, they tend to invest in more mature, and thus potentially less-risky, (and hence) less-rewarding ventures. In contrast, independent venture capitalists tend to welcome the opportunity to jump in early, even though it may result in a lot of failed investments. Another difference is that corporate venture capitalists are more prone to invest as part of larger groups, or syndicates, than are independent venture capitalists. The decision to reward their corporate venture capitalists on the basis of success has to do with organisational realities, such as the difficulty to establish and agree on performance metrics, and the administrative problems such a reward scheme presents as individuals transition in and out of the corporate VC unit. Perhaps most important to the organisation, is the inclination to maintain pay equality in order to avoid resentment by employees in other business units. After all, gaining the strategic benefits of corporate venture capitalists investments requires those responsible for investment decisions to be in close touch with other people in the firm, especially the R&D and business unit people. The authors conclude that when deciding on corporate venture capitalists compensation structure, one should balance two contrasting effects. Awarding high-powered incentives to a handful of employees may run contrary to corporate culture, yet failure to incentivise success may distract the corporate VC unit from fulfilling its full potential.
the Fastest Way From knoWing to netWorking

Louise Mors,Innovation in a global consulting firm:When the problem is too much diversity, Strategic Management Journal 31, no. 8, August 2010.
Innovation through knowledge creation is the key to the continued growth of large global enterprises. When it comes to management consulting firms, sustainable competitive advantage is as important to their success as growth and just as dependent on innovation. In these firms, it falls to the senior partners to accumulate information about new industry practices, new products or new ways of implementing existing processes and then to interpret and integrate that knowledge to come up with innovative ideas to help their clients. Louise Mors, Assistant Professor of Strategic and International Management at London Business School, set out to investigate the complex issue of the ways that individual partners in multinational firms utilise their informal relations to access and integrate the information needed for innovation in order to determine what works best for them in different contexts. She conducted in-depth interviews with 32 partners in a professional services firm owned and managed by a group of over 1,000 semiautonomous senior partners. She then tested the information garnered from those interviews on a unique data set of 1,449 informal relationships from a network survey of 79 senior partners based in 10 major offices across the United States, Europe and Asia.
research
The research showed that partners build informal networks of relationships internal, external, local and global as a means of gathering information. The size, or density, of their networks as well as their nature determines how well they work. For example, integrating information across functional areas poses difficulties, while commonalities that result from flows within firms ease the process because of the shared language of communication and the similarities of culture and procedures within the organisation. The study required an examination of the context in which the partners operated and built their networks as well as the density of the ties within networks from sparsely connected (low density) to highly interconnected (high density). The goal was to determine, first, whether a dense network of connections would facilitate the interpretation and integration of diverse information and knowledge. Next, it was important to determine whether operating in a confirmed homogeneous context could make it more difficult for partners to access the diverse information and knowledge necessary for new knowledge creation. In such a context, she believed, partners might benefit from low-density networks. The research showed that partners operating in homogeneous contexts, in which the primary challenge is to access diverse information, benefit from networks with limited density. In contrast, when firm and geographic boundaries are broader, partners with dense networks are more innovative because their network interactions facilitate their ability to integrate the diverse information to which they are exposed. Overall, the findings support the view that there may be much to be gained from deliberate network strategies when it comes to innovation. For example, when the context is homogeneous, actors should aim for less structure; and when the context is heterogeneous, the aim should be for more structured networks.
REVIEW
Opinions are the elixir of debate. In Voices, matters topical and controversial are aired and tested.
Voices
David De Cremer
Fixing bonuses
Some 15 executives responsible for hiring bankers said that bonuses werent all that important for their own motivation but that bonuses were very important to those they employ. David De Cremer thinks this is more than a discrepancy; it reveals a self-created myth that is destructive and addressable.
One of the most-cited examples of the unlimited pursuit of selfinterest in the financial world is the delivery of excessive bonuses. The idea that bankers evaluate the business of bonuses primarily in terms of their own self-interest became very clear when the then UK Chancellor of the Exchequer, Alistair Darling announced that he wanted to impose a one-off tax on banks so that some of the excessive bonus payments were directed back to the taxpayer. Colin Stanbridge, Chief Executive of the London Chamber of Commerce and Industry, opposed this proposal because such a tax would cause high fliers to leave London thereby explicitly illustrating that the primary motive of investment bankers does not seem to be about providing service for the welfare of the public but rather for their own welfare. But, if bonuses encourage self-interest, then why have they become such a popular compensation method? Not too long ago, the use of
bonuses was believed to be an effective compensation system that was designed to incentivise people. By providing these financial incentives, people would be motivated to work harder and perform better. True, but sadly, from what I have seen over the last year, bonuses seem to encourage the wrong type of motivation. I would much prefer people to be motivated in an intrinsic way. Intrinsic motivation refers to the idea that people do a job well because they truly enjoy the things they have to do. They are motivated to perform their tasks well because they like to and not because they have to. Through intrinsic motivation, the focus remains on the job itself and not on the perks that it may bring. Unfortunately, the use of incentive pay in the financial world seems to have undermined this intrinsic motivation. Rather, in the presence of free-market economy rules, the purpose of bonuses in the financial world seems to have shifted. Instead of being offered as a reward for a job well done, they now appear to be handed out simply because the job was done. Intrinsic motivation has been replaced by extrinsic motivation: the bonus is no longer the reward and, instead, has become the motivation. A psychological consequence of such an extrinsically motivated state of mind is that, for the individual, the interest in ones job diminishes and, ultimately, the quality of work suffers. Take a look, for example, at how a narrow focus adopted by bankers to ensure that they met their bonus target criteria revealed doubtful actions that contributed to the emergence of the current financial crisis. Behavioural research shows that using criteria to set bonuses can motivate people to engage in fraud more readily. Just imagine knowing that you will miss out on a hefty bonus by a slight margin. The temptation to misrepresent your performance figures, even
only slightly, and cash in on the desired bonus becomes great. Further, a recent survey conducted by eFinancialCareer and reported by the Financial Times indicated that bankers in the United Kingdom are not satisfied with the bonuses they received over the year 2009, despite the fact that more than half of them received a larger bonus than the year before. This observation underscores the idea that bonuses no longer seem to motivate bankers at all. A side effect of this situation is that bonuses have rapidly become what Joseph Stiglitz called (in a recent Harvard Business Review article) a charade. Bonuses no longer have motivational potential; but they are handed out nevertheless, whether performance is good or bad. Why bonuses prevail If the negative effect of the bonusincentive construction is so great, why then keep this form of incentive structure? To address this very question, I was involved in interviews with 15 Dutch executives responsible for hiring bankers. The findings indicate that the bonus culture is, in fact, something of a self-created myth that is maintained in the collective mind of the financial world. I asked executives how important they considered bonuses to be for their own work performance and motivation. I also asked them how important they considered bonuses to be for the performance and motivation of other bankers. As could be predicted by the selfenhancement bias (something we all suffer from), the executives were convinced of the benefit of bonuses in motivating others to do their jobs well, more so than was necessary for their own personal motivation. This belief resulting from the tendency of people to evaluate themselves more positively than others in almost all areas of life convinces them that high
VOICES Fixing bonuses
bonuses are a necessity to get the best talents to work for them. The thinking is that others are motivated by financial incentives, so it is necessary to provide them. Things got even worse. I also asked executives which type of banker they would prefer to take care of their personal savings: Banker A was presented as someone who was in his career for the money and thus considered financial incentives important; Banker B was someone who enjoyed his or her work and focused primarily on providing good service to customers. Without exception, the executives stated that they would want Banker B to take care of their personal savings. Ironically, based on their earlier responses, it was clear that in a professional context each of them would hire Banker A. Clearly, the idea that bonuses should be the primary incentive structure appears to be hardwired into the minds of those working in the financial world and, due to their own fears and biases, is likely to remain so. If we want to change the reward culture over the long term, it is imperative that, instead of just implementing rules limiting the size of bonuses, we should specifically create interventions based on behavioural insights that can help us to change the mindset of those in the financial world. What to do? Which interventions can help to make the allocation of bonuses effective and justifiable? I suggest five: 1 Bonuses will be more likely to influence work motivation positively if an allocation system is in place that reflects accurately the differences between employees in their performance. In this view, differences in ability and skills should reveal differences in performance that are awarded accordingly.
A culture needs to be created that uses an objective measure as the basis for allocating bonuses but, at the same time, also evaluates the manner in which people achieve their performances.
Author David De Cremer ddcremer@london.edu De Cremer is a Visiting Professor at London Business School and Professor of Behavioural Business Ethics and Scientific Director of the Erasmus Centre of Behavioural Ethics at Rotterdam School of Management.
2 The employees who receive the bonus should be in control of their own performance, and the influence of external factors should be limited. 3 Do not create a culture in which bonuses become a habit. Bonuses do not always need to be given. Make sure employees do not develop the idea that the bonus is merely part of their salaries. 4 Make people think that receiving a bonus is related to the idea of sustainability and longterm thinking by, for example, rewarding cooperation more than, or in different ways from, individual performances. 5 A culture needs to be created that uses an objective measure as the basis for allocating bonuses but, at the same time, also evaluates the manner in which people achieve their performances. Too often it happens that desirable outcomes and performances are achieved by means of unethical decisions or actions. Thus, its important to assess not only the evaluation criteria for a bonus but also the procedures used to award it.
REVIEW
Voices
What to do before you write a business plan
Business plans are often the linchpin to starting a successful enterprise. John Mullins believes you need to think before you write.
The evidence indicates that the vast majority of business plans raise no money. Of those ventures that are financed, many (if not most) will fail. Whats wrong with this picture? At least three things are wrong. The first thing is that most business plans are written for opportunities that are fundamentally flawed. Why write a business plan for a nohope opportunity? Its a waste of entrepreneurial time and talent. Whats also wrong is that the inherently persuasive nature of business plans, a principal purpose of which is often to raise money, forces their proponent entrepreneurs into everything about my opportunity is wonderful mode. Alas, the likelihood for most opportunities, even the attractive ones is that everything is not wonderful; but there may be one or two things that are sufficiently wonderful to outweigh those that are not. In the same vein, the aspiring entrepreneur who prepares and pitches an everything is wonderful business plan like the ones many books and software packages describe risks his or her credibility
John Mullins
with investors, people of experience who know the real risks that entrepreneurial ventures entail. This naivet makes it harder, not easier, to raise the money thats needed. Worse, notwithstanding a risk section in which the typical plan papers over what might go wrong and explains why it wont, such a positive slant risks blinding the entrepreneur to the very real risks that conspire to bring most entrepreneurial ventures to their knees. The third thing thats wrong is that most business plans are focused on the entrepreneur, his or her idea, and why its wonderful. They are me-focused or my idea-focused rather than customer-focused. People do matter, true, but investors dont really care very much about you and your idea, at least not at the beginning. What investors care about is solving significant customer problems or needs that offer significant profit and growth potential. If you have a solution to such a problem, then their ears will perk up. If youve shown that you can deliver results in solving this kind of problem, youll have their undivided attention. Thus, the importance of people lies in the context in which they operate. Set the context first. Let the people story of you and your entrepreneurial team close your sale. Is there a solution? There is a solution. Instead of diving into business-planning mode, step back and ask yourself whether the opportunity you have in mind is genuinely attractive. Thats what an aspiring entrepreneur named Cassian Drew did before embarking on a plan to sell climbing-wall hardware and exercise programmes to fitness facilities. He spent a summer examining his opportunity and, in the process, learned exactly how fitness operators assess the economics of the gear they acquire. Alas, it quickly became clear that the economics underlying what he had thought to be a great idea just werent going to fly. While he and his partner were well-suited to the opportunity and the market
was attractive with booming interest in both fitness and climbing in the UK there simply wasnt a business model that would work. As Drew and countless numbers of entrepreneurs have learned, usually the hard way, opportunities are best understood in terms of three crucial elements: markets, industries and the one or more key people that make up the entrepreneurial team. What I call a customer-driven feasibility study is something which entrepreneurs, whether in nascent start-ups or deep in the bowels of an established company, might use to guide their assessments before they invest precious time and effort in writing a business plan. Key differences There is considerable overlap in the content of a customer-driven feasibility study and a business plan. And thats actually a good thing. In fact, all of the analyses I advocate are essential, though not sufficient, for crafting a thoughtful, evidence-based business plan. So, whats new here? Whats different from a business plan? Customer focus The feasibility study is focused on the customer. As Peter Drucker wrote many years ago, the purpose of any business is to win a customer. The feasibility study hones in on that purpose, one quite different than that of most business plans to win an investor. Without the likelihood of there being customers, there will probably be no investors. Economic fundamentals The feasibility study succinctly addresses the fundamental economics of the business, by identifying the key drivers of cash flow: revenue, customer acquisition and retention costs and timelines, gross margins, required capital investment and the working capital characteristics of the operating cash cycle. If these drivers are satisfactory, detailed strategies for marketing, operations, and financing can probably be developed to make the venture economically viable, provided the market, industry and team elements are sufficiently attractive. If they are not, theres little point in wasting time developing such strategies.
VOICES What to do before you write a business plan
Mindset The customer-driven feasibility study asks the critical questions necessary to satisfy the entrepreneurial teams curiosity about the attractiveness of the opportunity itself and makes it possible to answer these questions before developing the detailed strategy necessary for the completion of a business plan. Thus, its mindset is to ask (and answer) questions, not to sell the ventures merit. In contrast, the business plan organises the answers delivered by the feasibility study and goes on to develop marketing, operating and financing strategies in an effort to sell the opportunity, in a sharply focused way, to investors and other stakeholders. Are these differences worth the effort? you might ask. Why shouldnt you, as a would-be entrepreneur, simply skip the feasibility study and proceed directly to preparing a business plan? First, researching and preparing a customer-driven feasibility study gives you a chance to opt out early in the process, before investing your precious time and energy in preparing a complete business plan. Thus, it can save weeks or months of time that might be wasted on a fundamentally flawed opportunity. Second, for opportunities that do look promising, the feasibility study jump-starts the business planning process and provides a clear, customerfocused vision about why your proposed venture makes sense from market, industry and team perspectives, viewed independently and collectively. It identifies the customer pain, how youll resolve it, and the one or two domains that probably make the opportunity stand out. These factors become the drivers of your business plan. Third, by ensuring that all aspects of the opportunity are examined, your analysis can better understand and thereby reduce your risk of entering a fatally flawed venture. An open mindset is crucial Asking and getting answers to the feasibility questions with an open mind deliberately, objectively and comprehensively, based on realworld evidence, rather than hopes
The Customer-Driven Feasibility Study

1 Executive summary that summarises what follows [tell the reader(s) you and your team what you are going to tell them] 2 Micro-level market assessment Target markets plan identified; compelling benefits of your solution identified, with evidence that those in this segment are willing to pay Target market segment, size and growth rate Options to grow into other segments 3 Macro-level market assessment Overall market size and growth rate Macro trends analysis to assess future market growth and attractiveness 4 Macro-level industry assessment Five forces analysis: Is the industry attractive? Likely changes therein going forward 5 Micro-level industry assessment Proprietary elements? Superior organisational processes, capabilities or resources identified that are not easily duplicated or imitated? Economic viability of business model understood Revenue forecast Customer acquisition and retention costs, and time required to obtain a customer Gross margins and operating costs understood Capital investment required Operating cash cycle characteristics 6 Team assessment Teams mission, aspirations, and propensity for risk Teams ability to execute on the critical success factors in this industry Teams connectedness up, down and across the value chain 7 Summary and conclusions [tell the reader(s) the key highlights of what youve told them] Why is or isnt this opportunity attractive? On what one (or, at most, two) domains do you rest your case?
Author John W. Mullins jmullins@london.edu Mullins is Associate Professor of Management Practice in Entrepreneurship and Marketing and holds the David and Elaine Potter Foundation Term Chair at London Business School. This article is adapted from The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (3rd Edition), FT/Prentice Hall, 2010.
or dreams is an important first step that entrepreneurs all too often ignore. No car buyer would buy a new car without a road test, and thats a far less risky decision than the one you are about to make. A customer-driven feasibility study is the entrepreneurs new business road test. Entrepreneurs who proceed without doing one ignore it at their peril.
Next issue
Marco Bertini, Julian Birkinshaw, entrepreneurs aplenty
REVIEW
WHaT a daY LOOKS LIKE RoBIN BEW
RObiN bew
Robin Bew joined the Economist Intelligence Unit in 1995. Previously, he was an economist at Her Majestys Treasury. He became the Economist Intelligence Units Chief Economist in 1997 and Editorial Director in 2006.
6:30 am Land at Heathrow from a twoweek trip around Asia where I was speaking at Economist Corporate Network events on the global economy. While there, I took the opportunity to visit clients and appeared on local news programmes for the BBC and CNN. I have to do a lot of travelling with my work. Today is looking very busy but is fairly typical for me. 7:45 am Jump on the Paddington Express and grab the chance to go through my notes and catch up on the days headlines on my phone. Im on my way to The Economist Conferences Emerging Markets Summit where I will be talking about new high growth markets and what this means for British businesses. With strong projections for Asian consumer demand spelling multiple opportunities for Western manufacturers, the Economist Intelligence Unit (EIU) has undertaken research supported by UK Trade & Investment into what more can be done to increase the percentage of UK companies entering Asian markets. 8:45 am Arriving at the Summit venue in Holborn, London, I get to say hello to The Economists Executive Editor and Chairman for the day, Daniel Franklin, who is having a quick chat with Vince Cable, Secretary of State for Business
a day with the Editorial director of the Economist Intelligence Unit
11:00 am I make my way back to the EIUs headquarters at Red Lion Square which is only just round the corner. I have a meeting with my Global Forecasting team to discuss our monthly report. 11:45 am A journalist from the Financial Times calls about a recent government action. I agree to be quoted. 2:30 pm Pop down to the shop near the office to grab a sandwich and stretch my legs then its straight back for a meeting with the Regional Directors of our Country Analysis division where we discuss topical political and economic issues affecting their regions. 4:30 pm Head back to my desk to check emails and dial in to a conference call on product development with colleagues in our New York office. 6:30 pm Dinner today will be with some clients and colleagues from The Economist newspaper to discuss a speech I am due to give the next day. Although this meeting is technically out of work hours, I really like to get out of the office and meet people. The work we do is very topical, and people are genuinely interested in our views both professionally and personally. So getting to spend time talking to our clients about their experiences and how they view the world is stimulating, and great fun. 11:00 pm Home at last!
and the keynote speaker for the event. The organisers scoop us up and lead us to the main room to be micd up by the sound engineers. 9:00 am Vince Cable kicks off the event with his keynote speech, referring to the new world as being turned upside down. Interesting to hear his views about global trade and the economic benefits to free movement of people. He asserts that by 2040, Indias economy will be larger than Germany, France and the UKs combined and that negotiating a global trade deal will be difficult. The atmosphere is charged as the audience listens very carefully. I can see Sir Terry Leahy, Chief Executive of Tesco, and Ahmet Bozer, President of Eurasia and Africa Group for Coca-Cola, from my seat at the front of the room. 9:30 am My turn to speak now and I head to the stage to explain what I see as the drivers of future prosperity. My main points include stressing to UK businesses who arent already active in emerging markets that they may need to rethink their strategy about which markets to enter first. I also talk about the second tier of emerging markets most likely to deliver sustained high growth in the long term, of which six stand out: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, known as the CIVETS an acronym coined recently by the EIU.

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BUSINESS STRATEGY REVIEW INSIGHTS FOR GLOBAL BUSINESS

Volume 21 Issue 4 2010 9.50 US$16 c14.25

WHY CUSTOMER FOCUS MATTERS... ALWAYS Page 46

Designed and produced by Mosaic www.emosaic.co.uk

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 03

04 BUSINESS STRATEGY REVIEW ISSUE 4 2010

How far do your career plans go?

London Business School

06 BUSINESS STRATEGY REVIEW ISSUE 4 2010

LEADING CHANGE INSIDE FUJITSU

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 07

W e need to change things if we are to become a $100 billion company.

Photo: Emma Cross

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LEADING CHANGE INSIDE FUJITSU

Making History 1935

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 09

10 BUSINESS STRATEGY REVIEW ISSUE 4 2010

LEADING CHANGE INSIDE FUJITSU

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 11

The art of Fujitsu management

Dreams and detail

Grow with customers

The fruits of experience

Multicultural and global

Co-innovation rather than domination

12 BUSINESS STRATEGY REVIEW ISSUE 4 2010

LEADING CHANGE INSIDE FUJITSU

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 13

14 BUSINESS STRATEGY REVIEW ISSUE 4 2010

health care REPORT

HEALTH CARE special report

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 15

HEALTH CARE REpoRT

healTh care FacToids

of aiDS-related illnesses worldwide in 2008.

Two million Two million people died

The alzheimers epidemic

malaria sTill biTes

diabeTes on The rise

hiv/aids: The ForgoTTen epidemic

16 BUSINESS STRATEGY REVIEW ISSUE 4 2010

HEALTH CARE ECoNoMIC pRESSURES

pan pan pan

Someone in the world is newly infected with TB bacilli every second.

smokings dark shadow

menTal healTh quesTions

Food For ThoughT

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 17

health care REPORT

The health care quandary

18 BUSINESS STRATEGY REVIEW ISSUE 4 2010

REPORT The health care quandary

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 19

reuters: Joshua Lott

HEALTH CARE REpoRT

healTh care cross-secTion

liFe expecTancy UK France Singapore Japan US 79 81 82 82 77

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REPORT The health care quandary

ISSUE 4 2010 BUSINESS STRATEGY REVIEW 21

health care REPORT

22 BUSINESS STRATEGY REVIEW ISSUE 4 2010